FORWARD-LOOKING STATEMENTS

 

 

Statements contained in this Annual Report on Form 10-K that are not historical facts are forward-looking statements (as defined in the Private Securities Litigation Reform Act of 1995). In addition, we, through our senior management, from time to time make forward-looking statements concerning our expected future operations and performance and other developments. The words “estimate,” “project,” “intend,” “anticipate,” “expect,” “believe” and similar expressions are indicative of forward-looking statements. Such forward-looking statements are necessarily estimates reflecting management’s best judgment based on current information and involve a number of risks and uncertainties, and various factors could cause actual results to differ materially from those contemplated by such forward-looking statements. Such factors could include those identified from time to time in our Securities and Exchange Commission filings and other public announcements, including the factors described in this Annual Report on Form 10-K for the year ended December 31, 2017. Specifically, with respect to statements relating to loan demand, growth and earnings potential, expansion and the adequacy of the allowance for loan losses for the Company, these factors include, but are not limited to, the rate of growth (or lack thereof) in the economy generally and in our service areas, market conditions and investment returns, the availability of quality loans in our service areas, the relative strength and weakness in the consumer and commercial credit sectors and in the real estate markets, collateral values and cybersecurity threats. Forward-looking statements speak only as of the date they are made, and we undertake no obligation to revise forward-looking statements to reflect circumstances or events that occur after the dates on which the forward-looking statements are made, except as required by law.

 

In addition, our business is subject to a number of general and market risks that would affect any forward-looking statements, including the risks discussed under Item 1A herein entitled “Risk Factors.”

 

 

 

PART I

 

Item 1.

Business.

 

First US Bancshares, Inc., a Delaware corporation (“Bancshares”), is a bank holding company registered under the Bank Holding Company Act of 1956, as amended (the “BHCA”). Bancshares operates one banking subsidiary, First US Bank, an Alabama banking corporation (the “Bank”). Prior to its name change on October 11, 2016, Bancshares was known as United Security Bancshares, Inc.

 

The Bank conducts a general commercial banking business and offers banking services such as demand, savings, individual retirement account and time deposits, personal and commercial loans, safe deposit box services and remote deposit capture. The Bank operates and serves its customers through sixteen full-service banking offices located in Birmingham, Bucksville, Butler, Calera, Centreville, Columbiana, Gilbertown, Grove Hill, Harpersville, Jackson, Thomasville, Tuscaloosa and Woodstock, Alabama, as well as a loan production office in Mountain Brook, a suburb of Birmingham, Alabama. In August 2017, the Bank opened its newly constructed office complex, known as Pump House Plaza, along U.S. Highway 280 in the Birmingham, Alabama metro area. In September 2017, the Bank relocated its headquarters to the Pump House Plaza location, which now houses a full-service retail office of the Bank and offices for the Bank’s commercial lending and executive leadership teams. The Bank has two wholly owned subsidiaries: Acceptance Loan Company, Inc. (“ALC”) and FUSB Reinsurance, Inc. (“FUSB Reinsurance”). As used herein, unless the context suggests otherwise, references to the “Company,” “we,” “us” and “our” refer to Bancshares, as well as the Bank, ALC and FUSB Reinsurance, collectively.

ALC, an Alabama corporation, is a finance company with approximately 19,900 consumer and real estate loans outstanding. In addition to its headquarters located in Mobile, Alabama, ALC operates and serves its customers through twenty-one offices in Alabama and southeast Mississippi. ALC’s business is generated through referrals from retail businesses, banks and customer mailings. ALC serves customers with a broad range of consumer loan needs. ALC’s lending guidelines are based on an established company policy that is reviewed regularly by its Loan Committee. The lending guidelines include a consideration of collateral (age, type and loan-to-value) and loan term, as well as the borrower’s budget (debt-to-income ratio), employment and residence history, credit score, credit history and experience with ALC. ALC’s average loan size is approximately $4,770, with an average term of 24 to 36 months. ALC currently has total loans of approximately $95.0 million, which carry an average yield of 19.4%. Interest rates charged vary depending on a consideration of certain factors, such as credit score and collateral. Approximately 10.8% of ALC’s current loan portfolio is secured by real estate and single family residence loans, with the remaining portion of the portfolio secured by various other types of collateral, depending on the type of loan being secured. ALC suspended making new real estate loans in May 2012 as a result of weakness in the real estate market at that time.

FUSB Reinsurance underwrites credit life and credit accident and health insurance policies sold to the Bank’s and ALC’s consumer loan customers. FUSB Reinsurance is responsible for the first level of risk on these policies up to a specified maximum amount, and a primary third-party insurer retains the remaining risk. A third-party insurer and/or a third-party administrator are responsible for performing most of the administrative functions of FUSB Reinsurance on a contract basis.

 

Employees

 

Bancshares has no employees, other than the executive officers discussed in the information incorporated by reference in Part III, Item 10 of this report. As of December 31, 2017, the Bank had 159 full-time equivalent employees, and ALC had 90 full-time equivalent employees. FUSB Reinsurance has no employees. None of our employees are party to a collective bargaining agreement. Management believes that the Company’s employee relations are good.

 

Competition

 

We face strong competition in making loans, acquiring deposits and attracting customers for investment services. Competition among financial institutions is based on interest rates offered on deposit accounts, interest rates charged on loans, other credit and service charges relating to loans, the quality and scope of the services rendered, the convenience of banking facilities and, in the case of loans to commercial borrowers, relative lending limits. We compete with numerous other financial services providers, including commercial banks, online banks, credit unions, finance companies, mutual funds, insurance companies, investment banking companies, brokerage firms and other financial intermediaries operating in Alabama and elsewhere. Many of these competitors, some of which are affiliated with large bank holding companies, have substantially greater resources and lending limits than we do. In addition, many of our non-bank competitors are not subject to the same extensive federal regulations that govern bank holding companies and federally insured banks.

 

The financial services industry is likely to become more competitive as further technological advances enable more companies to provide financial services. These technological advances may diminish the importance of depository institutions and other financial intermediaries.

 

 

Supervision and Regulation

 

General

 

We are extensively regulated under both federal and state law. These laws restrict permissible activities and investments and require compliance with various consumer protection provisions applicable to lending, deposit, brokerage and fiduciary activities. They also impose capital adequacy requirements and condition Bancshares’ ability to repurchase stock or to receive dividends from the Bank. Bancshares is subject to comprehensive examination and supervision by the Board of Governors of the Federal Reserve System (the “Federal Reserve”), and the Bank and its subsidiaries are subject to comprehensive examination and supervision by the Alabama State Banking Department (the “ASBD”) and the Federal Deposit Insurance Corporation (the “FDIC”). These regulatory agencies generally have broad discretion to impose restrictions and limitations on our operations. This supervisory framework could materially impact the conduct and profitability of our activities.

 

To the extent that the following information describes statutory and regulatory provisions, it is qualified in its entirety by reference to the text of such provisions. Proposals to change the laws and regulations governing the banking industry are frequently raised at both the state and federal level. The likelihood and timing of any changes in these laws and regulations, as well as the impact that such changes may have on us, are difficult to ascertain. A change in applicable laws and regulations, or in the manner in which such laws or regulations are interpreted by regulatory agencies or courts, may have a material effect on our business, operations and earnings.

 

Regulation of Bancshares

 

Bancshares is registered as a bank holding company and is subject to regulation and supervision by the Federal Reserve. The BHCA requires a bank holding company to secure the approval of the Federal Reserve before it owns or controls, directly or indirectly, more than five percent (5%) of the voting shares or substantially all of the assets of any bank or thrift, or merges or consolidates with another bank or thrift holding company. Further, under the BHCA, the activities of a bank holding company and any nonbank subsidiary are limited to: (1) those activities that the Federal Reserve determines to be so closely related to banking as to be a proper incident thereto and (2) investments in companies not engaged in activities closely related to banking, subject to quantitative limitations on the value of such investments. Prior approval of the Federal Reserve may be required before engaging in certain activities. In making such determinations, the Federal Reserve is required to weigh the expected benefits to the public, such as greater convenience, increased competition and gains in efficiency, against the possible adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interest and unsound banking practices.

 

There are a number of restrictions imposed on us by law and regulatory policy that are designed to minimize potential losses to the depositors of the Bank and the Deposit Insurance Fund maintained by the FDIC (as discussed in more detail below) if the Bank should become insolvent. For example, the Federal Reserve requires bank holding companies to serve as a source of financial strength to their subsidiary depository institutions and to commit resources to support such institutions in circumstances in which they might not otherwise do so. The Federal Reserve also has the authority to require a bank holding company to terminate any activity or to relinquish control of a non-bank subsidiary upon the Federal Reserve’s determination that such activity or control constitutes a serious risk to the financial soundness and stability of any bank subsidiary of the bank holding company.

 

Any capital loan by Bancshares to the Bank is subordinate in right of payment to deposits and certain other indebtedness of the Bank. In addition, in the event of Bancshares’ bankruptcy, any commitment by Bancshares to a federal banking regulatory agency to maintain the capital of the Bank will be assumed by the bankruptcy trustee and entitled to a priority of payment.

 

The Federal Deposit Insurance Act provides that, in the event of the “liquidation or other resolution” of an insured depository institution, the claims of depositors of the institution (including the claims of the FDIC as a subrogee of insured depositors) and certain claims for administrative expenses of the FDIC as a receiver will have priority over other general unsecured claims against the institution. If an insured depository institution fails, then insured and uninsured depositors, along with the FDIC, will have priority of payment over unsecured, non-deposit creditors, including the institution’s holding company, with respect to any extensions of credit that they have made to such insured depository institution.

 

Regulation of the Bank

 

The operations and investments of the Bank are limited by federal and state statutes and regulations. The Bank is subject to supervision and regulation by the ASBD and the FDIC and to various requirements and restrictions under federal and state law, including requirements to maintain reserves against deposits, restrictions on the types, amount and terms and conditions of loans that it may originate, and limits on the types of other activities in which the Bank may engage and the investments that it may make.

 

The Bank is subject to federal laws that limit the amount of transactions between the Bank and its nonbank affiliates, including Bancshares, but excluding operating subsidiaries, such as ALC. Under these provisions, transactions by the Bank with nonbank affiliates (such as loans or investments) are generally limited to 10% of the Bank’s capital and surplus for all covered transactions with any one affiliate and 20% of capital and surplus for all covered transactions with all affiliates. Any extensions of credit to affiliates, with limited exceptions, must be secured by eligible collateral in specified amounts. The Bank is also prohibited from purchasing any “low quality” assets from an affiliate. The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) imposed additional requirements on transactions with affiliates, including an expansion of the definition of “covered transactions” and an increase in the length of time for which collateral requirements regarding covered transactions must be maintained.

 

Securities and Exchange Commission

 

Bancshares is under the jurisdiction of the Securities and Exchange Commission (“SEC”) for matters relating to the offer and sale of its securities and is subject to the SEC’s rules and regulations related to periodic reporting, reporting to shareholders, proxy solicitations and insider trading regulations.

  

 

Monetary Policy

 

Our earnings are and will be affected by domestic economic conditions and the monetary and fiscal policies of the United States government and its agencies. The monetary policies of the Federal Reserve have a substantial effect on the operating results of commercial banks, including the Bank. The Federal Reserve has a significant impact on the levels of bank loans, investments and deposits through its open market operations in United States government securities and through its regulation of, among other things, the discount rate on borrowings of member banks and the reserve requirements against member banks’ deposits. It is not possible to predict the nature and impact of future changes in monetary and fiscal policies.

 

Deposit Insurance

 

The Bank’s deposits are insured up to applicable limits by the Deposit Insurance Fund maintained by the FDIC. As a result, the Bank is required to pay periodic assessments to maintain insurance coverage for its deposits. Under the FDIC’s assessment system for banks with less than $10 billion in assets, the assessment rate is determined based on a number of factors, including the Bank’s CAMELS (supervisory) rating, leverage ratio, net income, non-performing loan ratios, OREO ratios, core deposit ratios, one-year organic asset growth and a loan mix index.

 

The FDIC has authority to increase insurance assessments. A significant increase in insurance assessments would likely have an adverse effect on our operating expense, results of operations, and cash flows. Management cannot predict what insurance assessment rates will be in the future. Furthermore, deposit insurance may be terminated by the FDIC upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC.

 

Dividend Restrictions

 

Under Delaware law, dividends may be paid only out of the amount calculated as the present fair value of the total assets of the corporation, minus the present fair value of the total liabilities of the corporation, minus the capital of the corporation. In the event that there is no such amount, dividends may be paid out of the net profits of the corporation for the fiscal year in which the dividend is declared and/or the immediately preceding fiscal year. Dividends may not be paid, however, out of net profits of the corporation if the capital represented by the issued and outstanding stock of all classes having a preference on the distribution of assets is impaired. Further, the Federal Reserve permits bank holding companies to pay dividends only out of current earnings and only if future retained earnings would be consistent with the company’s capital, asset quality and financial condition.

 

Since it has no significant independent sources of income, Bancshares’ ability to pay dividends depends on its ability to receive dividends from the Bank. Under Alabama law, the Bank may not pay a dividend in excess of 90% of its net earnings unless its surplus is equal to at least 20% of capital. The Bank is also required by Alabama law to seek the approval of the Superintendent of the ASBD prior to the payment of dividends if the total of all dividends declared by the Bank in any calendar year will exceed the total of (1) the Bank’s net earnings for that year, plus (2) its retained net earnings for the preceding two years, less any required transfers to surplus. Alabama law defines net earnings as the remainder of all earnings from current operations plus actual recoveries on loans and investments and other assets, after deducting from the total thereof all current operating expenses, actual losses, accrued dividends on preferred stock, if any, and all federal, state and local taxes. The Bank must be able to satisfy the conditions described above in order to declare or pay a dividend to Bancshares without obtaining the prior approval of the Superintendent of the ASBD. In addition, the FDIC prohibits the payment of cash dividends if (1) as a result of such payment, the bank would be undercapitalized or (2) the bank is in default with respect to any assessment due to the FDIC, including a deposit insurance assessment. These restrictions could materially influence the Bank’s, and therefore Bancshares’, ability to pay dividends.

 

Capital Adequacy

 

In July 2013, the federal banking regulatory agencies adopted regulations to implement the framework developed by the Basel Committee on Banking Supervision for strengthening international capital and liquidity, known as “Basel III” (the “Basel III Rule”). The Basel III Rule provides risk-based capital guidelines designed to make regulatory capital requirements more sensitive to differences in risk profiles among banks, to account for off-balance sheet exposures and to minimize disincentives for holding liquid assets. Under these guidelines, assets and off-balance sheet items are assigned to broad risk categories, each with appropriate risk-weights. The net amount of assets remaining after applying the risk-weights to the gross asset values represents the institution’s total risk-weighted assets. An institution’s total risk-weighted assets are used to calculate its regulatory capital ratios. The Basel III Rule establishes minimum capital and leverage ratios that supervised financial institutions are required to maintain, while also providing countercyclical capital requirements so that the required amount of capital increases in times of economic expansion and decreases in times of economic contraction, consistent with safety and soundness. Under the Basel III Rule, banks must maintain a specified capital conservation buffer above each of the required minimum capital levels in order to avoid limitations on paying dividends, engaging in share repurchases and paying certain discretionary bonuses.

 

 

Prompt Corrective Action

 

In addition to the required minimum capital levels described above, federal law establishes a system of “prompt corrective actions” that federal banking agencies are required to take, and certain actions that they have discretion to take, based on the capital category into which a federally regulated depository institution falls. Regulations set forth detailed procedures and criteria for implementing prompt corrective action in the case of any institution that is not adequately capitalized. Each institution is assigned to one of five categories based on its capital ratios: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized.” Institutions categorized as “undercapitalized” or worse become subject to increasing levels of regulatory oversight and restrictions, which may include, among other things, limitations on growth and activities and payment of dividends.

 

As of December 31, 2017, the Bank was “well-capitalized” under the prompt corrective action rules. This classification is primarily for the purpose of applying the federal prompt corrective action provisions and is not intended to be, and should not be, interpreted as a representation of our overall financial condition or prospects.

 

Community Reinvestment Act

 

The Community Reinvestment Act (the “CRA”) requires the federal banking regulatory agencies to assess all financial institutions that they regulate to determine whether these institutions are meeting the credit needs of the communities that they serve, including their assessment area(s) (as established for these purposes in accordance with applicable regulations based principally on the location of the institution’s branch offices). Under the CRA, institutions are assigned a rating of “outstanding,” “satisfactory,” “needs to improve” or “unsatisfactory.” An institution’s record in meeting the requirements of the CRA is made publicly available and is taken into consideration in connection with any applications that it files with federal regulators to engage in certain activities, including approval of branches or other deposit facilities, mergers and acquisitions, office relocations or expansions into non-banking activities. The Bank received a “satisfactory” rating in its most recent CRA evaluation.

 

Anti-Money Laundering Laws

 

Under various federal laws, including the Currency and Foreign Transactions Reporting Act (also known as the “Bank Secrecy Act”), as amended by the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT) Act, financial institutions are subject to prohibitions against specified financial transactions and account relationships, as well as enhanced due diligence and “know your customer” standards in their dealings with foreign financial institutions and foreign customers. These laws also mandate that financial institutions establish anti-money laundering programs meeting certain standards and require the federal banking regulators to consider the effectiveness of a financial institution’s anti-money laundering activities when reviewing bank mergers and bank holding company acquisitions.

 

Sarbanes-Oxley Act of 2002

 

The Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”) comprehensively revised the laws affecting corporate governance, auditing, executive compensation and corporate reporting for entities with equity or debt securities registered under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Among other things, Sarbanes-Oxley and its implementing regulations established new membership requirements and additional responsibilities for audit committees, imposed restrictions on the relationships between public companies and their outside auditors (including restrictions on the types of non-audit services that auditors may provide), imposed additional responsibilities for public companies’ external financial statements on the chief executive officer and chief financial officer, and expanded the disclosure requirements for corporate insiders. The requirements are intended to allow stockholders to more easily and efficiently monitor the performance of companies and directors. We and our Board of Directors have, as appropriate, adopted or modified our policies and practices in order to comply with these regulatory requirements and to enhance our corporate governance practices.

 

As required by Sarbanes-Oxley, we have adopted a Code of Business Conduct and Ethics applicable to our Board, executives and employees. This Code of Business Conduct can be found on our website at http://www.firstusbank.com under the tabs “About – Investor Relations – FUSB Policies.”

 

Privacy of Customer Information

 

The Financial Services Modernization Act of 1999 (also known as the “Gramm-Leach-Bliley Act” or the “GLBA”) and the implementing regulations issued by federal banking regulatory agencies require financial institutions to adopt policies and procedures regarding the disclosure of nonpublic personal information about their customers to non-affiliated third parties. In general, financial institutions are required to explain to customers their policies and procedures regarding the disclosure of such nonpublic personal information, and, unless otherwise required or permitted by law, financial institutions are prohibited from disclosing such information except as provided in their policies and procedures. Specifically, the GLBA established certain information security guidelines that require each financial institution, under the supervision and ongoing oversight of its board of directors or an appropriate committee thereof, to develop, implement and maintain a comprehensive written information security program designed to ensure the security and confidentiality of customer information, to protect against anticipated threats or hazards to the security or integrity of such information, and to protect against unauthorized access to or use of such information that could result in substantial harm or inconvenience to any customer.

 

 

 

Regulation of Lending Practices

 

Our lending practices are subject to a number of federal and state laws, as supplemented by the rules and regulations of the various agencies charged with the responsibility of implementing these laws. These include, among others, the following:

 

	●	Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;

	●	Home Mortgage Disclosure Act of 1975, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the communities that it serves;

	●	Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other specified factors in extending credit;

	●	Fair Credit Reporting Act of 1978, as amended by the Fair and Accurate Credit Transactions Act, governing the use and provision of information to credit reporting agencies, certain identity theft protections and certain credit and other disclosures;

	●	Fair Debt Collection Practices Act, governing the manner in which consumer debts may be collected by collection agencies;
	●	Real Estate Settlement Procedures Act, requiring certain disclosures concerning loan closing costs and escrows, and governing transfers of loan servicing and the amounts of escrows in connection with loans secured by one-to-four family residential properties; and
	●	Rules and regulations established by the National Flood Insurance Program.

In addition, the Dodd-Frank Act created the Consumer Financial Protection Bureau (the “CFPB”), an independent bureau with broad authority to regulate the consumer finance industry, including regulated financial institutions, non-banks and others involved in extending credit to consumers. The CFPB has authority through rulemaking, orders, policy statements, guidance and enforcement actions to administer and enforce federal consumer financial laws. Although the CFPB has the power to interpret, administer and enforce federal consumer financial laws, the Dodd-Frank Act provides that the federal banking regulatory agencies continue to have examination and enforcement powers over the financial institutions that they supervise relating to the matters within the jurisdiction of the CFPB if the supervised institutions have less than $10 billion in assets. The CFPB has adopted a number of rules that impact our lending practices, including, among other things, (1) requiring financial institutions to make a “reasonable and good faith determination” that a consumer has a “reasonable ability” to repay a residential mortgage loan before making such a loan, (2) requiring sponsors of asset-backed securities to retain at least 5% of the credit risk of the assets underlying the securities (and generally prohibiting sponsors from transferring or hedging that credit risk), and (3) imposing a number of new and enhanced requirements on the mortgage servicing industry, including rules regarding communications with borrowers, maintenance of customer account records, procedures for responding to written borrower requests and complaints of errors, servicing delinquent loans, and conducting foreclosure proceedings, among other measures.

Regulation of Deposit Operations

 

Our deposit operations are subject to federal laws applicable to depository accounts, including, among others, the following:

 

	●	Right to Financial Privacy Act, which imposes a duty to maintain the confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records;

	●	Truth-In-Savings Act, requiring certain disclosures for consumer deposit accounts;

	●	Electronic Funds Transfer Act and Regulation E, which govern automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services; and

●

Rules and regulations of the various agencies charged with the responsibility of implementing these laws.

 

 

Federal Home Loan Bank Membership

 

The Bank is a member of the Federal Home Loan Bank of Atlanta (“FHLBA”). Each member of the FHLBA is required to maintain a minimum investment in the Class B stock of the FHLBA. The Board of Directors of the FHLBA can increase the minimum investment requirements if it concludes that additional capital is required to allow it to meet its own regulatory capital requirements. Any increase in the minimum investment requirements outside of specified ranges requires the approval of the Federal Housing Finance Agency. Because the extent of any obligation to increase the level of investment in the FHLBA depends entirely on the occurrence of a future event, we are unable to determine the extent of future required potential payments to the FHLBA at this time. Additionally, in the event that a member financial institution fails, the right of the FHLBA to seek repayment of funds loaned to that institution will take priority over the rights of all other creditors.

 

Future Legislation and Regulation

 

We are heavily regulated by regulatory agencies at the federal and state levels. Since the 2008 financial crisis, regulators have increased their focus on the regulation of the financial services industry, leading in many cases to greater uncertainty and compliance costs for regulated entities. For example, the provisions of the Dodd-Frank Act have required us to make material expenditures, particularly in the form of personnel training costs and additional compliance expenses. Recently, however, we have seen an effort at the federal level to provide some relief from the regulatory burdens placed on banks as a result of Dodd-Frank Act. A number of bills have been introduced in early 2018 in both the House of Representatives and the U.S. Senate that would scale back the regulatory burdens placed on banks in recent years. It is impossible to know at this time what practical impact these bills will have on our business, if enacted. In addition to the legislative changes, there have been leadership changes at all of the federal banking agencies, including the FDIC, the CFPB and the Federal Reserve. These legislative proposals and the changes in the key regulators who implement the banking laws are likely to impact our business; however, we cannot predict the actual effect that these proposals would have on our business, consolidated results of operations, financial condition or cash flows.

 

Website Information

 

The Bank’s website address is http://www.firstusbank.com. Bancshares does not maintain a separate website. Bancshares makes available free of charge on or through the Bank’s website, under the tabs “About – Investor Relations,” its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports filed or furnished pursuant to Section 13(a) of the Exchange Act as soon as reasonably practicable after such material is electronically filed with the SEC. These reports are also available on the SEC’s website, http://www.sec.gov. Bancshares will provide paper copies of these reports to shareholders free of charge upon written request. Bancshares is not including the information contained on or available through the Bank’s website as a part of, or incorporating such information into, this Annual Report on Form 10-K.

 

 

 

Item 1A.

Risk Factors.

 

Making or continuing an investment in our common stock involves certain risks that you should carefully consider. The risks and uncertainties described below are not the only risks that may have a material adverse effect on us. Additional risks and uncertainties also could adversely affect our business and results of operations. If any of the following risks actually occurs, our business, financial condition or results of operations could be negatively affected, the market price of your common stock could decline and you could lose all or a part of your investment. Further, to the extent that any of the information contained in this Annual Report on Form 10-K constitutes forward-looking statements, the risk factors set forth below also are cautionary statements identifying important factors that could cause our actual results to differ materially from those expressed in any forward-looking statements made by us or on our behalf.

 

If loan losses are greater than anticipated, our earnings may be adversely affected.

 

As a lender, we are exposed to the risk that customers will be unable to repay their loans according to their terms and that any collateral securing the payment of their loans may not be sufficient to assure repayment. Credit losses are inherent in the business of making loans and could have a material adverse effect on our operating results. Our credit risk with respect to our real estate and construction loan portfolio relates principally to the creditworthiness of individuals and the value of the real estate serving as security for the repayment of loans, and the credit risk with respect to our commercial and consumer loan portfolio relates principally to the general creditworthiness of businesses and individuals within the local markets in which we operate. We make various assumptions and judgments about the collectability of our loan portfolio and provide an allowance for potential loan losses based on a number of factors. We believe that our allowance for loan losses is adequate. However, if estimates, assumptions or judgments used in calculating this allowance are incorrect, the allowance for loan losses may not be sufficient to cover our actual loan losses. Deterioration of economic conditions affecting borrowers, new information regarding existing loans, inaccurate management assumptions, identification of additional problem loans and other factors, both within and outside of our control, may result in higher levels of nonperforming assets and charge-offs and loan losses in excess of our current allowance for loan losses, requiring us to make material additions to our allowance for loan losses, which could have a material adverse effect on our business, consolidated financial condition and results of operations. The actual amount of future provisions for loan losses cannot be determined at this time and may vary from the amounts of past provisions. In addition, banking regulators periodically review our allowance for loan losses and may require us to increase our provision for loan losses or recognize further charge-offs if the regulators’ judgments are different than those of our management. Material additions to the allowance could materially decrease our net income.

We may be required to increase our allowance for loan losses as a result of a recent change to an accounting standard.

The measure of our allowance for loan losses depends in part on the adoption and interpretation of accounting standards. The Financial Accounting Standards Board, or FASB, recently issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments - Credit Losses. This ASU provides a new credit impairment model, the Current Expected Credit Loss, or CECL model, which will apply to us in fiscal years beginning after December 15, 2019, though we may choose, or may be encouraged by our regulators, to adopt CECL in fiscal years beginning after December 15, 2018. CECL will require financial institutions to estimate and develop a provision for credit losses at origination for the lifetime of the loan, as opposed to reserving for incurred or probable losses up to the balance sheet date. Under the CECL model, credit deterioration would be reflected in the income statement in the period of origination or acquisition of the loan, with changes in expected credit losses due to further credit deterioration or improvement reflected in the periods in which the expectation changes. Accordingly, implementation of the CECL model will change our current method of providing allowances for loan losses, which would likely require us to increase our allowance for loan losses. Moreover, the CECL model likely would create more volatility in our level of allowance for loan losses. A material increase in our level of allowance for loan losses could adversely affect our business, consolidated financial condition and results of operations. 

 

Our business and operations may be materially adversely affected by weak economic conditions. 

 

Our business and operations, which primarily consist of banking activities, including lending money to customers in the form of loans and borrowing money from customers in the form of deposits, are sensitive to general business and economic conditions in the United States generally, and in our region in particular. The economic conditions in our local markets may be different from the economic conditions in the United States as a whole. If economic conditions in the United States or any of our markets weaken, our growth and profitability from our operations could be constrained. The current economic environment is characterized by interest rates near historically low levels, which impacts our ability to attract deposits and to generate attractive earnings through our loan and investment portfolios. All of these factors can individually or in the aggregate be detrimental to our business, and the interplay between these factors can be complex and unpredictable. Unfavorable market conditions can result in a deterioration in the credit quality of our borrowers and the demand for our products and services, an increase in the number of delinquencies, defaults and charge-offs, additional provisions for loan losses, a decline in the value of our collateral, and an overall material adverse effect on the quality of our loan portfolio. 

The banking industry is highly competitive, which could result in loss of market share and adversely affect our business.

We encounter strong competition in making loans, acquiring deposits and attracting customers for investment services. We compete with commercial banks, online banks, credit unions, finance companies, mutual funds, insurance companies, investment banking companies, brokerage firms and other financial intermediaries operating in Alabama and elsewhere in various segments of the financial services market. Many of these competitors, some of which are affiliated with large bank holding companies, have substantially greater resources and lending limits than we do. In addition, many of our non-bank competitors are not subject to the same extensive federal regulations that govern bank holding companies and federally insured banks, and, as a result, may be able to offer certain products and services at a lower cost than the we are able to offer, which could adversely affect our business.

 

 

 

We are subject to extensive governmental regulation, and the costs of complying with such regulation could have an adverse impact on our operations.

The financial services industry is extensively regulated and supervised under both federal and state law. We are subject to the supervision and regulation of the Federal Reserve, the FDIC and the ASBD. These regulations are intended primarily to protect depositors, the public and the FDIC’s Deposit Insurance Fund, rather than shareholders. Additionally, we are subject to supervision, regulation and examination by other regulatory authorities, such as the SEC and state securities and insurance regulators. If, as a result of an examination, the Federal Reserve, the FDIC or the ASBD were to determine that our financial condition, capital resources, asset quality, earnings prospects, management, liquidity or other aspects of any of our operations had become unsatisfactory, or that we were in violation of any law or regulation, they may take a number of different remedial actions as they deem appropriate. These actions include the power to require us to remediate any such adverse examination findings. We are also subject to changes in federal and state laws, as well as regulations and governmental policies, income tax laws and accounting principles. Regulations affecting banks and other financial institutions are undergoing continuous change, and the ultimate effect of such changes cannot be predicted. Regulations and laws may be modified at any time, and new legislation may be enacted that could affect us. We cannot assure you that any changes in regulations or new laws will not adversely affect our performance or consolidated results of operations. Our regulatory framework is discussed in greater detail under “Item 1. Business – Supervision and Regulation.”

We are subject to laws regarding the privacy, information security and protection of personal information, and any violation of these laws or unauthorized disclosure of such information could damage our reputation and otherwise adversely affect our operations and financial condition.

Our business requires the collection and retention of large volumes of customer data, including personally identifiable information in various information systems that we maintain and in those maintained by third parties with whom we contract to provide data services. We also maintain important internal data, such as personally identifiable information about our employees and information relating to our operations. We are subject to complex and evolving laws and regulations governing the privacy and protection of personal information of individuals (including customers, employees, suppliers and other third parties). For example, our business is subject to the Gramm-Leach-Bliley Act, which, among other things: (1) imposes certain limitations on our ability to share nonpublic personal information about our customers with nonaffiliated third parties; (2) requires us to provide certain disclosures to customers about our information collection, sharing and security practices and to afford customers the right to “opt out” of any information sharing by us with nonaffiliated third parties (with certain exceptions); and (3) requires us to develop, implement and maintain a written comprehensive information security program containing appropriate safeguards based on our size and complexity, the nature and scope of our activities, and the sensitivity of customer information we process, as well as plans for responding to data security breaches. Various state and federal banking regulators and state legislatures have also enacted data security breach notification requirements with varying levels of individual, consumer, regulatory or law enforcement notification in the event of a security breach. Ensuring that our collection, use, transfer and storage of personal information complies with all applicable laws and regulations can increase our costs. Furthermore, we may not be able to ensure that all of our clients, suppliers, counterparties and other third parties have appropriate controls in place to protect the confidentiality of the information that they exchange with us, particularly where such information is transmitted by electronic means. If personal, confidential or proprietary information of customers or others were to be mishandled or misused (in situations where, for example, such information was erroneously provided to unauthorized persons, or where such information was intercepted or otherwise compromised by third parties), we could be exposed to litigation or regulatory sanctions under applicable laws and regulations. Concerns about the effectiveness of our measures to safeguard personal information could cause us to lose customers or potential customers for our products and services and thereby reduce our revenues. Accordingly, any failure or perceived failure to comply with applicable privacy or data protection laws and regulations may subject us to inquiries, examinations and investigations that could result in requirements to modify or cease certain operations or practices or in significant liabilities, fines or penalties, and could damage our reputation and otherwise adversely affect our consolidated operations and financial condition.

 

Our FDIC deposit insurance premiums and assessments may increase and thereby adversely affect our financial results.

 

The Bank’s deposits are insured by the FDIC up to legal limits, and, accordingly, the Bank is subject to periodic insurance assessments by the FDIC. The Bank’s regular assessments are determined by its risk classification, which is based on its regulatory capital levels and the level of supervisory concern that it poses. Numerous bank failures during the financial crisis and increases in the statutory deposit insurance limits increased resolution costs to the FDIC and put significant pressure on the Deposit Insurance Fund. The FDIC has authority to increase insurance assessments, and any significant increase in insurance assessments would likely have an adverse effect on us and thereby negatively impact our consolidated results of operations. 

 

We may not be able to maintain consistent growth, earnings or profitability.

There can be no assurance that we will be able to continue to grow and to remain profitable in future periods, or, if profitable, that our overall earnings will remain consistent with our prior results of operations, or increase in the future. Our growth in recent years has been driven primarily by a strong commercial loan market and real estate loan market in certain of our markets. A downturn in economic conditions in our markets, heightened competition from other financial services providers, an inability to retain or grow our core deposit base, regulatory and legislative considerations, and failure to attract and retain high-performing talent, among other factors, could limit our ability to grow our assets or increase our profitability to the same extent as in recent periods. Sustainable growth requires that we manage our risks by following prudent loan underwriting standards, balancing loan and deposit growth without materially increasing interest rate risk or compressing our net interest margin, maintaining adequate capital, hiring and retaining qualified employees and successfully implementing our strategic initiatives. A failure to sustain our recent rate of growth or adequately manage the factors that have contributed to our growth or successfully enter new markets could have a material adverse effect on our earnings and profitability and, therefore on our business, consolidated financial condition and results of operations.

 

 

Rapid and significant changes in market interest rates may adversely affect our performance.

Most of our assets and liabilities are monetary in nature and are therefore subject to significant risks from changes in interest rates. Our profitability depends to a large extent on net interest income, and changes in interest rates can impact our net interest income as well as the valuation of our assets and liabilities. Our consolidated results of operations are affected by changes in interest rates and our ability to manage interest rate risks. Changes in market interest rates, changes in the relationships between short-term and long-term market interest rates and changes in the relationships between different interest rate indices can affect the interest rates charged on interest-earning assets differently than the interest rates paid on interest-bearing liabilities. These differences could result in an increase in interest expense relative to interest income or a decrease in our interest rate spread. For a more detailed discussion of these risks and our management strategies for these risks, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Our net interest margin depends on many factors that are partly or completely out of our control, including competition, federal economic monetary and fiscal policies and general economic conditions. Despite the implementation of strategies to manage interest rate risks, changes in interest rates may have a material adverse impact on our profitability.

 

The performance of our investment portfolio is subject to fluctuations due to changes in interest rates and market conditions.

 

Changes in interest rates can negatively affect the performance of most of our investments. Interest rate volatility can reduce gains or create losses in our investment portfolios. Interest rates are highly sensitive to many factors, including governmental monetary policies, domestic and international economic and political conditions and other factors beyond our control. Fluctuations in interest rates affect returns on, and the market value of, investment securities. The fair market value of the securities in our portfolio and the investment income from these securities also fluctuate depending on general economic and market conditions. In addition, actual net investment income and/or cash flows from investments that carry prepayment risk, such as mortgage-backed and other asset-backed securities, may differ from those anticipated at the time of investment as a result of interest rate fluctuations. The potential effect of these factors is heightened due to the current conditions in the financial markets and economic conditions generally.

 

Changes in the policies of monetary authorities and other government action could adversely affect our profitability.

 

Our consolidated results of operations are affected by credit policies of monetary authorities, particularly the Federal Reserve. The instruments of monetary policy employed by the Federal Reserve include open market operations in United States government securities, changes in the discount rate or the federal funds rate on bank borrowings and changes in reserve requirements against bank deposits. In view of changing conditions in the national economy and in the money markets, we cannot predict future changes in interest rates, deposit levels, loan demand or our business and earnings. Furthermore, the actions of the United States government and other governments in responding to such conditions may result in currency fluctuations, exchange controls, market disruption and other adverse effects.

 

Our profitability and liquidity may be affected by changes in economic conditions in the areas in which our operations and loans are concentrated.

 

Our success depends to a certain extent on the general economic conditions of the geographic markets that we serve in Alabama and Mississippi. Local economic conditions in these areas have a significant impact on our commercial, real estate and construction loans, the ability of borrowers to repay these loans and the value of the collateral securing these loans. Adverse changes in the economic conditions of the southeastern United States in general or any one or more of these local markets could negatively impact the financial results of our banking operations and have a negative effect on our profitability. For example, significant unemployment in the timber industry could cause widespread economic distress in many of the areas that we serve. Similar trends in other industries or sectors that we serve could have a significant negative effect on our profitability.

 

We cannot guarantee that we will pay dividends in the future.

 

Dividends from the Bank are Bancshares’ primary source of funds for the payment of dividends to its shareholders, and there are various legal and regulatory limits regarding the extent to which the Bank may pay dividends or otherwise supply funds to Bancshares. The ability of both the Bank and Bancshares to pay dividends will continue to be subject to and limited by the results of operations of the Bank and by certain legal and regulatory restrictions. Further, any lenders making loans to Bancshares or the Bank may impose financial covenants that may be more restrictive than the legal and regulatory requirements with respect to the payment of dividends. There can be no assurance as to whether or when Bancshares may pay dividends to its shareholders.

Extreme weather could cause a disruption in our operations, which could have an adverse impact on our profitability. 

Some of our operations are located in areas near the Gulf of Mexico, a region that is susceptible to hurricanes and other forms of extreme weather. Such weather events could disrupt our operations and have a material adverse effect on our overall results of operations. Further, a hurricane, tornado or other extreme weather event in any of our market areas could adversely impact the ability of borrowers to timely repay their loans and may adversely impact the value of collateral that we hold.

 

 

 

Technological changes in the banking and financial services industries may negatively impact our results of operations and our ability to compete.

 

The banking and financial services industries are undergoing rapid changes, with frequent introductions of new technology-driven products and services. In addition to enhancing the level of service provided to customers, the effective use of technology increases efficiency and enables financial institutions to reduce costs. To remain competitive, financial institutions must continuously evaluate changing customer preferences with respect to emerging technologies and develop plans to address such changes in the most cost-effective manner possible. Our future success will depend, in part, on our ability to use technology to offer products and services that provide convenience to customers and create additional efficiencies in operations, and our failure to do so could negatively impact our business. Additionally, our competitors may have greater resources to invest in technological improvements than we do, and we may not be able to effectively implement new technology-driven products and services, which could reduce our ability to effectively compete.

 

Our information systems may experience a failure or interruption.

 

We rely heavily on communications and information systems to conduct our business. Any failure or interruption in the operation of these systems could impair or prevent the effective operation of our customer relationship management, general ledger, deposit, lending or other functions. While we have policies and procedures designed to prevent or limit the effect of a failure or interruption in the operation of our information systems, there can be no assurance that any such failures or interruptions will not occur or, if they do occur, that they will be adequately addressed. The occurrence of any failures or interruptions impacting our information systems could damage our reputation, result in a loss of customer business, and expose us to additional regulatory scrutiny, civil litigation and possible financial liability, any of which could have a material adverse effect on our consolidated financial condition, results of operations or cash flows.

 

We use information technology in our operations and offer online banking services to our customers, and unauthorized access to our customers’ confidential or proprietary information as a result of a cyber-attack or otherwise could expose us to reputational harm and litigation and adversely affect our ability to attract and retain customers.

 

Information security risks for financial institutions have generally increased in recent years, in part because of the proliferation of new technologies, the use of the internet and telecommunications technologies to conduct financial transactions, and the increased sophistication and activities of organized crime, hackers, terrorists, activists and other external parties. We are under continuous threat of loss due to hacking and cyber-attacks, especially as we continue to expand customer capabilities to utilize the internet and other remote channels to transact business. Our risk and exposure to these matters remains heightened because of the evolving nature and complexity of these threats from cybercriminals and hackers, our plans to continue to provide internet banking channels, and our plans to develop additional remote connectivity solutions to serve our customers. Therefore, the secure processing, transmission and storage of information in connection with our online banking services are critical elements of our operations. However, our network could be vulnerable to unauthorized access, computer viruses and other malware, phishing schemes or other security failures. In addition, our customers may use personal smartphones, tablet PCs or other mobile devices that are beyond our control systems in order to access our products and services. Our technologies, systems and networks, and our customers’ devices, may become the target of cyber-attacks, electronic fraud or information security breaches that could result in the unauthorized release, gathering, monitoring, use, loss or destruction of our or our customers’ confidential, proprietary and other information, or otherwise disrupt our or our customers’ or other third parties’ business operations. As cyber threats continue to evolve, we may be required to spend significant capital and other resources to protect against these threats or to alleviate or investigate problems caused by such threats. To the extent that our activities or the activities of our customers involve the processing, storage or transmission of confidential customer information, any breaches or unauthorized access to such information could present significant regulatory costs and expose us to litigation and other possible liabilities. Any inability to prevent these types of security threats could also cause existing customers to lose confidence in our systems and could adversely affect our reputation and ability to generate deposits. While we have not experienced any material losses relating to cyber-attacks or other information security breaches to date, we may suffer such losses in the future. The occurrence of any cyber-attack or information security breach could result in potential legal liability, reputational harm, damage to our competitive position and the disruption of our operations, all of which could adversely affect our consolidated financial condition, results of operations or cash flows.

 

We depend on outside third parties for the processing and handling of our records and data, which exposes us to additional risk for cybersecurity breaches and regulatory action.

 

We rely on software and internet-based platforms developed by third-party vendors to process various transactions. In some cases, we have contracted with third parties to run their proprietary software on our behalf. These systems include, but are not limited to, general ledger, payroll, employee benefits, loan and deposit processing and securities portfolio accounting. If these third-party service providers experience difficulties, are subject to cybersecurity breaches or terminate their services, and we are unable to replace them with other service providers on a timely basis, our operations could be interrupted. If an interruption were to continue for a significant period of time, our business, consolidated financial condition and results of operations could be adversely affected. While we perform a review of controls instituted by the applicable vendors over these programs in accordance with industry standards and perform our own testing of user controls, we must rely on the continued maintenance of controls by these third-party vendors, including safeguards over the security of customer data. In addition, we maintain, or contract with third parties to maintain, daily backups of key processing outputs in the event of a failure on the part of any of these systems. Nonetheless, we may incur a temporary disruption in our ability to conduct business or process transactions, or damage to our reputation, if the third-party vendor fails to adequately maintain internal controls or institute necessary changes to systems. Such a disruption or breach of security could have a material adverse effect on our business.

 

In addition, federal regulators have issued guidance outlining their expectations for third-party service provider oversight and monitoring by financial institutions. Any failure to adequately oversee the actions of our third-party service providers could result in regulatory actions against us, which could adversely affect our business, consolidated financial condition and results of operations.

 

 

We face a risk of noncompliance and enforcement action under the Bank Secrecy Act and other anti-money laundering statutes and regulations. 

 

The Bank Secrecy Act of 1970, the USA PATRIOT Act and other laws and regulations require financial institutions, among other duties, to institute and maintain an effective anti-money laundering program and to file reports such as suspicious activity reports and currency transaction reports. We are required to comply with these and other anti-money laundering requirements. Our federal and state banking regulators, the Financial Crimes Enforcement Network and other government agencies are authorized to impose significant civil money penalties for violations of anti-money laundering requirements. We are also subject to increased scrutiny with respect to our compliance with the regulations issued and enforced by the Office of Foreign Assets Control. If our program is deemed deficient, we could be subject to liability, including fines, civil money penalties and other regulatory actions, which may include restrictions on our business operations and our ability to pay dividends, restrictions on mergers and acquisitions activity, restrictions on expansion, and restrictions on entering new business lines. Failure to maintain and implement adequate programs to combat money laundering and terrorist financing could also have significant reputational consequences for us. Any of these circumstances could have a material adverse effect on our business, financial condition or results of operations.

 

The internal controls that we have implemented to mitigate risks inherent to the business of banking might fail or be circumvented.

 

Management regularly reviews and updates our internal controls and procedures that are designed to manage the various risks in our business, including credit risk, operational risk, financial risk, compliance risk and interest rate risk. No system of controls, however well-designed and operated, can provide absolute assurance that the objectives of the system will be met. If such a system fails or is circumvented, there could be a material adverse effect on our consolidated financial condition, results of operations or cash flows.

 

Securities issued by us, including our common stock, are not insured.

 

Securities issued by us, including our common stock, are not savings or deposit accounts or other obligations of any bank and are not insured by the Deposit Insurance Fund maintained by the FDIC or by any other governmental agency or instrumentality, or any private insurer, and are subject to investment risk, including the possible loss of principal.

 

Future issuances of additional securities by us could result in dilution of your ownership.

 

We may decide from time to time to issue additional securities in order to raise capital, support growth or fund acquisitions. Further, we may issue stock options or other stock grants to retain and motivate employees. Such issuances of securities by us would dilute the respective ownership interests of our shareholders.

 

Our common stock price could be volatile, which could result in losses for individual shareholders.

 

The market price of our common stock may be subject to significant fluctuations in response to a variety of factors, including, but not limited to:

 

	●	general economic, business and political conditions;

	●	changing market conditions in the broader stock market in general, or in the financial services industry in particular;

	●	monetary and fiscal policies, laws and regulations and other activities of the government, agencies and similar organizations;

	●	actual or anticipated variations in our operating results, financial condition or asset quality;

	●	our failure to meet analyst predictions and projections;

	●	collectability of loans;

	●	cost and other effects of legal and administrative cases and proceedings, claims, settlements and judgments;

	●	additions or departures of key personnel;
	●	trades of large blocks of our stock;

	●	announcements of innovations or new services by us or our competitors;

●

future sales of our common stock or other securities; and

 

●

other events or factors, many of which are beyond our control.

 

Due to these factors, you may not be able to sell your stock at or above the price you paid for it, which could result in substantial losses.

 

 

Bancshares’ liquidity is subject to various regulatory restrictions applicable to its subsidiaries.

 

There are various regulatory restrictions on the ability of Bancshares’ subsidiaries to pay dividends or to make other payments to Bancshares. In addition, Bancshares’ right to participate in any distribution of assets of any of its subsidiaries upon a subsidiary’s liquidation or otherwise will be subject to the prior claims of creditors of that subsidiary, except to the extent that any of Bancshares’ claims as a creditor of such subsidiary may be recognized.

 

Our performance and results of operations depend in part on the soundness of other financial institutions.

 

Our ability to engage in routine investment and banking transactions, as well as the quality and value of our investments in equity securities and obligations of other financial institutions, could be adversely affected by the actions, financial condition and profitability of such other financial institutions with which we transact, including, without limitation, the FHLBA and our correspondent banks. Financial services institutions are interrelated as a result of shared credits, trading, clearing, counterparty and other relationships. As a result, defaults by, or even rumors or questions about, one or more financial institutions, or the financial services industry generally, could lead to market-wide liquidity problems and losses of depositor, creditor or counterparty confidence in certain institutions, and could lead to losses or defaults by other institutions. Any defaults by, or failures of, the institutions with whom we transact could adversely affect our debt and equity holdings in such other institutions, our participation interests in loans originated by other institutions, and our business, including our liquidity, consolidated financial condition and earnings. 

Liquidity risks could affect our operations and jeopardize our financial condition.

Liquidity is essential to our business. An inability to raise funds through deposits, borrowings, the repayment or sale of loans and other sources could have a substantial negative effect on our liquidity. Our funding sources include federal funds, purchased securities sold under repurchase agreements, core and non-core deposits, and short- and long-term debt. We maintain a portfolio of securities that can be used as a source of liquidity. Other sources of liquidity are available should they be needed, such as through our acquisition of additional non-core deposits. Bancshares may be able, depending on market conditions, to issue and sell debt securities and preferred or common equity securities in public or private transactions. Our access to funding sources in amounts adequate to finance or capitalize our activities or on acceptable terms could be impaired by factors that affect us specifically or the financial services industry or economy in general, such as further disruption in the financial markets, negative views and expectations about the prospects for the financial services industry, deterioration within the credit markets, or the financial condition, liquidity or profitability of the financial institutions with which we transact.

 

We depend on the services of our management team and board of directors, and the unexpected loss of key officers or directors may adversely affect our operations.

 

A departure of any of our executive officers, other key personnel or directors could adversely affect our operations. The community involvement of our executive officers and directors and our directors’ diverse and extensive business relationships are important to our success. A material change in the composition of our management team or board of directors could cause our business to suffer.

 

We may not realize the full expected benefit of our significant deferred income tax assets.

 

At December 31, 2017, we had gross deferred tax assets of $6.0 million. Our ability to realize our deferred tax assets is based on the extent to which we generate future taxable income and on prevailing corporate income tax rates, and we cannot provide any assurance as to when and to what extent we will generate sufficient future taxable income to realize our deferred tax assets, whether in whole or in any part. On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (“Tax Reform”) was enacted into law. While we believe that the full impact of Tax Reform on our business may not be fully known for some time, its reduction of the federal corporate income tax rate to 21% required us to record a one-time, non-cash charge of approximately $2.5 million to our provision for income taxes in the fourth quarter of 2017. The charge is solely due to the accounting re-measurement of our deferred tax assets based on the lower income tax rate. While we believe that Tax Reform will not impact the ability of our deferred tax assets, as re-measured, to reduce the amount of cash to be paid in federal income taxes in 2018 and beyond, any future lowering of corporate income tax rates and/or adjustment in the treatment of deferred tax assets could impact the realization as well as the value of our deferred tax assets in our consolidated balance sheets, and these impacts could be material and adverse. Further, we have filed our tax returns based on certain filing positions that we believe are appropriate. Should the applicable taxing authorities disagree with these positions, we may owe additional taxes.

 

Item 1B.

Unresolved Staff Comments.

 

None.

 

Item 2.

Properties.

 

The Bank owns all of its offices, including its executive offices, without encumbrances. ALC owns a commercial building in Jackson, Alabama, which houses its Jackson branch office, and leases additional office space throughout Alabama and southeast Mississippi. Bancshares does not separately own any property, and to the extent that its activities require the use of physical office facilities, such activities are conducted at the offices of the Bank. We believe that our properties are sufficient for our operations at the current time.

 

Item 3.

Legal Proceedings.

 

We are party to certain ordinary course litigation, and we intend to vigorously defend ourselves in all such litigation. In the opinion of management, based on a review and consultation with our legal counsel, the outcome of such ordinary course litigation should not have a material adverse effect on our consolidated financial statements or results of operations.

 

Item 4.

Mine Safety Disclosures.

 

Not applicable.

 

 

PART II

 

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

 

Bancshares’ common stock is listed on the Nasdaq Capital Market under the symbol “FUSB.” Prior to our name change on October 11, 2016, our common stock was listed on the Nasdaq Capital Market under the symbol “USBI.” As of March 12, 2018, there were 738 record holders of Bancshares’ common stock (excluding any participants in any clearing agency and “street name” holders).

 

The following table sets forth, for the calendar quarters indicated, the high and low sales prices per share for Bancshares’ common stock as reported on the Nasdaq Capital Market, and the cash dividends declared per share in each such quarter.

 

										Dividends
										Declared
		High				Low				Per Share
2017
Fourth Quarter		$	14.38			$	11.00			$	0.02
Third Quarter			12.14				10.87				0.02
Second Quarter			12.92				10.38				0.02
First Quarter			15.14				10.86				0.02
2016
Fourth Quarter		$	11.84			$	9.51			$	0.02
Third Quarter			10.89				8.65				0.02
Second Quarter			10.28				7.92				0.02
First Quarter			8.99				7.90				0.02

 

The last reported sales price of Bancshares’ common stock as reported on the Nasdaq Capital Market on March 12, 2018, was $11.80.

 

Dividends are paid at the discretion of Bancshares’ Board of Directors, based on our consolidated operating performance and financial position, including earnings, capital and liquidity. Dividends from the Bank are Bancshares’ primary source of funds for the payment of dividends to its shareholders, and there are various legal and regulatory limits regarding the extent to which the Bank may pay dividends or otherwise supply funds to Bancshares. In addition, federal and state regulatory agencies have the authority to prevent Bancshares from paying a dividend to its shareholders. We can make no assurances that we will be able or permitted to pay dividends in the future.

 

As noted in the table below, there were no purchases made by or on behalf of Bancshares or any “affiliated purchaser,” as defined in Rule 10b-18(a)(3) of the Exchange Act, of shares of Bancshares’ common stock during the fourth quarter of 2017.

 

		Issuer Purchases of Equity Securities
Period		Total Number of Shares Purchased				Average Price Paid per Share				Total Number of Shares Purchased as Part of Publicly Announced Programs(1)				Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Programs(1)
October 1-31, 2017			—			$	—				—				242,303
November 1-30, 2017			—			$	—				—				242,303
December 1-31, 2017			—			$	—				—				242,303
Total			—	(2)		$	—				—				242,303

 

(1)

On December 20, 2017, the Board of Directors extended the share repurchase program previously approved by the Board on January 19, 2006. Under the repurchase program, Bancshares is authorized to repurchase up to 642,785 shares of common stock before December 31, 2018, of which 242,303 shares remain available.

(2)

No shares were purchased in open-market transactions by an independent trustee for Bancshares’ 401(k) Plan during the fourth quarter of 2017.

 

 

Item 6.

Selected Financial Data

 

FIRST US BANCSHARES, INC. AND SUBSIDIARIES

 

SELECTED FINANCIAL DATA

 

		Year Ended December 31,
		2017				2016				2015				2014				2013
		(Dollars in Thousands, except Per Share Amounts)
Results of Operations:
Interest income		$	31,100			$	30,155			$	29,897			$	31,361			$	33,636
Interest expense			2,706				2,271				2,289				2,553				2,905
Net interest income			28,394				27,884				27,608				28,808				30,731
Provision (reduction in reserve) for loan losses			1,987				3,197				216				(74	)			(642	)
Non-interest income			4,666				5,201				4,531				5,091				4,865
Non-interest expense			28,449				28,495				28,377				28,595				30,802
Income before income taxes			2,624				1,393				3,546				5,378				5,436
Income taxes(1)			3,035				169				951				1,829				1,509
Net income (loss)(1)		$	(411	)		$	1,224			$	2,595			$	3,549			$	3,927
Per Share Data:
Basic net income (loss) per share(1)		$	(0.07	)		$	0.20			$	0.42			$	0.58			$	0.65
Diluted net income (loss) per share(1)		$	(0.06	)		$	0.19			$	0.41			$	0.57			$	0.65
Dividends declared		$	0.08			$	0.08			$	0.08			$	0.03			$	—
Common stock price - High		$	15.14			$	11.84			$	9.74			$	8.99			$	10.40
Common stock price - Low		$	10.38			$	7.90			$	7.75			$	7.40			$	5.10
Period end price per share		$	12.80			$	11.11			$	8.92			$	8.84			$	7.29
Period end shares outstanding (in thousands)			6,082				6,043				6,039				6,034				6,028
Period-End Balance Sheet:
Total assets		$	625,581			$	606,892			$	575,782			$	572,609			$	569,801
Loans, net of allowance for loan losses			346,121				322,772				255,432				259,516				300,927
Allowance for loan losses			4,774				4,856				3,781				6,168				9,396
Investment securities, net			180,150				207,814				231,202				234,086				170,804
Total deposits			517,079				497,556				479,258				483,659				484,279
Short-term borrowings			15,594				10,119				7,354				436				1,231
Long-term debt			10,000				15,000				5,000				5,000				5,000
Total shareholders’ equity			76,208				76,241				77,030				75,162				70,095
Book value			12.53				12.62				12.76				12.46				11.63
Performance Ratios:
Loans to deposits			66.9	%			64.9	%			53.3	%			53.7	%			62.1	%
Net yield on interest earning assets			5.08	%			5.16	%			5.36	%			5.53	%			5.95	%
Return on average assets(1)			(0.07	)%			0.21	%			0.46	%			0.63	%			0.70	%
Return on average equity(1)			(0.52	)%			1.56	%			3.41	%			4.88	%			5.68	%
Asset Quality:
Allowance for loan losses as % of loans			1.36	%			1.48	%			1.46	%			2.32	%			3.03	%
Nonperforming assets as % of loans and other real estate			1.67	%			2.19	%			3.45	%			5.23	%			6.74	%
Nonperforming assets as % of total assets			0.95	%			1.20	%			1.59	%			2.50	%			3.78	%
Net charge-offs as a % of average loans			0.62	%			0.72	%			1.07	%			1.55	%			2.77	%
Capital Adequacy:
CET 1 risk-based capital ratio			18.41	%			19.01	%			22.19	%			n/a				n/a
Tier 1 risk-based capital ratio			18.41	%			19.01	%			22.19	%			21.51	%			18.07	%
Total risk-based capital ratio			19.60	%			20.26	%			23.35	%			22.78	%			19.34	%
Tier 1 leverage ratio			11.89	%			12.27	%			13.02	%			11.85	%			10.97	%

 

⁽¹⁾ For the year ended December 31, 2017, the Company recorded a one-time, non-cash charge of $2.5 million that resulted from re-valuation of the Company’s deferred tax assets upon the enactment of the Tax Cuts and Jobs Act of 2017 (“Tax Reform”). The adjusted net income and related per share data and key ratios presented in the table below provide comparative selected financial data excluding the impact of Tax Reform. The table below is not prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The Company’s management believes that this non-GAAP presentation is useful in demonstrating the one-time impact of the deferred tax asset adjustment on the Company’s results for the periods presented, but cautions readers that non-GAAP measures should not be viewed as a substitute for results determined in accordance with GAAP.

 

 

FIRST US BANCSHARES, INC. AND SUBSIDIARIES

 

ADJUSTED NET INCOME AND RELATED PER SHARE DATA AND KEY RATIOS

 

(non-U.S. GAAP presentation to show impact of Tax Reform)

 

 

		Year Ended December 31,
		2017				2016				2015				2014				2013
		(Dollars in Thousands, except Per Share Amounts)
As Reported:
Income (loss) before income taxes		$	2,624			$	1,393			$	3,546			$	5,378			$	5,436
Provision (benefit from) for income taxes			3,035				169				951				1,829				1,509
Net income (loss)		$	(411	)		$	1,224			$	2,595			$	3,549			$	3,927
Impact of Tax Reform:
Provision (benefit from) for income taxes			(2,471	)			—				—				—				—
Adjusted Net income (loss)		$	2,060			$	1,224			$	2,595			$	3,549			$	3,927
Per Share Data:
Reported Basic net income (loss) per share		$	(0.07	)		$	0.20			$	0.42			$	0.58			$	0.65
Impact of Tax Reform			(0.40	)			—				—				—				—
Adjusted Basic net income (loss) per share		$	0.33			$	0.20			$	0.42			$	0.58			$	0.65
Reported Diluted net income (loss) per share		$	(0.06	)		$	0.19			$	0.41			$	0.57			$	0.65
Impact of Tax Reform			(0.38	)			—				—				—				—
Adjusted Diluted net income (loss) per share		$	0.32			$	0.19			$	0.41			$	0.57			$	0.65
Key Ratios:
Reported Return on average assets			(0.07	)%			0.21	%			0.46	%			0.63	%			0.70	%
Impact of Tax Reform			(0.40	)%			—				—				—				—
Adjusted Return on average assets			0.33	%			0.21	%			0.46	%			0.63	%			0.70	%
Reported Return on average equity			(0.52	)%			1.56	%			3.41	%			4.88	%			5.68	%
Impact of Tax Reform			(3.15	)%			—				—				—				—
Adjusted Return on average equity			2.63	%			1.56	%			3.41	%			4.88	%			5.68	%

 

 

 

 

Item 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Forward-Looking Statements

 

Statements contained in this Annual Report on Form 10-K that are not historical facts are forward-looking statements (as defined in the Private Securities Litigation Reform Act of 1995). In addition, the Company, through its senior management, from time to time makes forward-looking statements concerning its expected future operations and performance and other developments. The words “estimate,” “project,” “intend,” “anticipate,” “expect,” “believe,” “continues” and similar expressions are indicative of forward-looking statements. Such forward-looking statements are necessarily estimates reflecting the Company’s best judgment based on current information and involve a number of risks and uncertainties, and various factors could cause results to differ materially from those contemplated by such forward-looking statements. Such factors could include those identified from time to time in the Company’s Securities and Exchange Commission (“SEC”) filings and other public announcements, including the risk factors described in this Annual Report on Form 10-K for the year ended December 31, 2017. Specifically, with respect to statements relating to loan demand, growth and earnings potential, expansion and the adequacy of the allowance for loan losses for the Company, these factors include, but are not limited to, the rate of growth (or lack thereof) in the economy generally and in the Bank’s and ALC’s service areas, market conditions and investment returns, the availability of quality loans in the Bank’s and ALC’s service areas, the relative strength and weakness in the consumer and commercial credit sectors and in the real estate markets, collateral values and cybersecurity threats. Forward-looking statements speak only as of the date they are made, and the Company undertakes no obligation to revise forward-looking statements to reflect circumstances or events that occur after the dates on which the forward-looking statements are made, except as required by law.

 

In addition, the Company’s business is subject to a number of general and market risks that would affect any forward-looking statements, including the risks discussed under Item 1A herein entitled “Risk Factors.”

 

DESCRIPTION OF THE BUSINESS

 

First US Bancshares, Inc., a Delaware corporation (“Bancshares”), is a bank holding company with its principal offices in Birmingham, Alabama. Bancshares operates one commercial banking subsidiary, First US Bank (the “Bank”). As of December 31, 2017, the Bank operated and served its customers through 16 banking offices located in Birmingham, Bucksville, Butler, Calera, Centreville, Columbiana, Gilbertown, Grove Hill, Harpersville, Jackson, Thomasville, Tuscaloosa and Woodstock, Alabama, as well as a loan production office in Mountain Brook, Alabama.

 

The Bank owns all of the stock of Acceptance Loan Company, Inc., an Alabama corporation (“ALC”). ALC is a finance company organized for the purpose of making and purchasing consumer loans. ALC’s principal office is located in Mobile, Alabama. The Bank is the funding source for ALC. As of December 31, 2017, in addition to its principal office, ALC operated 21 offices located in Alabama and southeast Mississippi.

 

The Bank provides a wide range of commercial banking services to small- and medium-sized businesses, property managers, business executives, professionals and other individuals, while ALC’s business is focused on consumer lending.

 

FUSB Reinsurance, Inc., an Arizona corporation and a wholly-owned subsidiary of the Bank (“FUSB Reinsurance”), reinsures or “underwrites” credit life and credit accident and health insurance policies sold to the Bank’s and ALC’s consumer loan customers. FUSB Reinsurance is responsible for the first level of risk on these policies up to a specified maximum amount, and a third-party insurer retains the remaining risk. The third-party insurer is also responsible for performing most of the administrative functions of FUSB Reinsurance on a contract basis.

 

Delivery of the best possible financial services to customers remains an overall operational focus of Bancshares and its subsidiaries (collectively, the “Company”). We recognize that attention to detail and responsiveness to customers’ desires are critical to customer satisfaction. The Company continues to upgrade technology, both in its financial services and in the training of its 249 full-time equivalent employees, to ensure customer satisfaction and convenience.

 

The following discussion and financial information are presented to aid in an understanding of the current consolidated financial position, changes in financial position, results of operations and cash flows for the Company and should be read in conjunction with the Company’s Audited Consolidated Financial Statements and Notes thereto included herein. The emphasis of the discussion is on the years 2017 and 2016. All yields and ratios presented and discussed herein are recorded and presented on the accrual basis and not on the tax-equivalent basis, unless otherwise indicated.

 

 

 

CRITICAL ACCOUNTING ESTIMATES

 

The preparation of the Company’s consolidated financial statements requires management to make subjective judgments associated with estimates. These estimates are necessary to comply with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and general banking practices. The estimates include accounting for the allowance for loan losses, other real estate owned, valuation of deferred tax assets and fair value measurements.

 

Allowance for Loan Losses

 

The Company maintains the allowance for loan losses at a level deemed adequate by management to absorb probable losses from loans in the portfolio at the balance sheet date. In determining the adequacy of the allowance for loan losses, management considers numerous factors, including, but not limited to, management’s estimate of: (a) loan loss experience, (b) the financial condition and liquidity of certain loan customers and (c) collateral values of property securing certain loans. Because these factors and others involve the use of management’s estimation and judgment, the allowance for loan losses is inherently subject to adjustment at future dates. Unfavorable changes in the factors used by management to determine the adequacy of the allowance, including increased loan delinquencies and subsequent charge-offs, or the availability of new information, could require additional provisions in excess of normal provisions to the allowance for loan losses in future periods. There can be no assurance that loan losses in future periods will not exceed the allowance for loan losses or that additions to the allowances will not be required.

 

Other Real Estate Owned

 

Other real estate owned (“OREO”) consists of properties obtained through foreclosure or in satisfaction of loans and is reported at the lower of the loan's carrying amount or the fair value of the property, less estimated costs to sell. Estimates of fair value are generally based on third-party appraisals of the property and are classified within Level 3 of the fair value hierarchy. The appraisals are sometimes discounted based on management's knowledge of the property and/or changes in market conditions from the date of the most recent appraisal. Such discounts are typically unobservable inputs for determining fair value.

 

Deferred Tax Asset Valuation

 

Income tax expense and current and deferred tax assets and liabilities reflect management’s best estimate of current and future taxes to be paid. Deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the consolidated financial statements, which will result in taxable or deductible amounts in the future. Deferred tax assets may also arise from the carryforward of operating loss or tax credit carryforwards as allowed by applicable federal or state tax jurisdictions. In evaluating the ability to recover deferred tax assets in the tax jurisdictions from which they arise, management considers all available positive and negative evidence, including the Company’s historical earnings and, in particular, the results of recent operations, expected reversals of temporary differences, the ability to utilize tax planning strategies, and the expiration dates of any operating loss and tax credit carryforwards. A valuation allowance is recognized for a deferred tax asset if, based on the weight of all available evidence, it is more likely than not that some portion of or the entire deferred tax asset will not be realized. The assumptions about the amount of future taxable income require the use of significant judgment and are consistent with the plans and estimates that management uses in the underlying business. At this time, management considers it to be more likely than not that the Company will have sufficient taxable income in the future to allow all deferred tax assets to be realized. Accordingly, a valuation allowance was not established for deferred tax assets as of December 31, 2017 and 2016.

 

Fair Value Measurements

 

Portions of the Company’s assets and liabilities are carried at fair value, with changes in fair value recorded either in earnings or accumulated other comprehensive income (loss). These include securities available-for-sale, impaired loans and derivatives. Additionally, other real estate and certain other assets acquired in foreclosure are reported at the lower of the recorded investment or fair value of the property, less estimated cost to sell. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between willing market participants at the measurement date. While management uses judgment when determining the price at which willing market participants would transact when there has been a significant decrease in the volume or level of activity for the asset or liability in relation to “normal” market activity, management’s objective is to determine the point within the range of fair value estimates that is most representative of a sale to a third party under current market conditions. The value to the Company if the asset or liability were held to maturity is not included in the fair value estimates.

 

A fair value measure should reflect the assumptions that market participants would use in pricing the asset or liability, including the assumptions about the risk inherent in a particular valuation technique, the effect of a restriction on the sale or use of an asset and the risk of nonperformance. Fair value is measured based on a variety of inputs that the Company utilizes. Fair value may be based on quoted market prices for identical assets or liabilities traded in active markets (Level 1 valuations). If market prices are not available, we may use quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market (Level 2 valuations). Where observable market data is not available, the valuation is generated from model-based techniques that use significant assumptions not observable in the market, but that are observable based on Company-specific data (Level 3 valuations). These unobservable assumptions reflect the Company’s own estimates for assumptions that market participants would use in pricing the asset or liability.

 

Other Significant Accounting Policies

 

Other significant accounting policies, not involving the same level of measurable uncertainties as those discussed above, are nevertheless important to an understanding of the consolidated financial statements. Policies related to revenue recognition, investment securities and long-lived assets require difficult judgments on complex matters that are often subject to multiple and recent changes in the authoritative guidance. Certain of these matters are among topics currently under re-examination by accounting standard setters and regulators. Specific conclusions have not been reached by these standard setters, and outcomes cannot be predicted with confidence. See Note 2, “Summary of Significant Accounting Policies,” in the Notes to the Consolidated Financial Statements, which discusses accounting policies that we have selected from acceptable alternatives.

 

 

 

 

EXECUTIVE OVERVIEW

 

The composition of the Company’s earnings continued to improve in 2017 compared to the previous year. Income before income taxes totaled $2.6 million in 2017, compared to $1.4 million in 2016. The 2017 results were positively impacted by increased net interest income as a result of growth in net loans, as well as a decrease in the provision for loan losses, compared to 2016. The improved results in net interest income were partially offset by reductions in non-interest income, primarily resulting from reduced gains on sale of investment securities. Non-interest expense was flat comparing 2017 to 2016.

 

At the end of 2017, the Company adjusted its deferred tax assets and liabilities in accordance with the new federal corporate tax rate under the Tax Cuts and Jobs Act of 2017 (“Tax Reform”). The deferred tax asset adjustments resulted in a one-time, non-cash charge of $2.5 million, which was included in the Company’s provision for income taxes in 2017. As a result of this charge to the provision for income taxes, the Company recorded a net loss of $0.4 million, or $(0.06) per diluted share, in 2017, compared to net income of $1.2 million, or $0.19 per diluted share, in 2016.

 

As of December 31, 2017, the Company's net loans totaled $346.1 million, an increase of $23.3 million, or 7.2%, compared to December 31, 2016. Of the total loan growth in 2017, $17.4 million was attributable to the Bank’s commercial lending efforts, while $5.9 million was attributable to consumer lending at ALC. The Bank’s commercial lending strategy over the past 24 to 36 months has been focused on the larger metropolitan service territories of Birmingham and Tuscaloosa, Alabama, and the majority of the Bank’s loan growth has been concentrated in those areas.  ALC’s loan growth in 2017 was attributable to continued expansion of indirect lending through point-of-sale retail opportunities. This growth has led to overall improvement of the credit quality of ALC’s portfolio in recent years, resulting in reduced credit losses, along with a reduction in yield.

 

Pre-provision net interest income totaled $28.4 million for the year ended December 31, 2017, compared to $27.9 million for the year ended December 31, 2016, an increase of $0.5 million. The increase resulted from an increase in total interest income of $0.9 million, partially offset by an increase of $0.4 million in total interest expense.  The increased interest income was driven by loan growth, partially offset by a modest reduction in yield. Average loans for the Company totaled $331.7 million and $293.0 million in 2017 and 2016, respectively, while yield decreased to 5.57% in 2017, compared to 5.59% in 2016. The increase in interest expense resulted from increases in interest-bearing deposits, as well as increases in interest rates charged on deposits and borrowings commensurate with the overall interest rate environment in 2017. Average interest-bearing deposits increased by $18.9 million in 2017 compared to 2016. The aggregate interest rate on interest-bearing liabilities increased to 0.60% in 2017, compared to 0.53% in 2016.   Net yield on interest-earning assets totaled 5.08% in 2017, compared to 5.16% in 2016.

 

As a result of the credit management efforts at both the Bank and ALC, the Company’s loan loss experience and asset quality continued to improve in 2017. For the Company, net charge-offs were 0.62% of average loans in 2017, compared to 0.72% in 2016. For both years, the Bank was in a net recovery position of $0.2 million, or (0.07%) and (0.09%) of average loans in 2017 and 2016, respectively. ALC recorded net charge-offs of $2.2 million, or 2.49% of average loans, in 2017, compared to $2.3 million, or 2.69% of average loans, in 2016. Non-performing assets, including loans in non-accrual status and other real estate owned (OREO), decreased by 18.3% to $5.9 million as of December 31, 2017, compared to $7.3 million as of December 31, 2016. Non-performing assets as a percentage of total assets totaled 0.96% as of December 31, 2017, compared to 1.20% as of December 31, 2016. As a percentage of shareholders’ equity, non-performing assets improved to 7.9% as of December 31, 2017, compared to 9.5% as of December 31, 2016.

 

The Company recorded provision for loan losses of $2.0 million in 2017, compared to $3.2 million in 2016. The provision for loan losses reflects the expense required to establish the allowance for loan losses at a level that in management’s judgment is adequate to absorb losses in the loan portfolio as of the balance sheet date. The Company’s allowance for loan losses as a percentage of loans decreased to 1.36% as of December 31, 2017, compared to 1.48% as of December 31, 2016. The decrease resulted from the continued overall improvement in loss experience at ALC, as well as the resolution of certain loan relationships at the Bank that were previously considered impaired. The allowance for loan losses as a percentage of loans at the Bank decreased to 0.95% as of December 31, 2017, compared to 1.01% as of December 31, 2016. At ALC, the allowance for loan losses as a percentage of loans totaled 2.48% as of December 31, 2017, compared to 2.78% as of December 31, 2016.

 

Non-interest income for the Company totaled $4.7 million in 2017, compared to $5.2 million in 2016. The decrease resulted primarily from reductions in gains on sale and prepayment of investment securities at the Bank, and to a lesser extent, reductions in certain ancillary revenues at the Bank and ALC. These reductions were offset in part by increased revenues from service charges and other fees on deposit accounts at the Bank and credit insurance commissions and fees on policies sold at ALC.

 

Non-interest expense for the Company totaled $28.4 million for the year ended December 31, 2017, compared to $28.5 million for the year ended December 31, 2016. Although non-interest expense remained relatively flat in 2017 compared to 2016, management continued efforts to expend resources in areas that it believes will be beneficial to the Company in the future.

 

 

 

 

Balance Sheet Management

 

Loan growth at the Bank and ALC was funded through available cash balances, growth in deposits and cash flows generated from the investment securities portfolio. Investment securities, combined with federal funds sold, totaled $195.2 million as of December 31, 2017, compared to $207.8 million as of December 31, 2016, a decrease of $12.6 million. The decrease resulted from maturity of securities, as well as the sale of securities from the Bank’s available-for-sale portfolio. The cash generated from the reduction of the portfolio was primarily redeployed in the loan portfolio. All sales of securities in 2017 resulted in net realized gains. Investment securities and federal funds sold serve to both enhance interest income and provide an additional source of liquidity available to fund loan growth and capital expenditures. Management has structured the investment portfolio to provide cash flows through interest earned and the maturity or payoff of securities in the portfolio on a monthly basis. In the current environment, we expect that cash flows from the investment portfolio will continue to serve as a significant source of liquidity available for the funding of future loan growth.

 

Total deposits increased $19.5 million, or 3.8%, comparing December 31, 2017 to December 31, 2016. Deposit growth provided additional funding sources for loan growth during 2017. Deposits generated through the Bank’s branch system are considered the Company’s primary funding source to meet short- and long-term liquidity needs. In addition to deposits, significant external sources of liquidity are available to the Company, including access to funding through federal funds lines, Federal Home Loan Bank advances and brokered deposits.

 

A significant portion of deposit growth in 2017 was generated at the Bank’s new retail banking office in Birmingham, Alabama, which opened during the third quarter of 2017. The new office is part of an office complex that also houses the Bank’s Birmingham-based commercial lending team and members of executive management that are based in Birmingham. At the end of the third quarter of 2017, the Company and the Bank relocated their headquarters to the office complex. The construction of the office complex resulted in increases to premises and equipment of $8.1 million during 2017.

 

Shareholders’ equity was $76.2 million, or $12.53 per common share, as of December 31, 2017, compared to $76.2 million, or $12.62 per common share, as of December 31, 2016.

 

Progress on Strategic Initiatives

 

Management focused on various strategic initiatives during 2017, including those summarized below.

 

●

Expansion of Metropolitan Presence – During 2017, the Bank continued efforts to expand into contiguous metropolitan markets with the completion of an office complex along U.S. Highway 280 in Birmingham, Alabama that houses a retail banking office and the Bank’s Birmingham-based commercial lending team. In addition, at the end of the third quarter of 2017, the headquarters of both the Company and the Bank were relocated to the office complex. Management believes that the establishment of a strong presence in the Birmingham metropolitan area will serve as a significant enhancement of the Company’s profile and ability to grow both quality assets and core deposits over the long-term.

 

●

Quality Loan Growth – Management’s primary focus over the past two years has been growth of the loan portfolio, and in particular, the Bank’s commercial loan portfolio. As a result of this focus, the Company’s net loans increased by $90.7 million over the two-year period between December 31, 2015 and December 31, 2017. Approximately $80.9 million of this growth was attributable to the Bank’s commercial lending portfolio, while approximately $9.7 million was attributable to ALC’s consumer-oriented portfolio. Management believes that continued growth of the loan portfolio within established credit standards is critical to improving the Company’s earnings position over time. The Company’s balance sheet remains poised for additional growth. Loans as a percentage of deposits totaled 66.9% as of December 31, 2017, compared to 64.9% as of December 31, 2016, and 53.3% as of December 31, 2015.

 

●

Deposit Growth – Management views continued growth in core deposits as an important strategic imperative to fund loan growth over the longer term. As discussed above, the primary driver of deposit growth in 2017 was the Bank’s new Birmingham office that became operational in 2017. Furthermore, the Bank continues to enhance its deposit offerings, including demand deposit accounts structured under a suite of products known as “First Link Checking,” as well as cash management products for commercial banking clients.

 

●

Technological Advancement and Cybersecurity – The Company continued strategic efforts in 2017 to enhance its technological platforms to improve customer service offerings and to mitigate risks associated with cybersecurity. The Company also continued efforts to upgrade its computer and telephone network systems. These efforts are expected to further enhance risk mitigation and efficiency at both the Bank and ALC.

 

●

Credit Quality – While the Bank and ALC both experienced loan growth in 2017, management at both entities remains vigilant with respect to the credit quality of the loan portfolio. At the Bank, this includes continued adherence to previously established credit policies and procedures, and at ALC, this includes continued focus on indirect retail lending opportunities, which generally provide loans of higher credit quality than traditional consumer lending.

 

●

Mortgage Division – In 2017, the Bank began originating loans into the secondary market through a mortgage division. Management believes that the ability to serve our customer base in the future through a full array of secondary market mortgage services will allow the Bank to provide a wider range of product offerings in its existing service territories. Additionally, this unit will provide an opportunity to originate loans for the Bank's portfolio that reflect our credit criteria and fit strategically into our earning asset mix.

 

●

Market/Interest Rate Risk Management – We continue to manage interest rate risk and evaluate lending, funding, pricing and hedging strategies through financial simulation models and tools utilized by the Company’s Asset/Liability Committee. As part of this evaluation, management considers the current and prospective mix of fixed and variable rate lending arrangements at the Bank and ALC. Approximately 59.4% of the Bank’s new loan growth during 2017 was in fixed rate lending arrangements, while approximately 40.6% was at variable rates. As of December 31, 2017, fixed rate loans at the Bank totaled $241.9 million, while variable rate loans totaled $98.0 million. All loans at ALC as of December 31, 2017 were considered fixed rate loans; however, average terms of loans at ALC are relatively short, with average terms of new loans at 24 to 36 months.

 

 

 

RESULTS OF OPERATIONS

 

		Year Ended December 31,
		2017				2016
		(Dollars in Thousands)
Interest income		$	31,100			$	30,155
Interest expense			2,706				2,271
Net interest income			28,394				27,884
Provision for loan losses			1,987				3,197
Net interest income after provision for loan losses			26,407				24,687
Non-interest income			4,666				5,201
Non-interest expense			28,449				28,495
Income before income taxes			2,624				1,393
Provision for income taxes			3,035				169
Net income		$	(411	)		$	1,224

 

 

Net Interest Income

 

Net interest income is calculated as the difference between interest and fee income generated from earning assets and the interest expense paid on deposits and borrowed funds. Fluctuations in interest rates, as well as volume and mix changes in earning assets and interest-bearing liabilities, can materially impact net interest income. The Company’s earning assets consist of loans at both the Bank and ALC, as well as taxable and nontaxable investments and federal funds sold by the Bank. Interest-bearing liabilities consist of interest-bearing demand deposits and savings and time deposits, as well as short-term borrowings and long-term debt. Net interest income for the Company increased $0.5 million, or 1.8%, in 2017 compared to 2016.

 

 

The following table shows the average balances of each principal category of assets, liabilities and shareholders’ equity for the years ended December 31, 2017 and 2016. Additionally, the table provides an analysis of interest revenue or expense associated with each category, along with the accompanying yield or rate percentage. Net yield is calculated for each period presented as net interest income divided by average total interest-earning assets.

 

		Year Ended December 31,
		2017												2016
		Average Balance				Interest				Annualized Yield/ Rate %				Average Balance				Interest				Annualized Yield/ Rate %
		(Dollars in Thousands)
ASSETS
Interest-earning assets:
Loans – Bank (Note A)		$	241,940			$	10,130				4.19	%		$	206,858			$	8,866				4.29	%
Loans – ALC (Note A)			89,794				16,866				18.78	%			86,137				17,071				19.82	%
Taxable investment securities			191,390				3,487				1.82	%			211,026				3,619				1.71	%
Non-taxable investment securities			8,355				304				3.64	%			13,449				483				3.59	%
Federal funds sold			1,274				20				1.57	%			3,210				18				0.56	%
Interest-bearing deposits in banks			25,669				293				1.14	%			19,202				98				0.51	%
Total interest-earning assets			558,422				31,100				5.57	%			539,882				30,155				5.59	%
Non-interest-earning assets:
Other assets			56,876												49,666
Total		$	615,298											$	589,548
LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest-bearing liabilities:
Demand deposits		$	163,301			$	633				0.39	%		$	150,472			$	547				0.36	%
Savings deposits			81,420				199				0.24	%			77,435				145				0.19	%
Time deposits			183,477				1,575				0.86	%			181,415				1,402				0.77	%
Borrowings			23,082				299				1.30	%			17,519				177				1.01	%
Total interest-bearing liabilities			451,280				2,706				0.60	%			426,841				2,271				0.53	%
Non-interest-bearing liabilities:
Demand deposits			78,609												76,781
Other liabilities			7,141												7,645
Shareholders’ equity			78,268												78,281
Total		$	615,298											$	589,548
Net interest income (Note B)						$	28,394											$	27,884
Net yield on interest-earning assets											5.08	%											5.16	%

 

Note A		—		For the purpose of these computations, non-accruing loans are included in the average loan amounts outstanding. At the Bank, these loans averaged $0.5 million and $1.1 million for 2017 and 2016, respectively. At ALC, these loans averaged $1.7 million for both of the respective periods presented.
Note B		—		Loan fees are included in the interest amounts presented. At the Bank, loan fees totaled $0.4 million and $0.3 million for 2017 and 2016, respectively. At ALC, loan fees totaled $2.2 million and $2.8 million for the respective periods presented.

 

 

The following table summarizes the impact of variances in volume and rate of interest-earning assets and interest-bearing liabilities on components of net interest income.

 

		2017 Compared to 2016 Increase (Decrease) Due to Change In:												2016 Compared to 2015 Increase (Decrease) Due to Change In:
		Volume				Average Rate				Net				Volume				Average Rate				Net
		(Dollars in Thousands)
Interest earned on:
Loans – Bank		$	1,504			$	(240	)		$	1,264			$	1,964			$	(1,963	)		$	1
Loans – ALC			725				(930	)			(205	)			1,495				(736	)			759
Taxable investments			(337	)			205				(132	)			(269	)			(126	)			(395	)
Non-taxable investments			(183	)			4				(179	)			(98	)			(8	)			(106	)
Federal funds			(11	)			13				2				—				18				18
Interest bearing deposits in banks			33				162				195				(26	)			7				(19)
Total interest-earning assets			1,731				(786	)			945				3,066				(2,808	)			258
Interest expense on:
Demand deposits			47				39				86				17				(64	)			(47	)
Savings deposits			7				47				54				7				2				9
Time deposits			16				157				173				(23	)			(108	)			(131	)
Other borrowings			56				66				122				65				86				151
Total interest-bearing liabilities			126				309				435				66				(84	)			(18	)
Increase (decrease) in net interest income		$	1,605			$	(1,095	)		$	510			$	3,000			$	(2,724	)		$	276

 

Interest income earned on loans at the Bank increased comparing 2017 to 2016 as a result of growth in average loan volume. The increase in interest income at the Bank was partially offset by a modest reduction in yield, which was a result of the competitive environment. At ALC, despite continued growth in loan volume, interest income decreased comparing 2017 to 2016 as a result of reductions in yield. The decrease in yield at ALC was due to continued focus on credit quality improvement. These activities have been ongoing for the past several years and have resulted in significant improvement in the credit quality of ALC’s portfolio, with a corresponding decrease in yield commensurate with reduced risk. The loan volume increases were partially offset by decreases in the average balances of taxable and non-taxable investments and federal funds sold. The shift in the mix of earning assets is consistent with management’s ongoing strategy to utilize cash flows from the maturity and paydown of investment securities to fund loan growth as opportunities permit. The investment portfolio has been structured to provide monthly cash flows through the maturity and paydown of securities in a manner that management believes can continue to fund a substantial portion of loan growth over time.

 

Interest expense increased comparing 2017 to 2016 due to increases in the volume of interest-bearing liabilities, as well as increases in rates commensurate with the interest rate environment experienced during the year ended December 31, 2017.

 

We expect that continued growth in net loan volume at both the Bank and ALC with loans of sufficient credit quality will enhance net interest income, particularly as resources are shifted from lower-earning investment securities to higher-earning loan balances. However, the competitive environment is significant relative to the generation of loans of high credit quality. At both the Bank and ALC, management is continuing to focus efforts on new loan origination within the parameters of established credit policy, while also maintaining vigilance in the deployment of strategies to effectively manage risks associated with interest rate fluctuations. Net interest income could experience downward pressure as a result of increased competition for quality loan opportunities, lower reinvestment yields and fewer opportunities to reduce future funding costs.

 

Provision (Reduction in Reserve) for Loan Losses

 

The provision for loan losses is an expense used to establish the allowance for loan losses. Actual loan losses, net of recoveries, are charged directly to the allowance for loan losses. The expense recorded for each reporting period is a reflection of actual net losses experienced during the period and management’s judgment as to the adequacy of the allowance to absorb losses inherent in the portfolio as of the balance sheet date. The following table presents the provision (reduction in reserve) for loan losses for the Bank and ALC for the years ended December 31, 2017 and 2016.

 

 

 

		Year Ended December 31,
		2017				2016
		(Dollars in Thousands)
Bank		$	(130	)		$	886
ALC			2,117				2,311
Net provision for loan losses		$	1,987			$	3,197

 

At the Bank, during the year ended December 31, 2017, recoveries of previously charged-off loans exceeded current period charge-offs.  In addition, during 2017, the Bank resolved a previously impaired loan relationship through the collection of contractual amounts due.  The resolution of the impairment, combined with continued net recoveries, enabled the Bank to reduce the allowance for loan losses by $0.1 million during the year.  The Bank’s allowance for loan losses as a percentage of loans totaled 0.95% as of December 31, 2017, compared to 1.01% as of December 31, 2016.

 

At ALC, the provision for loan losses decreased during the year ended December 31, 2017, based primarily on improvements in charge-off experience during the period.  ALC’s allowance for loan losses as a percentage of loans totaled 2.48% as of December 31, 2017, compared to 2.78% as of December 31, 2016.

 

For the Company, the allowance for loan losses totaled 1.36% as of December 31, 2017, compared to 1.48% as of December 31, 2016.  Based on our evaluation of the loan portfolio, we believe that the allowance for loan losses at both the Bank and ALC is adequate to absorb losses inherent in the loan portfolio as of December 31, 2017. While we believe that the methodologies and calculations that have been used in the determination of the allowance are adequate, our conclusions are based on estimates and judgments and are, therefore, approximate and imprecise. Factors beyond our control, such as changes in economic conditions impacting the national economy or the local service areas in which the Bank and ALC operate, may negatively and materially affect asset quality and the adequacy of the allowance for loan losses, as well as the resulting provision for loan losses.  In general, we expect the provision for loan losses to increase commensurate with growth in loan volume at both the Bank and ALC; however, we would also expect such increases to be partially offset should credit quality of the portfolio continue to improve.

 

 

Non-Interest Income

 

Non-interest income represents fees and income derived from sources other than interest-earning assets. The following table presents the major components of non-interest income. Expanded discussion of certain significant non-interest income items and fluctuations is provided below the table.

 

		Year Ended December 31,
		2017				2016				$ Change				% Change
		(Dollars in Thousands)
Service charges and other fees on deposit accounts		$	1,880			$	1,773			$	107				6.0	%
Credit insurance commissions and fees			715				681				34				5.0	%
Bank-owned life insurance			424				422				2				0.5	%
Net gain on sale and prepayment of investment securities			229				659				(430	)			(65.3	)%
Other income			1,418				1,666				(248	)			(14.9	)%
Total non-interest income		$	4,666			$	5,201			$	(535	)			(10.3	)%

 

 

Service Charges and Other Fees on Deposit Accounts

 

Service charges and other fees are generated on deposit accounts held at the Bank. The increase in this category of non-interest income during the year ended December 31, 2017 compared to the year ended December 31, 2016 resulted primarily from increased fees generated from service charges on deposit accounts.  Periodically, management evaluates the fee structure on the Bank’s deposit accounts in order to ensure that fees charged are competitive in the current environment and compliant with regulatory guidance. In addition, management continues to evaluate opportunities for deposit growth through further penetration in existing service territories.  We expect that income from these sources will grow over time as deposit levels grow.  However, there is significant competition among financial institutions for deposits.

 

Credit Insurance Commissions and Fees

 

Credit insurance commissions and fees are generated from credit life and credit accident and health insurance policies offered primarily at ALC to consumer loan customers through FUSB Reinsurance. The increase in non-interest income in this category during the year ended December 31, 2017 compared to the year ended December 31, 2016 resulted primarily from a focus by ALC management on product lines that facilitate the generation of these types of sales. Although revenues in this category increased in 2017 compared to 2016, such revenues are generally dependent on the mix of product lines offered at ALC and the specific needs of borrowers. Management continues to seek opportunities to grow revenues in this category when opportunities arise based on customer needs and in accordance with regulatory guidelines.

 

 

 

Bank-owned Life Insurance

 

The Bank utilizes bank-owned life insurance as a tool to offset the cost of certain retirement benefit programs. The income derived from bank-owned life insurance represents the increase in the cash surrender value of the policies (which is generally non-taxable) over the periods presented. The cash surrender value of the policies totaled $14.9 million and $14.6 million as of December 31, 2017 and December 31, 2016, respectively. The insurance policies are adjustable-rate assets with minimum guaranteed rates of interest between 2% and 4%. Accordingly, management does not expect significant fluctuation in the income derived from these assets.

 

Net Gain on Sale and Prepayment of Investment Securities

 

The investment securities portfolio is used by management to provide liquidity, to generate interest income and for use as collateral for public deposits and wholesale funding. Management reviews the securities in the investment portfolio periodically and, from time to time, may determine that it is appropriate to sell securities that are designated as securities available-for-sale. When this occurs, a gain or loss is recorded as the difference between the fair value of the security on the date of sale and the security's carrying value.  In addition, a gain may be recognized for prepayment penalties earned by the Company when a security is called by the debtor prior to its maturity date.  Because determinations of whether to sell investment securities are made by management based on specific facts and circumstances at a given point in time, no assessment can be made as to the level of gains or losses that could be incurred from sales of investment securities or prepayment penalties in the future.

 

Other Income

 

Other non-interest income includes fee income generated by the Bank for ancillary services, such as letters of credit, ATMs, debit and credit cards, wire transfers and real estate rental. In addition, other non-interest income is generated at ALC for ancillary services, including ALC’s auto club membership program, which provides members with emergency roadside assistance, lock and key services and reimbursement for emergency travel expenses. The decrease in other non-interest income in 2017 compared to 2016 resulted primarily from reductions in ACH fees and services at the Bank and in ALC’s auto club membership revenue.  In addition, other income was reduced as a result of collection of settlement amounts associated with a nonaccrual asset in 2016 that was not repeated in 2017. Given the nature of the types of revenues categorized as other income, there is uncertainty as to the level of revenue that will be derived from these sources in the future.

 

Non-Interest Expense

 

Non-interest expense represents expenses incurred from sources other than interest-bearing liabilities. The following table presents the major components of non-interest expense for the periods indicated. Expanded discussion of certain significant non-interest expense items and fluctuations is provided below the table.

 

		Year Ended December 31,
		2017				2016				$ Change				% Change
		(Dollars in Thousands)
Salaries and employee benefits		$	17,374			$	16,663			$	711				4.3	%
Net occupancy and equipment expense			3,164				3,150				14				0.4	%
Computer services			1,384				1,383				1				0.1	%
Insurance expense and assessments			644				1,032				(388	)			(37.6	)%
Fees for professional services			813				948				(135	)			(14.2	)%
Postage, stationery and supplies			674				725				(51	)			(7.0	)%
Telephone/data communication			830				691				139				20.1	%
Other real estate/foreclosure expense, net			538				719				(181	)			(25.2	)%
Other			3,028				3,184				(156	)			(4.9	)%
Total non-interest expense		$	28,449			$	28,495			$	(46	)			(0.2	)%

 

 

Salaries and Employee Benefits

 

Salaries and employee benefits expense, the largest category of non-interest expense, totaled $11.6 million and $10.8 million at the Bank and $5.8 million and $5.9 million at ALC in 2017 and 2016, respectively. The expense amounts for the Bank are inclusive of salaries and benefits paid to certain members of management and employees for work performed on behalf of Bancshares, as well as current and deferred fees paid to members of the Bank’s and Bancshares’ Boards of Directors. Management remains committed to providing salaries and benefits packages to employees at competitive levels in order to ensure that we continue to provide quality service to our customers. Accordingly, we expect salaries and employee benefits expense to generally increase commensurate with our growth and trends in the employment market over time.

 

 

Net Occupancy and Equipment Expense

 

This category of non-interest expense includes expenses associated with depreciation of buildings, equipment and furniture and fixtures, rent of office space, utilities expense and maintenance and repair costs. The majority of the Bank's office space is owned, while the majority of ALC's office space is leased. Net occupancy and equipment expense remained relatively flat comparing 2017 to 2016; however, these expenses are expected to increase over time due to inflationary adjustments in the cost of repairs and maintenance, as well as additional depreciation associated with capital expenditures. During 2017, the Company recorded approximately $8.9 million in capital additions to premises and equipment. The majority of these expenditures were associated with the construction of an office complex in Birmingham, Alabama. The office complex was placed into service during the third quarter of 2017, and the headquarters of both the Company and the Bank were relocated to that location at the end of the third quarter. As of December 31, 2017, approximately 29% of the usable square footage of the office complex was utilized by the Company, with the remainder available to be leased to commercial tenants. Annual depreciation associated with the office complex is expected to total approximately $0.4 million, with additional expenses incurred in connection with building operations, the level of which will depend on the extent to which the office space in the complex is leased. Upon full lease-up, management expects that the majority of depreciation expense, as well as additional operating costs associated with the complex, will be recovered through lease revenue; however, no assurance can be given regarding the office complex being fully leased by third-party tenants or the timing of such third-party leases.

 

Computer Services

 

Computer services expenses were primarily associated with core processing at the Bank and ALC. Due to the differing nature of their businesses, the Bank and ALC utilize different core processors. Although expenses in this category remained relatively flat in 2017 compared to 2016, in recent years, expenditures have generally increased in this category associated with efforts to enhance the Bank’s technology platform, including increased protections against data security risk and enhanced disaster recovery planning. Given the rapid pace of technological change, increases in this category of expense are generally expected to occur at a more rapid pace than other expense categories.

 

Insurance Expense and Assessments

 

This category of non-interest expense includes the cost of corporate insurance maintained by the Company, as well as FDIC insurance and state banking assessments. The Bank pays assessments to the FDIC based on a prescribed regulatory calculation that factors in average total assets and the Company’s supervisory ratings, as determined by regulatory examinations. The decrease in this expense category in 2017 compared to 2016 resulted primarily from reductions in FDIC assessments. Over time, management expects this category of expenses to increase based on growth in the Company’s balance sheet and expansion of the Company’s activities.

 

Fees for Professional Services

 

Fees for professional services include fees associated with legal, accounting and auditing, compliance and other consulting services. The decrease in these expenses in 2017 compared to 2016 resulted primarily from a decrease in professional fees associated with collections and other legal matters, which have decreased over time as a result of the increased credit quality in the Bank’s loan portfolio.  Although we do not anticipate significant fluctuations in this category of expense, we do expect inflationary increases over time, as well as increases associated with regulatory oversight and reporting requirements commensurate with the Company’s growth and development.

 

Postage, Stationery and Supplies

 

The decrease in expense in this category comparing 2017 to 2016 resulted from continued efforts by management at the Bank and ALC to manage controllable expenses. We will continue efforts to control these expenses in a prudent manner; however, expense in this category is generally expected to increase over time due to inflationary growth, as well as expanded penetration by the Bank into metropolitan service territories.

 

Telephone / Data Communications

 

The increase in this expense category for 2017 compared to 2016 was primarily associated with management’s efforts to enhance network and telephone capabilities. During 2016, the Company began efforts to upgrade its computer and telephone network systems, and these efforts continued in 2017. The upgrades are expected to create long-term benefits in improved efficiency and technical capabilities that will benefit both the Bank and ALC. In the short-term, however, we expect increases in this category of expenses as the Company continues upgrades.

 

Other Real Estate / Foreclosure Expense

 

Other real estate / foreclosure expense, net includes both the cost of carrying OREO and write-downs of OREO. Cost of carrying OREO includes property taxes, attorneys’ fees, maintenance costs, security costs and the cost of obtaining independent property appraisals. Write-downs include impairments recorded on existing OREO properties in order to carry the property at the lower of cost or fair value, less estimated cost to sell. Both OREO carrying costs and write-downs decreased in 2017 compared to 2016 as a result of continued reduction in the level of OREO at both the Bank and ALC. OREO totaled $3.5 million and $0.3 million at the Bank and ALC, respectively, as of December 31, 2017, compared to $4.4 million and $0.5 million, respectively, as of December 31, 2016, an overall decrease of $1.1 million for the Company.

 

Although management continued to reduce OREO levels in 2017, there is inherent uncertainty with respect to economic conditions and real estate values in certain of the service areas in which both the Bank and ALC operate. In addition, as the level of OREO is reduced, it becomes more difficult to work out remaining OREO at the same pace as experienced when OREO volumes were higher. Accordingly, continued reduction of carrying costs cannot be expected with any level of certainty. Furthermore, if the national or local economy weakens, or if real estate values decline in the Company’s primary service areas, additional write-downs of existing OREO could be required. Additionally, the pace of migration of properties into OREO could increase, resulting in the potential for increased levels of both write-downs and carrying costs.

 

 

 

Other

 

This category encompasses a variety of expenses, including business development, security services, sales and other taxes, employee training, expenses associated with fixed asset write-downs and other miscellaneous expenses. Comparing 2017 to 2016, expenses in this category decreased due to reductions in a number of areas, including collection fees, debit card fraud, impairment on closed branch assets and reserves for accident and health policies sold through FUSB Reinsurance. Certain of these reductions are expected to be offset in future periods; however, management continues to maintain vigilance in efforts to reduce these costs where opportunities to do so exist.

 

Provision for Income Taxes

 

The provision for income taxes was $3.0 million and $0.2 million for the years ended December 31, 2017 and 2016, respectively. The 2017 provision included a one-time, non-cash charge of $2.5 million associated with the revaluation of deferred tax assets and liabilities as a result of Tax Reform. The Company’s resulting 2017 effective tax rate was 115.7%. Of that percentage, 21.5% was associated with the Company's 2017 operations, while 94.2% related to the deferred tax re-valuations resulting from Tax Reform. The Company’s 2016 effective tax rate was 12.1%.

 

Beginning January 1, 2018, the Company’s federal statutory income tax rate was set at 21%, reduced from the 34% statutory rate previously applied. In general, it is expected that the Company’s effective tax rate will be reduced from previous levels (computed absent the impact of Tax Reform) in the near term; however, the effective tax rate may fluctuate based on recurring items, such as changes in tax-exempt interest earned from bank-qualified municipal bonds and loans and the cash surrender value of bank-owned life insurance. Management makes decisions about whether to invest in tax-exempt instruments on a case-by-case basis after considering a number of factors, including investment return, credit quality and consistency of such investments with the Company’s overall strategy. The Company’s effective tax rate is expected to fluctuate commensurate with the level of these investments as compared to total pre-tax income.

 

 

BALANCE SHEET ANALYSIS

 

Investment Securities

 

The investment securities portfolio is used by management to provide liquidity, to generate interest income and for use as collateral for public deposits and wholesale funding. Risk and return can be adjusted by altering the duration, composition and/or balance of the portfolio. The expected average life of securities in the investment portfolio was 2.8 years and 3.1 years as of December 31, 2017 and December 31, 2016, respectively.

 

Available-for-sale securities are recorded at estimated fair value, with unrealized gains or losses recognized, net of taxes, in accumulated other comprehensive income, a separate component of shareholders’ equity. As of December 31, 2017, available-for-sale securities totaled $153.9 million, or 85.4% of the total investment portfolio, compared to $181.9 million, or 87.5% of the total investment portfolio, as of December 31, 2016. Available-for-sale securities consisted of residential and commercial mortgage-backed securities, U.S. Treasury securities, obligations of U.S. government-sponsored agencies, obligations of state and political subdivisions and corporate notes.

 

Held-to-maturity securities are recorded at amortized cost and represent securities that the Company both intends and has the ability to hold to maturity. As of December 31, 2017, held-to-maturity securities totaled $26.3 million, or 14.6% of the total investment portfolio, compared to $25.9 million, or 12.5% of the total investment portfolio, as of December 31, 2016. Held-to-maturity securities consisted of commercial mortgage-backed securities, obligations of U.S. government-sponsored agencies and obligations of states and political subdivisions.

 

Due to growth in loan demand, management re-deployed certain investment assets to the loan portfolio. As a result, the investment securities portfolio (including both available-for-sale and held-to-maturity securities) decreased to $180.2 million as of December 31, 2017, compared to $207.8 million as of December 31, 2016. In addition, the Company realized gains on the sale of securities totaling $0.2 million as of December 31, 2017. All sales were made from the available-for-sale portfolio in response to market conditions that, in management’s view, were favorable for sale. No losses were realized from the sale of securities.

 

Management has structured the investment portfolio to provide cash flows on a monthly basis through interest earned and the maturity or payoff of securities in the portfolio. In the current environment, it is expected that cash flows from the investment portfolio will continue to serve as a significant source of liquidity available for the funding of future loan growth. In addition, purchase and sale transactions affecting the investment portfolio are directed by asset and liability management activities, with consideration given to the expected pace of loan growth. In general, it is expected that the investment portfolio will continue to decrease over time as loan volume increases. However, no assurance can be given as to the level or pace of loan growth that will ultimately materialize, and accordingly, there is uncertainty as to the ultimate level of increases or decreases in the investment portfolio. See Note 3, “Investment Securities,” in the Notes to the Consolidated Financial Statements for additional detail related to the investment portfolio.

 

 

Investment Securities Maturity Schedule

 

The following tables summarize the carrying values and weighted average yield of the available-for-sale and held-to-maturity securities portfolios as of December 31, 2017 according to contractual maturity. Available-for-sale securities are stated at fair value. Held-to-maturity securities are stated at amortized cost.

 

		Available-for-Sale
		Stated Maturity as of December 31, 2017
		Within One Year								After One But Within Five Years								After Five But Within Ten Years								After Ten Years
		Amount				Yield				Amount				Yield				Amount				Yield				Amount				Yield
		(Dollars in Thousands)
Investment securities available-for-sale:
Obligations of U.S. government-sponsored agencies		$	—				0.00	%		$	—				0.00	%		$	—				0.00	%		$	—				0.00	%
Obligations of states and political subdivisions			203				6.49				536				5.10				1,855				5.25				2,337				6.30
U.S. Treasury securities			80				1.38				—				0.00				—				0.00				—				0.00
Mortgage-backed securities:
Residential			99				3.61				19,611				1.77				45,975				1.92				17,101				1.97
Commercial			—				0.00				403				1.11				12,727				1.78				52,944				1.87
Total		$	382				4.68	%		$	20,550				1.84	%		$	60,557				1.99	%		$	72,382				2.04	%
Total securities with stated maturity																										$	153,871				2.00	%

 

 

		Held-to-Maturity
		Stated Maturity as of December 31, 2017
		Within One Year								After One But Within Five Years								After Five But Within Ten Years								After Ten Years
		Amount				Yield				Amount				Yield				Amount				Yield				Amount				Yield
		(Dollars in Thousands)
Investment securities held-to-maturity:
Obligations of U.S. government-sponsored agencies		$	—				0.00	%		$	1,201				2.17	%		$	3,398				1.58	%		$	4,727				1.95	%
Obligations of states and political subdivisions			—				0.00				414				3.00				900				1.98				574				3.05
Mortgage-backed securities:
Commercial			—				0.00				371				1.13				—				0.00				14,694				2.06
Total		$	—				0.00	%		$	1,986				1.94	%		$	4,298				1.67	%		$	19,995				2.07	%
Total securities with stated maturity																										$	26,279				2.01	%

 

 

Condensed Portfolio Maturity Schedule

 

Maturity Summary as of December 31, 2017		Dollar Amount				Portfolio Percentage
		(Dollars in Thousands)
Maturing in three months or less		$	80				0.0	%
Maturing after three months to one year			302				0.2
Maturing after one year to three years			1,585				0.9
Maturing after three years to five years			20,951				11.6
Maturing after five years to fifteen years			124,855				69.3
Maturing in more than fifteen years			32,377				18.0
Total		$	180,150				100.0	%

 

 

Condensed Portfolio Repricing Schedule

 

Repricing Summary as of December 31, 2017		Dollar Amount				Portfolio Percentage
		(Dollars in Thousands)
Repricing in thirty days or less		$	7,841				4.3	%
Repricing in thirty-one days to one year			2,182				1.2
Repricing after one year to three years			2,789				1.6
Repricing after three years to five years			24,125				13.4
Repricing after five years to fifteen years			122,624				68.1
Repricing in more than fifteen years			20,589				11.4
Total		$	180,150				100.0	%

 

 

 

Loans and Allowance for Loan Losses

 

The tables below summarize loan balances by portfolio segment for both the Bank and ALC at the end of each of the most recent five quarters as of December 31, 2017.

 

		Bank
		2017																2016
		December 31,				September 30,				June 30,				March 31,				December 31,
		(Dollars in Thousands)
Real estate loans:
Construction, land development and other land loans		$	26,143			$	20,213			$	12,424			$	25,853			$	23,772
Secured by 1-4 family residential properties			34,272				35,125				32,227				32,535				32,955
Secured by multi-family residential properties			16,579				16,498				16,702				16,464				16,627
Secured by non-farm, non-residential properties			105,133				107,679				113,037				97,294				102,112
Other			190				223				226				230				234
Commercial and industrial loans			69,969				66,320				65,087				57,253				57,963
Consumer loans			5,217				5,431				5,671				6,057				6,206
Total loans		$	257,503			$	251,489			$	245,374			$	235,686			$	239,869
Less unearned interest, fees and deferred cost			374				367				371				249				218
Allowance for loan losses			2,447				2,422				2,526				2,521				2,409
Net loans		$	254,682			$	248,700			$	242,477			$	232,916			$	237,242

 

		ALC
		2017																2016
		December 31,				September 30,				June 30,				March 31,				December 31,
		(Dollars in Thousands)
Real estate loans:
Construction, land development and other land loans		$	—			$	—			$	—			$	—			$	—
Secured by 1-4 family residential properties			10,801				11,490				12,229				12,993				13,724
Secured by multi-family residential properties			—				—				—				—				—
Secured by non-farm, non-residential properties			—				—				—				—				—
Other			—				—				—				—				—
Commercial and industrial loans			—				—				—				—				—
Consumer loans:
Consumer			34,083				35,650				31,920				32,892				36,413
Indirect sales			55,071				50,553				52,134				47,196				44,775
Total loans		$	99,955			$	97,693			$	96,283			$	93,081			$	94,912
Less unearned interest, fees and deferred cost			6,189				5,981				5,855				5,962				6,935
Allowance for loan losses			2,327				2,386				2,379				2,358				2,447
Net loans		$	91,439			$	89,326			$	88,049			$	84,761			$	85,530

 

 

The tables below summarize changes in the allowance for loan losses at the end of each of the most recent five quarters as of December 31, 2017 at both the Bank and ALC.

 

		Bank
		2017																2016
		Fourth Quarter				Third Quarter				Second Quarter				First Quarter				Fourth Quarter
		(Dollars in Thousands)
Balance at beginning of period		$	2,422			$	2,526			$	2,521			$	2,409			$	1,216
Charge-offs:
Real estate loans:
Construction, land development and other loan loans			—				—				—				—				—
Secured by 1-4 family residential properties			—				—				—				—				(56	)
Secured by multi-family residential properties			—				—				—				—				—
Secured by non-farm, non-residential properties			—				—				—				—				—
Other			—				—				—				—				—
Commercial and industrial loans			—				—				(16	)			—				(1	)
Consumer loans			—				(1	)			(60	)			(2	)			(13	)
Other loans			—				—				—				—				—
Total charge-offs			—				(1	)			(76	)			(2	)			(70	)
Recoveries			25				27				81				114				28
Net recoveries (charge-offs)			25				26				5				112				(42	)
Provision (reduction in reserve) for loan losses			—				(130	)			—				—				1,235
Ending balance		$	2,447			$	2,422			$	2,526			$	2,521			$	2,409
as a percentage of loans			0.95	%			0.96	%			1.03	%			1.07	%			1.01	%

 

		ALC
		2017																2016
		Fourth Quarter				Third Quarter				Second Quarter				First Quarter				Fourth Quarter
		(Dollars in Thousands)
Balance at beginning of period		$	2,386			$	2,379			$	2,358			$	2,447			$	2,452
Charge-offs:
Real estate loans:
Construction, land development and other loan loans			—				—				—				—				—
Secured by 1-4 family residential properties			(1	)			(10	)			(4	)			(13	)			(7	)
Secured by multi-family residential properties			—				—				—				—				—
Secured by non-farm, non-residential properties			—				—				—				—				—
Other			—				—				—				—				—
Commercial and industrial loans			—				—				—				—				—
Consumer loans:
Consumer			(576	)			(494	)			(569	)			(658	)			(398	)
Indirect sales			(142	)			(150	)			(160	)			(135	)			(354	)
Other loans			—				—				—				—				—
Total charge-offs			(719	)			(654	)			(733	)			(806	)			(759	)
Recoveries			137				158				178				202				176
Net recoveries (charge-offs)			(582	)			(496	)			(555	)			(604	)			(583	)
Provision (reduction in reserve) for loan losses			523				503				576				515				578
Ending balance		$	2,327			$	2,386			$	2,379			$	2,358			$	2,447
as a percentage of loans			2.48	%			2.60	%			2.63	%			2.71	%			2.78	%

 

Nonperforming Assets

 

Nonperforming assets at the end of the five most recent quarters as of December 31, 2017 were as follows:

 

		Consolidated
		2017																2016
		December 31,				September 30,				June 30,				March 31,				December 31,
		(Dollars in Thousands)
Non-accrual loans		$	2,148			$	1,956			$	1,847			$	2,205			$	2,417
Other real estate owned			3,792				3,819				4,351				4,587				4,858
Total		$	5,940			$	5,775			$	6,198			$	6,792			$	7,275
Nonperforming assets as a percentage of loans and other real estate			1.67	%			1.67	%			1.82	%			2.08	%			2.19	%
Nonperforming assets as a percentage of total assets			0.95	%			0.94	%			1.01	%			1.10	%			1.20	%

 

 

		Bank
		2017																2016
		December 31,				September 30,				June 30,				March 31,				December 31,
Non-accrual loans		$	315			$	332			$	343			$	609			$	603
Other real estate owned			3,527				3,527				3,951				4,161				4,353
Total		$	3,842			$	3,859			$	4,294			$	4,770			$	4,956
Nonperforming assets as a percentage of loans and other real estate			1.47	%			1.52	%			1.72	%			1.99	%			2.03	%
Nonperforming assets as a percentage of total assets			0.61	%			0.63	%			0.69	%			0.77	%			0.81	%

 

		ALC
		2017																2016
		December 31,				September 30,				June 30,				March 31,				December 31,
Non-accrual loans		$	1,833			$	1,624			$	1,504			$	1,596			$	1,814
Other real estate owned			265				292				400				426				505
Total		$	2,098			$	1,916			$	1,904			$	2,022			$	2,319
Nonperforming assets as a percentage of loans and other real estate			2.23	%			2.08	%			2.10	%			2.31	%			2.62	%
Nonperforming assets as a percentage of total assets			2.22	%			2.06	%			2.08	%			2.29	%			2.59	%

 

Loans are considered restructured loans if concessions have been granted to borrowers that are experiencing financial difficulty. The concessions granted generally involve the modification of the terms of the loan, such as changes in payment schedule or interest rate, that generally would not otherwise be considered. Restructured loans can involve loans remaining on non-accrual, moving to non-accrual or continuing on accrual status, depending on the individual facts and circumstances of the borrower. Non-accrual restructured loans are included and treated with all other non-accrual loans. In addition, all accruing restructured loans are reported as troubled debt restructurings. Generally, restructured loans remain on non-accrual until the customer has attained a sustained period of repayment performance under the modified loan terms (generally a minimum of six months). However, performance prior to the restructuring or significant events that coincide with the restructuring are considered in assessing whether the borrower can meet the new terms and whether the loan should be returned to accrual or maintained on non-accrual status. If the borrower’s ability to meet the revised payment schedule is not reasonably assured, then the loan remains on non-accrual. The Company had $0.1 million of non-accruing loans that were restructured and remained on non-accrual status as of both December 31, 2017 and 2016. During the year ended December 31, 2017, the Company had no restructured loans that were restored to accrual status based on a sustained period of repayment performance. During the year ended December 31, 2016, the Company had $0.3 million in restructured loans that were restored to accrual status based on a sustained period of repayment performance.

 

Summarized below is information concerning income on those loans with deferred interest or principal payments resulting from deterioration in the financial condition of the borrower.

 

		December 31,
		2017				2016
		(Dollars in Thousands)
Total loans accounted for on a non-accrual basis		$	2,148			$	2,417
Interest income that would have been recorded under original terms			19				35
Interest income reported and recorded during the year			3				4

 

 

Allocation of Allowance for Loan Losses

 

While no portion of the allowance is in any way restricted to any individual loan or group of loans and the entire allowance is available to absorb losses from any and all loans, the following table shows an allocation of the allowance for loan losses as of the end of the two years indicated.

		2017								2016
		Allocation Allowance				Percent of Loans in Each Category to Total Loans				Allocation Allowance				Percent of Loans In Each Category To Total Loans
		(Dollars in Thousands)
Real estate loans:
Construction, land development and other land loans		$	203				7.3	%		$	535				7.1	%
Secured by 1-4 family residential properties			290				12.6				411				13.9
Secured by multi-family residential properties			116				4.6				88				5.0
Secured by non-farm, non-residential properties			777				29.4				905				30.5
Other			2				0.1				—				0.1
Commercial and industrial loans			1,049				19.6				527				17.3
Consumer loans:
Consumer			1,715				11.0				1,767				12.7
Indirect sales			622				15.4				623				13.4
Total		$	4,774				100.0	%		$	4,856				100.0	%

 

Summary of Loan Loss Experience

 

The following table summarizes the Company’s loan loss experience for each of the two years indicated.

		2017				2016
		(Dollars in Thousands)
Balance of allowance for loan loss at beginning of period		$	4,856			$	3,781
Charge-offs:
Real estate loans:
Construction, land development and other land loans			—				—
Secured by 1-4 family residential properties			(28	)			(122	)
Secured by multi-family residential properties			—				—
Secured by non-farm, non-residential properties			—				(40	)
Commercial and industrial loans			(16	)			(2	)
Consumer loans:
Consumer			(2,360	)			(2,260	)
Indirect sales			(587	)			(753	)
			(2,991	)			(3,177	)
Recoveries:
Real estate loans:
Construction, land development and other land loans			—				200
Secured by 1-4 family residential properties			135				62
Secured by multi-family residential properties			—				—
Secured by non-farm, non-residential properties			69				—
Commercial and industrial loans			19				73
Consumer loans:
Consumer			601				501
Indirect sales			98				220
			922				1,056
Net charge-offs			(2,069	)			(2,121	)
Provision for loan losses			1,987				3,196
Balance of allowance for loan loss at end of period		$	4,774			$	4,856
Ratio of net charge-offs during period to average loans outstanding			0.62	%			0.72	%

 

Net charge-offs improved for the Company to 0.62% of average loans outstanding in 2017, compared to 0.72% of average loans outstanding in 2016. The improvement resulted primarily from the continued shift in the mix of loans at ALC to higher balances in indirect lending. Compared to ALC’s traditional consumer lending portfolio, indirect lending has historically experienced significantly lower credit losses. In 2017, net charge-offs as a percentage of average loans totaled 5.71% in ALC’s consumer lending portfolio, compared to 1.03% in the indirect lending portfolio. In 2016, net charge-offs as a percentage of average loans totaled 5.38% and 1.39% in ALC’s consumer and indirect lending portfolios, respectively. Credit loss experience in ALC’s real estate portfolio, which has been discontinued and is in run-off mode, also continued to improve in 2017. This portfolio experienced net recoveries as a percentage of average loans in 2017 of (0.03%), compared to net charge-offs as a percentage of average loans of 0.11% in 2016. The Bank’s portfolio, which is primarily comprised of commercial loans, experienced net recoveries in both 2017 and 2016 with net recoveries as a percentage of average loans of (0.07%) in 2017 and (0.09%) in 2016.

 

 

 

Deposits

 

Total deposits increased by 3.9% to $517.1 million as of December 31, 2017, from $497.6 million as of December 31, 2016. Core deposits, which exclude time deposits of $250 thousand or more, provide for a relatively stable funding source that supports earning assets. Core deposits totaled $489.0 million, or 94.6% of total deposits, as of December 31, 2017, compared to $461.8 million, or 92.8% of total deposits, as of December 31, 2016.

 

Deposits, in particular core deposits, have historically been the Company’s primary source of funding and have enabled the Company to successfully meet both short-term and long-term liquidity needs. Management anticipates that such deposits will continue to be one of the Company’s primary sources of funding in the future, and we will continue to monitor deposit levels closely to help ensure an adequate level of funding for the Company’s activities. However, various economic and competitive factors could affect this funding source in the future, including increased competition from other financial institutions in deposit gathering, national and local economic conditions, and interest rate policies adopted by the Federal Reserve and other central banks.

 

Average Daily Amount of Deposits and Rates

 

The average daily amount of deposits and rates paid on such deposits are summarized for the periods indicated in the following table.

		2017								2016
		Amount				Rate				Amount				Rate
		(Dollars in Thousands)
Non-interest-bearing demand deposit accounts		$	78,609				—			$	76,781				—
Interest-bearing demand deposit accounts			163,301				0.39	%			150,473				0.36	%
Savings deposits			81,420				0.24				77,435				0.19
Time deposits			183,477				0.86				181,414				0.77
Total		$	506,807				0.56	%		$	486,103				0.51	%

 

Maturities of time certificates of deposit of $250 thousand or more outstanding as of December 31, 2017 and 2016 are summarized as follows:

 

Maturities		December 31,
		2017				2016
		(Dollars in Thousands)
Three months or less		$	7,334			$	6,439
Over three through six months			3,540				6,929
Over six through twelve months			10,942				16,627
Over twelve months			6,268				5,762
Total		$	28,084			$	35,757

 

Other Interest-Bearing Liabilities

 

Other interest-bearing liabilities consist of federal funds purchased, securities sold under agreements to repurchase and FHLB advances. This category continues to be utilized as an alternative source of funds. As of December 31, 2017, these borrowings represented 5.11% of average interest-bearing liabilities, compared to 4.10% as of December 31, 2016.

 

		Short- Term Borrowings (Maturity Less Than One Year)				Long- Term Borrowings (Maturity One Year or Greater)
		(Dollars in Thousands)
Other interest-bearing liabilities outstanding at year-end:
2017		$	15,594			$	10,000
2016			10,119				15,000
Weighted average interest rate at year-end:
2017			1.27	%			1.32	%
2016			0.70	%			0.81	%
Maximum amount outstanding at any month end:
2017		$	20,710			$	15,000
2016			10,607				15,000
Average amount outstanding during the year:
2017		$	11,630			$	11,452
2016			5,115				12,404
Weighted average interest rate during the year:
2017			1.04	%			1.55	%
2016			0.70	%			1.17	%

 

 

Shareholders’ Equity

 

The Company places great emphasis on maintaining its strong capital base. As of December 31, 2017, shareholders’ equity totaled $76.2 million, or 12.2% of total assets, compared to $76.2 million, or 12.6% of total assets, as of December 31, 2016. Management believes that this level of equity is an indicator of the financial soundness of the Company and the Company’s ability to sustain future growth and profitability. 

 

Bancshares’ Board of Directors evaluates dividend payments based on the Company’s level of earnings and our desire to maintain a strong capital base, as well as regulatory requirements relating to the payment of dividends. During each of the years ended December 31, 2017 and 2016, Bancshares declared dividends of $0.08 per common share, or approximately $0.1 million in aggregate amount.

 

As of December 31, 2017 and December 31, 2016, the Company retained approximately $20.4 million and $20.8 million in treasury stock, respectively. The Company initiated a share repurchase program in January 2006, under which the Company was authorized to repurchase up to 642,785 shares of Bancshares’ common stock before December 31, 2007. In December 2007, and in each year since, the Board of Directors has extended the expiration date of the share repurchase program for an additional year. Currently, the share repurchase program is set to expire on December 31, 2018. There are 242,303 shares available for repurchase under this program, at management’s discretion. No shares were purchased under this program for the years ended 2017 or 2016.

 

As of December 31, 2017 and December 31, 2016, a total of 103,620 and 114,547 shares of common stock, respectively, were deferred in connection with Bancshares’ Non-Employee Directors’ Deferred Compensation Plan. The plan permits non-employee directors to invest their directors’ fees and to receive the adjusted value of the deferred amounts in cash or shares of common stock. All deferred fees, whether in the form of cash or shares of common stock, are reflected as compensation expense in the period earned. The Company classifies all deferred directors’ fees allocated to be paid in shares of common stock as equity surplus. The Company uses shares of treasury stock to satisfy these obligations when due.

 

Liquidity and Capital Resources

 

The asset portion of the balance sheet provides liquidity primarily from two sources: (1) principal payments and maturities of loans and (2) maturities and principal payments from the investment portfolio. Other short-term investments, such as federal funds sold, may also provide additional sources of liquidity. Loans maturing or repricing in one year or less amounted to $117.3 million as of December 31, 2017 and $127.3 million as of December 31, 2016. Investment securities forecasted to mature or reprice in one year or less were estimated to be $9.7 million and $15.2 million of the investment portfolio as of December 31, 2017 and 2016, respectively.

 

Although a substantial portion of securities in the investment portfolio have legal final maturities exceeding 10 years, a substantial percentage of the portfolio provides monthly principal and interest payments and consists of securities that are readily marketable and easily convertible into cash on short notice. As of December 31, 2017, the investment securities portfolio had an estimated average life of 2.75 years, and approximately 86.3% of the portfolio (including both available-for-sale and held-to-maturity investments) was expected to be repaid within five years. However, management does not rely solely upon the investment portfolio to generate cash flows to fund loans, capital expenditures, dividends, debt repayment and other cash requirements. These activities are also funded by cash flows from loan payments, as well as increases in deposits and short-term borrowings.

 

The liability portion of the balance sheet provides liquidity through interest-bearing and non-interest-bearing deposit accounts, which represent the Company’s primary sources of funds. In addition, federal funds purchased, FHLB advances, securities sold under agreements to repurchase and short-term and long-term borrowings are additional sources of available liquidity.  Liquidity management involves the continual monitoring of the sources and uses of funds to maintain an acceptable cash position. Long-term liquidity management focuses on considerations related to the total balance sheet structure.  The Bank manages the pricing of its deposits to maintain a desired deposit balance. In addition, the Bank invests in short-term interest-earning assets, which provide liquidity to meet lending requirements.

 

As of both December 31, 2017 and 2016, the Company had $25.0 million in outstanding borrowings under FHLB advances.  The Company had up to $159.3 million and $155.0 million in remaining unused credit from the FHLB (subject to available collateral) as of December 31, 2017 and 2016, respectively.  In addition, the Company had $18.8 million in unused established federal funds lines as of both December 31, 2017 and 2016.

 

Management believes that the Company has adequate sources of liquidity to more than cover its contractual obligations and commitments over the next twelve months. Management is not aware of any condition that currently exists that would have an adverse effect on the liquidity, capital resources or operation of the Company.

 

 

Regulatory Capital

 

Since January 1, 2015, the Bank has been subject to certain capital requirements as described in the section captioned “Capital Adequacy” included in Part I, Item I of this report.  Under these requirements, the Bank is subject to minimum risk-based capital and leverage capital requirements, which are administered by the federal banking regulatory agencies.   These capital requirements, as defined by federal regulations, involve quantitative and qualitative measures of assets, liabilities and certain off-balance sheet instruments.  Failure to meet minimum capital requirements can result in mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the financial statements of Bancshares and the Bank, and could impact Bancshares’ ability to pay dividends.  As of December 31, 2017, the Bank exceeded all applicable minimum capital standards.  In addition, the Bank met applicable regulatory guidelines to be considered well-capitalized as of December 31, 2017.  No significant conditions or events have occurred since December 31, 2017 that management believes would affect the Bank’s classification as “well capitalized” for regulatory purposes.

 

It is expected that as the Company experiences growth in loan volume, the risk-based capital ratios will decline as earning assets are shifted to loans from the Bank’s securities investment portfolio, which generally carries a lower risk profile than loans for purposes of risk-based calculations. Refer to the section captioned “Regulatory Capital” included in Note 15, “Shareholders’ Equity,” in the Notes to the Consolidated Financial Statements for an illustration of the Bank’s actual regulatory capital amounts and ratios under regulatory capital standards in effect at December 31, 2017 and December 31, 2016.

 

 

Asset/Liability Management

 

Market risk reflects the potential risk of loss arising from adverse changes in interest rates and market prices.  The Company has risk management policies and procedures in place to monitor and limit exposure to market risk.  The Company’s primary market risk is interest rate risk created by core banking activities.  Interest rate risk is the potential variability of the Company’s income that results from changes in various market interest rates.  The Bank’s Asset/Liability Committee routinely reassesses the Company’s strategies to manage interest rate risk in accordance with policies established by the Company’s Board of Directors.  A key objective of the asset/liability management program is to quantify, monitor and manage interest rate risk and to assist management in maintaining stability in net interest margin under varying interest rate environments.

 

As part of interest rate risk management, the Company may use derivative instruments in accordance with policies established by the Board of Directors.  The Asset/Liability Committee, in its oversight role, approves the use of derivatives, which include interest rate swaps, caps and floors. As of December 31, 2017 and 2016, the Company had entered into interest rate swaps to mitigate risks associated with rising interest rates. See Note 16, “Derivative Financial Instruments,” in the Notes to the Consolidated Financial Statements for additional information related to these derivative instruments.

 

 

Contractual Obligations

 

The Company has contractual obligations to make future payments under debt and lease agreements. Long-term debt is reflected on the consolidated balance sheets, whereas operating lease obligations for office space and equipment are not recorded in the consolidated balance sheets. The Company has not entered into any unconditional purchase obligations or other long-term obligations, other than as included below. These types of obligations are more fully discussed in Note 10, “Long-Term Debt,” and Note 19, “Operating Leases,” in the Notes to Consolidated Financial Statements.

 

Many of the Bank’s lending relationships, including those with commercial and consumer customers, contain both funded and unfunded elements. The unfunded component of these commitments is not recorded in the consolidated balance sheets. These commitments are more fully discussed in Note 20, “Guarantees, Commitments and Contingencies,” in the Notes to Consolidated Financial Statements.

 

 

The following table summarizes the Company’s contractual obligations as of December 31, 2017.

 

		Payment Due by Period
		Total				Less than One Year				One to Three Years				Three to Five Years				More than Five Years
		(Dollars in Thousands)
Time deposits		$	183,530			$	121,390			$	39,071			$	23,069			$	—
Long-term debt			10,000				10,000				—				—				—
Commitments to extend credit			55,801				48,485				—				—				7,316
Operating leases			1,952				483				763				405				300
Standby letters of credit			180				180				—				—				—
Total		$	251,463			$	180,538			$	39,834			$	23,474			$	7,616

 

 

Off-Balance Sheet Obligations

 

The Company does not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on its consolidated financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources other than as described under the captions “Derivative Financial Instruments,” included in Note 16, “Operating Leases,” included in Note 19, and “Guarantees, Commitments and Contingencies,” included in Note 20 in the Notes to Consolidated Financial Statements.

 

 

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk.

 

Market/Interest Rate Risk Management

 

The primary purpose of managing interest rate risk is to invest capital effectively and preserve the value created by our core banking business.  This is accomplished through the development and implementation of lending, funding, pricing and hedging strategies designed to maximize net interest income performance under varying interest rate environments, subject to liquidity and interest rate risk guidelines. Effective interest rate sensitivity management ensures that both assets and liabilities respond to changes in interest rates within an acceptable timeframe, thereby minimizing the effect of such interest rate movements on short- and long-term net interest margin and net interest income.

 

Financial simulation models are the primary tools used by the Asset/Liability Committee of the Bank’s board of directors to measure interest rate exposure.  Using a wide range of scenarios, management is provided with extensive information on the potential impact on net interest income caused by changes in interest rates.  In these simulations, assumptions are made about the direction and volatility of interest rates, the slope of the yield curve and the changing composition of the Company’s balance sheet resulting from both strategic plans and customer behavior.  Simulation models also incorporate management’s assumptions regarding such factors as loan and deposit growth, pricing, prepayment speeds and spreads between interest rates.

 

Assessing Short-Term Interest Rate Risk – Net Interest Margin Simulation

 

On a monthly basis, management simulates how changes in short- and long-term interest rates will impact future profitability, as reflected by changes in the Bank’s net interest margin and interest income. The tables below depict how, as of December 31, 2017, pre-tax net interest margins and pre-tax net income are forecasted to change over timeframes of six months, one year, two years and five years under the three listed interest rate scenarios. The interest rate scenarios contemplate immediate and parallel shifts in short- and long-term interest rates.

 

 

Average Change in Net Interest Margin from Level Interest Rate Forecast (basis points, pre-tax):

 

		6 Months				1 Year				2 Years				5 Years
+1%			10				9				10				19
+2%			9				6				9				28
-1%			(17	)			(18	)			(21	)			(32	)

 

 

Cumulative Change in Net Interest Income from Level Interest Rate Forecast (dollars in thousands, pre-tax):

 

		6 Months				1 Year				2 Years				5 Years
+1%		$	308			$	541			$	1,289			$	6,143
+2%			275				393				1,181				9,008
-1%			(548	)			(1,138	)			(2,706	)			(10,019	)

 

 

Assessing Long-Term Interest Rate Risk – Market Value of Equity and Estimating Modified Durations for Assets and Liabilities

 

On a monthly basis, management calculates how changes in interest rates would impact the market value of the Company’s assets and liabilities. The process is similar to assessing short-term risk but emphasizes and is measured over a longer period, approximately five to seven years, which allows for a more comprehensive assessment of longer-term repricing and cash flow imbalances that may not be captured by short-term net interest margin simulations. The results of these calculations are representative of long-term interest rate risk in terms of changes in the present value of the Company’s assets and liabilities.

 

The table below is a summary of estimated market value changes in the Company’s assets, liabilities and equity as of December 31, 2017 for the three listed scenarios.

 

		+1%				+2%					-1%
		(Dollars in Thousands)
Change in market value of assets		$	(10,858	)		$	(21,838	)		$	9,445
Change in market value of liabilities			11,079				18,006				(13,459	)
Change in off balance sheet items			913				1,783				(958	)
Net change in market value of equity			1,134				(2,049	)			(4,972	)
Beginning market value of equity			104,800				104,800				104,800
Resulting market value of equity		$	105,934			$	102,751			$	99,828

 

 

Item 8.

Financial Statements and Supplementary Data.

 

Management’s Report on Internal Control over Financial Reporting

 

Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that: 

 

	●	pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect our transactions and dispositions of assets;

	●	provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with the authorization of our management and directors; and

●

provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.

 

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2017. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013). Based on its assessment and those criteria, management has concluded that we maintained effective internal control over financial reporting as of December 31, 2017.

 

This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Our internal control over financial reporting is not subject to attestation by our registered public accounting firm pursuant to the rules of the Securities and Exchange Commission that permit us, as a smaller reporting company, to provide only management’s report on internal control over financial reporting.

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

 

To the Board of Directors and Shareholders

First US Bancshares, Inc.

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of First US Bancshares, Inc. and subsidiaries (the “Company”) as of December 31, 2017 and 2016, and the related consolidated statements of operations, changes in shareholders’ equity, comprehensive income (loss), and cash flows for each of the years in the two-year period ended December 31, 2017, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2017 and 2016, and the results of their operations and their cash flows for each of the years in the two-year period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.

 

Basis for Opinion

 

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

/s/ Carr, Riggs & Ingram, LLC

We have served as the Company’s auditor since December 31, 2008.

Enterprise, Alabama

March 15, 2018

 

FIRST US BANCSHARES, INC. AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

 

(In Thousands, Except Share and Per Share Data)

 

 

The accompanying notes are an integral part of these consolidated statements.

 

FIRST US BANCSHARES, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF OPERATIONS

 

(Dollars in Thousands, Except Per Share Data)

 

 

 

The accompanying notes are an integral part of these consolidated statements.

 

FIRST US BANCSHARES, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

 

(In Thousands, Except Share and Per Share Data)

 

 

The accompanying notes are an integral part of these consolidated statements.

 

FIRST US BANCSHARES, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

 

(Dollars in Thousands)

 

 

The accompanying notes are an integral part of these consolidated statements.

 

FIRST US BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

(Dollars in Thousands)

 

 

The accompanying notes are an integral part of these consolidated statements.

 

 

FIRST US BANCSHARES, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

DECEMBER 31, 2017 AND 2016

 

 

Item 9.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.

 

None.

  

Item 9A.

Controls and Procedures.

 

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures and Changes in Internal Control over Financial Reporting

 

Bancshares maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in Bancshares’ Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to Bancshares’ management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

 

Bancshares’ management carried out an evaluation, under the supervision and with the participation of its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of Bancshares’ disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Exchange Act) as of December 31, 2017, pursuant to the evaluation of these controls and procedures required by Rule 13a-15 of the Exchange Act. Based on that evaluation, Bancshares’ management concluded, as of December 31, 2017, that Bancshares’ disclosure controls and procedures are effective to ensure that the information required to be disclosed in Bancshares’ periodic filings with the Securities and Exchange Commission is recorded, processed, summarized and reported within the time periods specified.

 

There were no changes in Bancshares’ internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the quarter ended December 31, 2017 that have materially affected, or are reasonably likely to materially affect, Bancshares’ internal control over financial reporting.

 

Management’s Report on Internal Control Over Financial Reporting

 

This report is included in Item 8 beginning on page 38 and is incorporated herein by reference.

 

Item 9B.

Other Information.

 

None.

 

PART III

 

Item 10.

Directors, Executive Officers and Corporate Governance.

 

Bancshares has adopted a Code of Business Conduct and Ethics for directors, officers (including its Chief Executive Officer and Chief Financial Officer) and employees.  The Code of Business Conduct and Ethics is incorporated herein by reference to Exhibit 14 to Bancshares’ Annual Report on Form 10-K for the year ended December 31, 2003 (File No. 000-14549), filed on March 12, 2004.  Bancshares will provide any interested person a copy of the Code of Business Conduct and Ethics free of charge, upon written request to First US Bancshares, Inc., Attention: Beverly J. Dozier, Corporate Secretary, 131 West Front Street, Post Office Box 249, Thomasville, Alabama 36784.

 

Other information required by this Item is incorporated by reference pursuant to General Instruction G(3) of Form 10-K from Bancshares’ definitive proxy statement for the 2018 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A.

 

Item 11.  Executive Compensation.

 

The information required by this Item is incorporated by reference pursuant to General Instruction G(3) of Form 10-K from Bancshares’ definitive proxy statement for the 2018 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A.

 

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

 

Securities Authorized for Issuance under Equity Compensation Plans

 

The following table summarizes, as of December 31, 2017, the securities that were authorized for issuance under the United Security Bancshares, Inc. 2013 Incentive Plan (the “Omnibus Incentive Plan”) and the United Security Bancshares, Inc. Non-Employee Directors’ Deferred Compensation Plan (the “Deferral Plan”). The Omnibus Incentive Plan provides for grants of incentive stock options, nonqualified stock options, stock appreciation rights, restricted awards and performance compensation awards to our employees, consultants and directors and was approved by Bancshares’ shareholders in 2013. The Deferral Plan permits non-employee directors to defer their directors’ fees and receive the adjusted value of the deferred amounts in cash and/or in Bancshares’ common stock and was approved by Bancshares’ shareholders in 2004.

 

		Plan Category
		Number of securities to be issued upon exercise of outstanding options, warrants and rights (a)				Weighted-average exercise price of outstanding options, warrants and rights (b)				Number of securities remaining available for future issuance (c) (excluding securities reflected in column(a))(1)
Equity compensation plans approved by shareholders			443,436			$	9.36	(2)			237,618
Equity compensation plans not approved by shareholders			—				—				—
Total			443,436			$	9.36	(2)			237,618

 

 

---

(1)	Does not include shares reserved for future issuance under the Deferral Plan. Includes shares available for issuance pursuant to future awards under the Omnibus Incentive Plan.

(2)	Does not include amounts deferred pursuant to the Deferral Plan, as there is no exercise price associated with these deferred amounts.

 

Other information required by this Item is incorporated by reference pursuant to General Instruction G(3) of Form 10-K from Bancshares’ definitive proxy statement for the 2018 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A.

 

 

Item 13.

Certain Relationships and Related Transactions, and Director Independence.

 

The information required by this Item is incorporated by reference pursuant to General Instruction G(3) of Form 10-K from Bancshares’ definitive proxy statement for the 2018 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A.

 

Item 14.

Principal Accounting Fees and Services.

 

The information required by this Item is incorporated by reference pursuant to General Instruction G(3) of Form 10-K from Bancshares’ definitive proxy statement for the 2018 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A.

 

 

PART IV

 

Item 15.

Exhibits and Financial Statement Schedules.

 

(a) Documents filed as part of this report

 

(1) Financial Statements.

 

The consolidated financial statements of Bancshares and its subsidiaries, included herein in Item 8, are as follows:

 

	●	Management’s Report on Internal Control over Financial Reporting;

	●	Report of Independent Registered Public Accounting Firm – Carr, Riggs & Ingram, LLC;

	●	Consolidated Balance Sheets – December 31, 2017 and 2016;

	●	Consolidated Statements of Operations – Years Ended December 31, 2017 and 2016;

	●	Consolidated Statements of Changes in Shareholders’ Equity – Years Ended December 31,  2017 and 2016;

	●	Consolidated Statements of Comprehensive Income – Years Ended December 31, 2017 and 2016;

	●	Consolidated Statements of Cash Flows – Years Ended December 31, 2017 and 2016; and

●

Notes to Consolidated Financial Statements – Years Ended December 31, 2017 and 2016

 

 

(2) Financial Statement Schedules.

 

The financial statement schedules required to be included pursuant to this Item are not included herein because they are not applicable, or the required information is shown in the financial statements or notes thereto, which are incorporated by reference at subsection (a)(1) of this Item, above.

 

 

(3) Exhibits.

 

The exhibits to this report are listed in the exhibit index below.

 

 

(b) Description of Exhibits

 

The following exhibits are filed with this report or incorporated by reference.

 

Exhibit No.		Description
3.1		Certificate of Incorporation of United Security Bancshares, Inc. (incorporated by reference to Exhibit 3(i) to the Quarterly Report on Form 10-Q (File No. 000-14549), filed on November 12, 1999)
3.1A		Certificate of Amendment to the Certificate of Incorporation of United Security Bancshares, Inc., effective as of October 11, 2016 (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K (File No. 000-14549), filed on October 11, 2016)
3.2		Bylaws of First US Bancshares, Inc., effective as of October 11, 2016 (incorporated by reference to Exhibit 3.2 to the Current Report on Form 8-K (File No. 000-14549), filed on October 11, 2016)
10.1		Amended and Restated Executive Employment Agreement, dated December 19, 2013 (effective as of January 1, 2014), by and among United Security Bancshares, Inc., First United Security Bank and James F. House (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K (File No. 000-14549), filed on December 19, 2013)*
10.2		Change in Control Agreement dated May 20, 2014, by and among United Security Bancshares, Inc., First United Security Bank and Thomas S. Elley (incorporated by reference to Exhibit 10.1 to the Current Report on 8-K (File No. 000-14549), filed on May 23, 2014)*
10.3		Change in Control Agreement dated May 20, 2014, by and among United Security Bancshares, Inc., Acceptance Loan Company, Inc. and William C. Mitchell (incorporated by reference to Exhibit 10.2 to the Current Report on 8-K (File No. 000-14549), filed on May 23, 2014)*
10.4		Change in Control Agreement dated May 20, 2014, by and among United Security Bancshares, Inc., First United Security Bank and Anthony G. Cashio (incorporated by reference to Exhibit 10.4 to the Annual Report on Form 10-K (File No. 000-14549), filed on March 11, 2016)*
10.5		Change in Control Agreement dated May 20, 2014, by and among United Security Bancshares, Inc., First United Security Bank and Beverly J. Dozier (incorporated by reference to Exhibit 10.5 to the Annual Report on Form 10-K (File No. 000-14549), filed on March 11, 2016)*
10.6		Form of Director Indemnification Agreement between United Security Bancshares, Inc. and its directors (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K (File No. 000-14549), filed on October 30, 2009)*
10.7		United Security Bancshares, Inc. 2013 Incentive Plan, effective March 22, 2013 (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K (File No. 000-14549), filed on May 22, 2013)*
10.8		Form of Nonqualified Stock Option Agreement under the United Security Bancshares, Inc. 2013 Incentive Plan – 2014 Grants (incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q (File No. 000-14549), filed on May 14, 2014)*
10.9		Form of Nonqualified Stock Option Agreement (Executive Officers and Directors – Immediate Vesting – 2014 Grants) (incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q (File No. 000-14549), filed on November 13, 2014)*
10.10		Form of Nonqualified Stock Option Agreement (Executive Officers and Directors – One-Year Vesting – 2015 Grants) (incorporated by reference to Exhibit 10.9 to the Annual Report on Form 10-K (File No. 000-14549), filed on March 12, 2015)*
10.11		Form of Nonqualified Stock Option Agreement (Directors – One-Year Vesting – 2016 Grants) (incorporated by reference to Exhibit 10.11 to the Annual Report on Form 10-K (File No. 000-14549), filed on March 11, 2016)*
10.12		Form of Nonqualified Stock Option Agreement (Employees – Three-Year Vesting – 2016 Grants) (incorporated by reference to Exhibit 10.12 to the Annual Report on Form 10-K (File No. 000-14549), filed on March 11, 2016)*
10.13		Form of Nonqualified Stock Option Agreement (Employees – Three-Year Vesting – 2017 and 2018 Grants)

 

 

 

Exhibit No.		Description
10.14		Form of Restricted Stock Award Agreement under the United Security Bancshares, Inc. 2013 Incentive Plan (incorporated by reference to Exhibit 10.12 to the Annual Report on Form 10-K (File No. 000-14549), filed on March 15, 2017)*
10.15		First United Security Bank Director Retirement Agreement dated October 17, 2002, with Linda H. Breedlove (incorporated by reference to Exhibit 10.7 to the Quarterly Report on Form 10-Q (File No. 000-14549), filed on November 14, 2002)*
10.15A		First Amendment to the First United Security Bank Director Retirement Agreement for Linda H. Breedlove, dated November 20, 2008 (incorporated by reference to Exhibit 10.10A to the Annual Report on Form 10-K (File No. 000-14549), filed on March 16, 2009)*
10.15B		Second Amendment to the First United Security Bank Director Retirement Agreement for Linda H. Breedlove, dated January 25, 2017 (incorporated by reference to Exhibit 10.13B to the Annual Report on Form 10-K (File No. 000-14549), filed on March 15, 2017)*
10.16		First United Security Bank Director Retirement Agreement dated October 17, 2002, with John C. Gordon (incorporated by reference to Exhibit 10.10 to the Quarterly Report on Form 10-Q (File No. 000-14549), filed on November 14, 2002)*
10.16A		First Amendment to the First United Security Bank Director Retirement Agreement for John C. Gordon, dated November 20, 2008 (incorporated by reference to Exhibit 10.13A to the Annual Report on Form 10-K (File No. 000-14549), filed on March 16, 2009)*
10.16B		Second Amendment to the First United Security Bank Director Retirement Agreement for John C. Gordon, dated January 25, 2017 (incorporated by reference to Exhibit 10.15B to the Annual Report on Form 10-K (File No. 000-14549), filed on March 15, 2017)*
10.17		First United Security Bank Director Retirement Agreement dated October 16, 2002, with William G. Harrison (incorporated by reference to Exhibit 10.16 to the Annual Report on Form 10-K (File No. 000-14549), filed on March 21, 2003)*
10.17A		First Amendment to the First United Security Bank Director Retirement Agreement for William G. Harrison, dated November 20, 2008 (incorporated by reference to Exhibit 10.14A to the Annual Report on Form 10-K (File No. 000-14549), filed on March 16, 2009)*
10.17B		Second Amendment to the First United Security Bank Director Retirement Agreement for William G. Harrison, dated January 25, 2017 (incorporated by reference to Exhibit 10.16B to the Annual Report on Form 10-K (File No. 000-14549), filed on March 15, 2017)*
10.18		First United Security Bank Director Retirement Agreement dated October 17, 2002, with Jack Meigs (incorporated by reference to Exhibit 10.13 to the Quarterly Report on Form 10-Q (File No. 000-14549), filed on November 14, 2002)*
10.18A		First Amendment to the First United Security Bank Director Retirement Agreement for Jack Meigs, dated November 20, 2008 (incorporated by reference to Exhibit 10.16A to the Annual Report on Form 10-K (File No. 000-14549), filed on March 16, 2009)*
10.18B		Second Amendment to the First United Security Bank Director Retirement Agreement for Jack Meigs, dated January 25, 2017 (incorporated by reference to Exhibit 10.17B to the Annual Report on Form 10-K (File No. 000-14549), filed on March 15, 2017)*
10.19		First United Security Bank Director Retirement Agreement dated October 17, 2002, with Howard M. Whitted (incorporated by reference to Exhibit 10.17 to the Quarterly Report on Form 10-Q (File No. 000-14549), filed on November 14, 2002)*
10.19A		First Amendment to the First United Security Bank Director Retirement Agreement for Howard M. Whitted, dated November 20, 2008 (incorporated by reference to Exhibit 10.20A to the Annual Report on Form 10-K (File No. 000-14549), filed on March 16, 2009)*
10.19B		Second Amendment to the First United Security Bank Director Retirement Agreement for Howard M. Whitted, dated January 25, 2017 (incorporated by reference to Exhibit 10.18B to the Annual Report on Form 10-K (File No. 000-14549), filed on March 15, 2017)*
10.20		First United Security Bank Director Retirement Agreement dated October 17, 2002, with Bruce N. Wilson (incorporated by reference to Exhibit 10.18 to the Quarterly Report on Form 10-Q (File No. 000-14549), filed on November 14, 2002)*

 

 

 

Exhibit No.		Description
10.20A		First Amendment to the First United Security Bank Director Retirement Agreement for Bruce N. Wilson, dated November 20, 2008 (incorporated by reference to Exhibit 10.21A to the Annual Report on Form 10-K (File No. 000-14549), filed on March 16, 2009)*
10.20B		Second Amendment to the First United Security Bank Director Retirement Agreement for Bruce N. Wilson, dated January 25, 2017 (incorporated by reference to Exhibit 10.19B to the Annual Report on Form 10-K (File No. 000-14549), filed on March 15, 2017)*
10.21		First United Security Bank Director Retirement Agreement dated November 17, 2011, with Andrew C. Bearden, Jr. (incorporated by reference to Exhibit 10.21 to the Annual Report on Form 10-K (File No. 000-14549), filed on March 30, 2012)*
10.22		First United Security Bank Director Retirement Agreement dated November 30, 2011, with J. Lee McPhearson (incorporated by reference to Exhibit 10.22 to the Annual Report on Form 10-K (File No. 000-14549), filed on March 30, 2012)*
10.23		United Security Bancshares, Inc. Non-Employee Directors’ Deferred Compensation Plan (incorporated by reference to Exhibit 10.22 to the Annual Report on Form 10-K (File No. 000-14549), filed on March 12, 2004)*
10.23A		Amendment One to the United Security Bancshares, Inc. Non-Employee Directors’ Deferred Compensation Plan dated December 18, 2008 (incorporated by reference to Exhibit 10.22A to the Annual Report on Form 10-K (File No. 000-14549), filed on March 16, 2009)*
10.23B		Amendment Two to the United Security Bancshares, Inc. Non-Employee Directors’ Deferred Compensation Plan dated December 30, 2010 (incorporated by reference to Exhibit 10.22B to the Annual Report on Form 10-K (File No. 000-14549), filed on March 15, 2011)*
10.24		First US Bancshares, Inc. and First US Bank Board and Committee Fee Schedule
10.25A		Real Estate Sales Agreement, dated April 20, 2015 (incorporated by reference to Exhibit 10.1A to the Current Report on Form 8-K (File No. 000-14549), filed on March 11, 2016)
10.25B		First Amendment to Real Estate Sales Agreement, dated May 26, 2015 (incorporated by reference to Exhibit 10.1B to the Current Report on Form 8-K (File No. 000-14549), filed on March 11, 2016)
10.25C		Second Amendment to Real Estate Sales Agreement, dated August 25, 2015 (incorporated by reference to Exhibit 10.1C to the Current Report on Form 8-K (File No. 000-14549), filed on March 11, 2016)
10.25D		Third Amendment to Real Estate Sales Agreement, dated September 17, 2015 (incorporated by reference to Exhibit 10.1D to the Current Report on Form 8-K (File No. 000-14549), filed on March 11, 2016)
10.25E		Fourth Amendment to Real Estate Sales Agreement, dated October 17, 2015 (incorporated by reference to Exhibit 10.1E to the Current Report on Form 8-K (File No. 000-14549), filed on March 11, 2016)
14		United Security Bancshares, Inc. Code of Business Conduct and Ethics (incorporated by reference to Exhibit 14 to the Annual Report on Form 10-K (File No. 000-14549), filed on March 12, 2004)
21		Subsidiaries of First US Bancshares, Inc.
23		Consent of Carr, Riggs & Ingram, LLC
31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended
31.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended
32		Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101		Interactive Data Files

 

*Indicates a management contract or compensatory plan or arrangement.

 

 

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on this 15th day of March, 2018.

 

		FIRST US BANCSHARES, INC.
		By:		/s/ James F. House
				James F. House
				President and Chief Executive Officer

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

Signature		Title		Date
/s/ James F. House		President, Chief Executive Officer and Director		March 15, 2018
James F. House		(Principal Executive Officer)
/s/ Thomas S. Elley		Vice President, Treasurer, Assistant Secretary, Chief Financial Officer and Principal Accounting Officer (Principal Financial Officer and Principal Accounting Officer)		March 15, 2018
Thomas S. Elley
/s/ Andrew C. Bearden, Jr.		Director		March 15, 2018
Andrew C. Bearden, Jr.
/s/ Linda H. Breedlove		Director		March 15, 2018
Linda H. Breedlove
/s/ Robert Stephen Briggs		Director		March 15, 2018
Robert Stephen Briggs
/s/ Sheri S. Cook		Director		March 15, 2018
Sheri S. Cook
/s/ John C. Gordon		Director		March 15, 2018
John C. Gordon
/s/ David P. Hale		Director		March 15, 2018
David P. Hale
/s/ William G. Harrison		Director		March 15, 2018
William G. Harrison
/s/ J. Lee McPhearson		Director		March 15, 2018
J. Lee McPhearson
/s/ Jack W. Meigs		Director		March 15, 2018
Jack W. Meigs
/s/ Aubrey S. Miller		Director		March 15, 2018
Aubrey S. Miller
/s/ Donna D. Smith		Director		March 15, 2018
Donna D. Smith
/s/ Howard M. Whitted		Director		March 15, 2018
Howard M. Whitted
/s/ Bruce N. Wilson		Director		March 15, 2018
Bruce N. Wilson

91