First US Bancshares, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. The company is a bank holding company operating First US Bank and consumer finance subsidiary Acceptance Loan Company (ALC). Unless otherwise noted, amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions.
Financial performance and condition
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Interest income | $10.0m | $11.0m | $30.2m | $32.8m |
| Net interest income | $9.0m | $9.3m | $26.5m | $27.8m |
| Provision for loan and lease losses | $1.0m | $0.9m | $2.5m | $2.0m |
| Non-interest income | $1.4m | $1.4m | $4.0m | $4.0m |
| Non-interest expense | $8.7m | $8.5m | $25.8m | $25.5m |
| Net income | $0.4m | $1.1m | $1.7m | $3.4m |
| Diluted earnings per share | $0.06 | $0.16 | $0.25 | $0.49 |
| Net interest margin | 4.56% | 5.23% | 4.72% | 5.20% |
At September 30, 2020, total assets were $852.9m, versus $788.7m at December 31, 2019. Net loans were $627.6m (up from $545.2m); deposits were $745.3m (up from $683.7m); and shareholders’ equity was $85.7m (up from $84.7m). Cash and cash equivalents were $65.6m. The allowance for loan and lease losses was $7.2m, or 1.13% of loans (1.16% excluding SBA-guaranteed PPP loans).
For the first nine months, operating cash flow was $4.0m, investing cash flow was negative $56.1m, and financing cash flow was positive $60.7m; cash and cash equivalents increased $8.6m to $65.6m. Short-term borrowings were $10.0m, principally FHLB advances; the company reported no long-term FHLB advances. Available unused FHLB credit was $233.6m, subject to collateral, and unused federal funds lines were $61.6m. Bank capital ratios were 11.71% for both common equity Tier 1 and Tier 1 risk-based capital, 12.81% total capital, and 9.08% Tier 1 leverage.
Material changes versus comparable periods
- Net income fell 63% for Q3 and 50% for the first nine months year over year. Lower asset yields and higher loan-loss provisioning were key pressures.
- NIM contracted 67 basis points in Q3 and 48 basis points year to date, following Federal Reserve rate reductions. Lower deposit costs partly offset weaker asset yields.
- Loans increased $83.0m from year-end, led by indirect sales lending and commercial real estate. The indirect portfolio grew following its $45.5m transfer from ALC to the Bank effective January 1, 2020.
- Deposits rose 9.0% from year-end, including $40.2m of non-interest-bearing deposits. The securities portfolio declined to $93.4m from $108.4m.
- Nonperforming assets declined to $4.0m, or 0.47% of assets, from $4.8m, or 0.61%, at year-end. Net charge-offs for the nine months were $1.1m, below the prior-year $1.5m.
Outlook, risks and unusual items
- Management provided no formal earnings guidance. It said lower interest costs may continue as deposits reprice, but prolonged low rates, competition for quality loans and continued COVID-19 uncertainty could pressure net interest income and profitability.
- COVID-19 deferments covered 153 loans totaling $18.4m (2.9% of the loan portfolio) at September 30, down from $95.2m (16.5%) at June 30. Management said the ultimate borrower impact remains uncertain and further provisioning may be required.
- Management identified $14.8m of hotel/motel and dine-in restaurant loans as high-risk pandemic exposures. PPP loans totaled $14.0m across 167 loans and are 100% SBA-guaranteed, subject to program requirements; PPP processing and guarantee compliance also carry litigation and repayment risks.
- Non-interest income included a $0.3m gain on sales of premises, equipment and other assets in Q3, and $0.3m of net securities gains for the first nine months. The company discontinued secondary mortgage marketing in Q4 2020 and expected lower related fees, substantially offset by expense reductions.
- The company had $109.6m of commitments to extend credit and $0.7m of standby letters of credit/performance letters at quarter-end. Ordinary-course litigation was described by management as not expected to have a material adverse effect.
- CECL adoption was deferred for smaller reporting companies; the future transition adjustment was not yet known. Management did not consider goodwill impaired at September 30 but noted pandemic and stock-price developments could prompt interim testing.
- Management stated liquidity was adequate for contractual obligations and commitments over the next 12 months. The company declared dividends of $0.03 per share each quarter in 2020.
Most important facts for investors to verify
- Whether loan performance and credit-loss provisioning remain adequate as deferments end, particularly for hospitality, commercial real estate and rapidly growing indirect lending.
- How NIM, funding costs and earnings respond to low rates, deposit repricing and loan growth.
- Whether deposit growth and available borrowing capacity remain sufficient to fund asset growth and meet liquidity needs.
- PPP loan forgiveness, SBA guarantee compliance and any resulting income, credit or litigation exposure.
- Any subsequent changes to capital ratios, goodwill impairment assessments, CECL implementation estimates, or the dividend and share-repurchase programs.