First US Bancshares, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. The company is a bank holding company headquartered in Birmingham, Alabama; its principal operating segments are First US Bank and Acceptance Loan Company (ALC). ALC stopped originating new loans and closed its branches in 2021, and continues to service its runoff portfolio. Unless stated otherwise, dollar figures below are in millions.
Financial performance and position
| Metric | Q1 2023 / March 31, 2023 | Comparable period / prior date |
|---|---|---|
| Interest income | $11.96 | $9.38 in Q1 2022 |
| Net interest income | $9.43 | $8.71 in Q1 2022 |
| Net interest margin | 4.13% | 3.97% in Q1 2022 |
| Provision for credit losses | $0.27 | $0.72 in Q1 2022 |
| Non-interest income / expense | $0.83 / $7.27 | $0.83 / $7.06 in Q1 2022 |
| Net income | $2.07; diluted EPS $0.33 | $1.36; diluted EPS $0.20 in Q1 2022 |
| Operating / investing / financing cash flow | $3.59 / $2.19 / $32.50 | $0.85 / $21.87 / $13.88 in Q1 2022 |
| Total assets | $1,026.7 | $994.7 at December 31, 2022 |
| Loans, gross | $775.9 | $773.9 at December 31, 2022 |
| Deposits | $897.9 | $870.0 at December 31, 2022 |
| Shareholders’ equity | $84.8 | $85.1 at December 31, 2022 |
Net interest margin and yields are presented on the company’s stated accrual, non-tax-equivalent basis. Net cash and cash equivalents increased $38.3 million during the quarter to $68.4 million.
Material changes and key developments
- Net income rose about 52% year over year. Higher interest income, reflecting both loan growth and higher asset yields, more than offset the sharp rise in funding costs; lower credit-loss provision also supported earnings.
- Average earning-asset yield increased to 5.24% from 4.28% year over year. Average total funding cost rose to 1.14% from 0.32%; management said margin pressure emerged during Q1 as liability costs rose faster than asset yields.
- Deposits increased by $27.9 million from year-end, supported by $35 million of additional brokered deposits used to strengthen liquidity. Core deposits fell to $761.7 million, or 84.8% of deposits, from $778.1 million, or 89.4%.
- The allowance for credit losses was $11.6 million, or 1.49% of loans, versus $9.4 million, or 1.22%, at year-end. The January 1 CECL adoption added $2.1 million to the loan allowance and established a $0.3 million reserve for unfunded commitments, reducing retained earnings by $1.8 million after tax.
- Nonperforming assets declined to $1.8 million (0.18% of assets) from $2.3 million (0.24%) at year-end. Net charge-offs were $0.2 million, or 0.11% of average loans, compared with $0.6 million, or 0.32%, in Q1 2022. ALC loans declined to $16.9 million from $20.2 million at year-end.
- Available-for-sale securities had $11.5 million of gross unrealized losses at quarter-end, principally attributed by management to higher interest rates rather than issuer credit concerns. The company reported no securities credit-loss allowance.
- During Q1, the company terminated four interest-rate swaps with $40 million total notional value. Associated gains are being reclassified over the original contract terms; the filing reports a $0.34 million net pretax increase to Q1 income from hedge effects, including reclassifications.
Liquidity, debt, capital and outlook
- Quarter-end borrowings included $25.0 million of short-term FHLB advances and $10.7 million of subordinated notes, net of issuance costs. The notes mature in 2031; their rate is 3.50% for the first five years, then floats at three-month SOFR plus 275 basis points, subject to the note terms.
- Management reported $181.8 million of readily available liquidity, including cash, pledgeable securities, excess FHLB lendable collateral and unsecured bank lines. This measure depends partly on collateral availability and excludes additional potential BTFP capacity. The company also reported access to the Federal Reserve discount window and Bank Term Funding Program.
- Estimated uninsured deposits were $165.9 million, or 18.5% of total deposits, versus $148.3 million, or 17.1%, at year-end. Excluding brokered deposits, total deposits decreased $7.4 million, or 0.9%, during the quarter.
- The Bank reported regulatory capital ratios above “well-capitalized” thresholds: CET1 and Tier 1 risk-based capital of 11.16% each, total capital of 12.41%, and Tier 1 leverage of 9.36%.
- No numerical earnings guidance was provided. Management said it expects ALC-related net charge-offs to continue declining as its portfolio runs off, but cautioned that timing is uncertain. It described liquidity actions as precautionary and said it believes liquidity is adequate for contractual obligations and commitments over the next 12 months.
- Management highlighted uncertainty from banking-sector volatility, deposit competition, inflation, interest-rate changes and an inverted yield curve. Its interest-rate simulations show potential two-year pretax net-interest-income changes ranging from positive $1.15 million under an immediate +1% parallel rate shift to negative $9.17 million under a −3% shift; these are scenarios, not forecasts.
Risks, contingencies and other matters
- Rising rates may increase deposit and borrowing costs, pressure margins, reduce securities values, and impair borrowers’ ability to repay. Credit-loss estimates are judgmental and sensitive to economic conditions and forecasts.
- Management identified banking-sector liquidity concerns, dependence on other financial institutions, possible tighter credit conditions, federal debt-ceiling or shutdown risks, competition, cybersecurity and technology risks, and regulatory costs among relevant risks.
- The company reported ordinary-course litigation that management, after consultation with counsel, does not expect to have a material adverse effect. It reported no material changes to previously disclosed risk factors other than the additional banking-sector and federal-government risks described in the filing.
- Management concluded disclosure controls were effective at the reasonable-assurance level as of March 31, 2023; no material change in internal control over financial reporting was reported during the quarter.
Important facts for investors to verify
- Whether deposit trends, especially core deposits and uninsured deposits, remain stable and brokered funding needs change.
- Whether asset yields keep pace with deposit and borrowing costs, and how the reported margin responds to subsequent rate moves.
- Whether ALC runoff continues to reduce charge-offs, and whether the CECL allowance remains appropriate as portfolio performance and forecasts evolve.
- How much liquidity is practically accessible under collateral, discounting and borrowing conditions, including the distinction between reported available capacity and actual funding.
- Whether unrealized securities losses, capital levels and the dividend remain manageable if rates, liquidity conditions or credit quality deteriorate.