First US Bancshares, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; balance-sheet comparisons are with December 31, 2021. Dollar amounts below are in millions unless otherwise stated. The company is a bank holding company operating First US Bank and Acceptance Loan Company (ALC).
Financial performance and position
- Earnings: Net income was $1.36 million, or $0.20 per diluted share, versus $0.95 million, or $0.14, a year earlier. Pretax income was $1.76 million; the effective tax rate was 22.7%.
- Interest income and margin: Interest income was $9.38 million versus $9.85 million. Net interest income declined 3.9% to $8.71 million, while net interest margin fell to 3.97% from 4.40%.
- Credit costs and operating expenses: Provision for loan and lease losses increased to $0.72 million from $0.40 million. Non-interest income declined to $0.83 million from $0.95 million; non-interest expense decreased 16.0% to $7.06 million from $8.40 million.
- Loans and credit quality: Total loans were $680.1 million, down 4.3% from year-end; net loans were $669.8 million. The allowance was $8.48 million, or 1.25% of loans. Nonperforming assets were $3.10 million, or 0.32% of assets, compared with $4.16 million, or 0.43%, at year-end. Net charge-offs were $0.56 million versus $0.40 million a year earlier.
- Balance sheet and liquidity: Total assets were $968.6 million, up 1.1% from year-end. Deposits increased 1.8% to $853.1 million. Cash and cash equivalents were $97.8 million, compared with $61.2 million at year-end. The company reported $20.7 million of borrowings: $10.1 million short-term and $10.7 million long-term. Unused credit included $237.5 million of FHLB capacity, subject to collateral, and $45.0 million of correspondent-bank lines.
- Cash flow: Operating activities provided $0.85 million, compared with $1.89 million in Q1 2021. Investing activities provided $21.87 million, including a $28.71 million net decrease in loans; financing activities provided $13.88 million, including $14.99 million of net deposit growth. Cash and cash equivalents increased $36.60 million during the quarter.
- Capital and shareholder returns: Shareholders’ equity was $87.8 million, or 9.1% of assets, down from $90.1 million at year-end, largely due to securities valuation losses. The Bank’s CET1 and Tier 1 risk-based capital ratios were each 11.82%; total capital was 12.95%, and Tier 1 leverage was 9.38%. The company declared a $0.03-per-share dividend and repurchased 87,600 shares under its program at a weighted average $10.94 per share.
Material changes versus comparable periods
- Net income rose 43% year over year, principally because non-interest expense fell by $1.34 million, reflecting cost reductions following ALC’s 2021 cessation of new lending and branch closures. Lower interest expense also contributed.
- These improvements were partly offset by lower net interest income and higher credit-loss provision. Management attributed the interest-income decline mainly to ALC loan runoff; ALC interest income fell to $1.6 million from $2.4 million.
- ALC-related credit costs remained significant: management attributed approximately 98.4% of Q1 2022 net charge-offs to ALC. The company increased provision partly in response to inflation and economic uncertainty.
- Available-for-sale securities had $4.84 million of gross unrealized losses at quarter-end, versus $0.77 million at year-end, amid rising rates. The resulting change contributed to accumulated other comprehensive loss of $2.87 million. Management considered the losses rate-related, not credit-related, and recorded no other-than-temporary impairment.
- Loans declined from year-end, including commercial real estate and construction balances and ALC consumer runoff; growth in indirect and multifamily lending partly offset the decreases. Deposits increased.
Outlook, commentary, risks and contingencies
- Outlook: The filing provides no quantified earnings guidance. Management expects ALC’s remaining portfolio to continue running off, with most loans expected to be paid off by the end of 2023. That runoff should reduce expenses and, over time, credit risk, but also reduce interest and fee income. Cost savings are expected to continue, though inflation may offset some reductions.
- Rates and markets: Management’s simulations indicate net interest income generally benefits over time from rising rates, but results may vary with the pace and pattern of rate changes. Higher rates may also pressure deposit pricing, loan demand, borrowers’ ability to repay, and securities values. The filing cites inflation, COVID-19 uncertainty, Russia’s invasion of Ukraine, and China lockdowns as economic uncertainties.
- Credit and concentrations: Management said the allowance was sufficient under the incurred-loss model at March 31, 2022, but noted increased risk in ALC’s runoff portfolio. Real estate secured 51.6% of loans; indirect lending was 32.5% of total loans. Commitments to extend credit were $188.2 million, and standby performance letters of credit were $0.58 million.
- Accounting and other matters: The company expects to adopt CECL on January 1, 2023; the amount of any initial allowance adjustment is not yet known. Ordinary-course litigation was not expected by management to have a material adverse effect. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether ALC runoff, expense savings, and the expected payoff timing for its loans develop as management anticipates.
- Trends in net interest margin, deposit costs, loan growth, and sensitivity to further rate changes.
- Credit performance, particularly ALC charge-offs and the indirect consumer portfolio, and whether the allowance remains adequate.
- Whether securities valuation losses recover or further reduce equity and regulatory capital; also verify the effects of CECL adoption.
- Liquidity availability, including collateral-dependent FHLB capacity, and the company’s capital and share-repurchase plans.