FIRST US BANCSHARES, INC. quarterly report, Q1 FY2024

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First US Bancshares, Inc. — Q1 2024 Form 10-Q

Reporting period: Three months ended March 31, 2024; balance-sheet comparisons are with December 31, 2023. First US Bancshares is a bank holding company operating First US Bank, a community and commercial bank with 15 full-service branches and indirect consumer lending across 17 states. Unless indicated otherwise, financial amounts below are in millions of dollars.

Financial performance and condition

  • Earnings: Net income was $2.107 million, versus $2.072 million in Q1 2023. Diluted earnings per share were $0.34, up from $0.33. The company declared dividends of $0.05 per share.
  • Interest income and margin: Interest income rose to $14.277 million from $11.960 million, but interest expense more than doubled to $5.237 million from $2.526 million. Net interest income declined 4.2% to $9.040 million from $9.434 million. Net interest margin was 3.65%, versus 4.13% a year earlier and 3.67% in Q4 2023.
  • Other income and expenses: Non-interest income increased to $0.865 million from $0.829 million. Non-interest expense declined to $7.147 million from $7.270 million. Pretax income was $2.758 million; income tax expense was $0.651 million.
  • Credit costs: No net provision for credit losses was recorded, compared with a $0.269 million provision in Q1 2023. The loan allowance was $10.436 million, or 1.27% of loans, versus $10.507 million, or 1.28%, at year-end. Net charge-offs were $0.183 million; annualized net charge-offs were 0.09% of average loans.
  • Loans and credit quality: Loans grew 0.1% from year-end to $822.941 million; net loans were $812.505 million. Nonaccrual loans were $2.393 million, and nonperforming assets totaled $2.965 million, or 0.28% of assets. Past-due loans were 0.33% of total loans. Indirect consumer loans were $301.192 million, about 36.6% of total loans.
  • Balance sheet and funding: Total assets were $1.071 billion, down 0.2% from year-end. Deposits declined 0.7% to $943.268 million; core deposits were $807.3 million, or 85.6% of deposits. Cash and cash equivalents were $60.242 million, and federal funds sold were $5.532 million.
  • Debt and liquidity: Short-term FHLB advances increased to $15.0 million from $10.0 million. Long-term borrowings of $10.817 million principally comprise subordinated notes; no long-term FHLB advances were outstanding. Reported readily available liquidity was $356.484 million, versus $375.344 million at year-end. Estimated uninsured deposits were $192.5 million, or 20.4% of deposits.
  • Cash flow: Operating activities provided $0.825 million, investing activities provided $11.402 million, and financing activities used $2.264 million. Cash and cash equivalents increased $9.963 million to $60.242 million.
  • Capital and equity: Shareholders’ equity was $92.326 million, or 8.6% of assets. The Bank reported common equity Tier 1 and Tier 1 risk-based capital ratios of 11.11% each, a total capital ratio of 12.32%, and a Tier 1 leverage ratio of 9.37%; management said these exceeded well-capitalized requirements.

Material changes versus comparable periods

  • Higher asset yields and growth in average earning assets lifted interest income, but deposit costs rose faster: the average cost of interest-bearing deposits increased to 2.57% from 1.25%. The resulting margin compression reduced net interest income despite higher loan yields.
  • Average interest-earning assets increased to $997.2 million from $926.5 million, while the average cost of total funding rose to 2.19% from 1.14%.
  • Deposit balances fell from year-end, including a decline in core deposits; deposit mix continued shifting toward interest-bearing time deposits. Wholesale brokered time deposits decreased $5.5 million during the quarter.
  • Loans were nearly unchanged overall, with growth in construction and land development loans partly offset by declines in other categories. Allowance coverage continued to ease from 1.49% a year earlier to 1.27%.
  • Available-for-sale securities declined to $125.380 million from $135.565 million, mainly following maturities. Their gross unrealized losses were $9.972 million, largely attributed by management to interest rates rather than issuer credit quality. Accumulated other comprehensive loss increased by $0.190 million during the quarter.

Outlook, management commentary, and risks

  • Management said margin compression slowed in Q1 2024, but continued deposit competition and interest-rate uncertainty could pressure net interest income. The filing does not provide earnings or revenue guidance.
  • Management described inflation as elevated, the yield curve as inverted, and economic and geopolitical conditions as uncertain. It warned that higher rates and inflation could strain borrowers and increase operating costs and credit losses.
  • The company purchased $50 million notional in interest-rate floors to mitigate risk in falling-rate scenarios. Its sensitivity analysis estimates that a 1% rate decline would reduce net interest income by $1.375 million over one year and $2.353 million cumulatively over two years; a 1% increase would raise it by $0.926 million and $1.502 million, respectively. These are modeled scenarios, not forecasts.
  • Management said liquidity was adequate for obligations and commitments over the next 12 months. Core deposits, securities, FHLB and Federal Reserve borrowing capacity, and correspondent-bank lines are key funding sources. Some stated borrowing capacity depends on eligible collateral.
  • Management anticipated opening a replacement Knoxville-Bearden banking center in Q2 2024 and a Daphne, Alabama facility in Q4 2024; both had received required regulatory approvals as of quarter-end. The filing does not state the projects’ expected costs or financial contribution.
  • Other unusual items included a $0.2 million recovery of prior check-fraud losses that reduced other expense. The company recorded $0.374 million of net losses on premises, equipment, and other real estate in operating cash-flow adjustments, including $0.344 million of net losses on repossessed assets.
  • The company reported ordinary-course litigation that management does not expect to have a material adverse effect. It reported no material changes to previously disclosed risk factors and said disclosure controls were effective.

Important facts for investors to verify

  1. Whether deposit pricing and funding mix stabilize enough to limit further net interest margin compression.
  2. Credit performance and allowance adequacy, particularly in the indirect consumer portfolio and commercial real estate exposures; real estate-secured loans were 54.8% of the portfolio.
  3. Deposit stability, uninsured-deposit trends, and the availability of liquidity after accounting for collateral requirements and existing pledges.
  4. How interest-rate movements affect the securities portfolio, accumulated other comprehensive loss, and modeled earnings sensitivity.
  5. Execution, costs, and expected returns of the Knoxville and Daphne banking-center plans.