First US Bancshares, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; balance-sheet comparisons are with December 31, 2019. First US Bancshares is a bank holding company whose principal businesses are First US Bank and consumer-finance subsidiary Acceptance Loan Company (ALC). Amounts below are in U.S. dollars; financial statement amounts are shown in millions unless otherwise noted.
Financial results and position
| Metric | Q1 2020 / March 31, 2020 | Comparable period / prior date |
|---|---|---|
| Interest income | $10.397 million | $10.813 million in Q1 2019 |
| Net interest income | $8.886 million | $9.173 million in Q1 2019 |
| Net interest margin | 4.97% | 5.17% in Q1 2019 |
| Provision for loan and lease losses | $0.580 million | $0.400 million in Q1 2019 |
| Non-interest income / expense | $1.297 million / $8.494 million | $1.265 million / $8.453 million in Q1 2019 |
| Net income; diluted EPS | $0.847 million; $0.13 | $1.234 million; $0.18 in Q1 2019 |
| Operating cash flow | $0.999 million | $2.081 million in Q1 2019 |
| Total assets | $788.565 million | $788.738 million at December 31, 2019 |
| Loans, net of allowance | $539.685 million | $545.243 million at December 31, 2019 |
| Deposits | $682.595 million | $683.662 million at December 31, 2019 |
| Short-term borrowings | $10.152 million | $10.025 million at December 31, 2019; no long-term FHLB advances outstanding |
| Shareholders’ equity | $84.332 million | $84.748 million at December 31, 2019 |
Cash and cash equivalents were $56.121 million, with a further $15.080 million in federal funds sold. The Bank reported regulatory capital ratios above well-capitalized thresholds: common equity Tier 1 and Tier 1 risk-based capital each 13.27%, total capital 14.32%, and Tier 1 leverage 9.46%. Management reported $226.5 million of remaining FHLB credit, subject to available collateral, and $61.5 million of unused correspondent-bank and Federal Reserve lines.
Material changes and credit developments
- Net income fell about 31% year over year. Net interest income declined about 3%, as lower loan and investment yields more than offset reduced deposit costs. Average loan yield was 7.07%, versus 7.66%; average rate on interest-bearing liabilities was 1.04%, versus 1.12%.
- The Federal Reserve cut the federal funds rate by 150 basis points in March. Management said asset yields had repriced faster than funding costs and expected further pressure on interest income, while seeking additional reductions in funding costs.
- The allowance for loan losses rose to $5.954 million from $5.762 million; it equaled 1.09% of loans, compared with 1.05% at year-end. The company increased qualitative economic-risk factors in response to COVID-19 and used the incurred-loss model, not CECL.
- Nonperforming assets were $4.749 million, or 0.60% of total assets, compared with $4.801 million, or 0.61%, at year-end. Nonaccrual loans were $3.695 million. Gross loans decreased $5.1 million during the quarter; indirect-sales loans increased $24.5 million, partly offsetting declines in other categories.
- Effective January 1, 2020, $45.5 million of indirect-sales loans were transferred from ALC to the Bank. Management said the move was intended to support growth and diversification.
- Core deposits increased to 95.8% of total deposits from 93.0%. Deposits declined slightly, partly reflecting the nonrenewal of a $7.4 million brokered certificate of deposit.
- Other comprehensive loss was $0.717 million, including a $1.339 million after-tax loss on cash-flow hedge derivatives, partly offset by $0.622 million of after-tax unrealized securities gains. The company repurchased 38,604 shares under its program at a weighted average $11.70 per share and declared a $0.03 dividend per share.
COVID-19, outlook and other risks
- By April 30, 2020, the company had granted 1,433 COVID-related payment deferments totaling approximately $114.990 million, or 20.9% of March 31 loans. Most were for 90 days or less. The filing reported no risk-grade changes on deferred loans as of March 31; these accommodations generally were not treated as troubled debt restructurings or past due/nonaccrual during the deferral period under applicable guidance.
- Management identified $79.747 million, or 14.5% of loans, as pandemic at-risk exposures: $14.987 million classified high risk (hotels/motels and dine-in restaurants) and $64.760 million moderate risk (fast food, retail and 1–4 family investment properties). Management said no such loans had been downgraded as of April 30.
- As of April 30, the SBA had approved 132 company-originated PPP loans totaling $13.6 million. The filing warns of possible litigation, compliance exposure and potential SBA guarantee or forgiveness issues.
- Management cautioned that the duration and economic effects of COVID-19 were uncertain and could increase credit losses, provisions, operating costs and liquidity needs, and reduce net interest income and non-interest income. It stated that additional loan-loss provisioning might be required if conditions deteriorated. No specific earnings or financial guidance was provided.
- Other disclosed risks include interest-rate and LIBOR transition exposure, borrower and collateral deterioration, potential cybersecurity and operational disruption, and commitments to extend credit of $109.308 million. Ordinary-course litigation was not expected by management to have a material adverse effect.
Key facts for investors to verify
- Subsequent credit performance, renewals and outcomes for the $114.990 million of payment deferments and the $79.747 million of identified at-risk loans.
- Whether the allowance remains adequate as COVID-related borrower stress develops, including any later changes in risk grades, delinquencies, nonaccruals or charge-offs.
- Effects of low interest rates on loan yields, funding costs and net interest margin, and how the $30 million notional cash-flow hedge portfolio and LIBOR transition are managed.
- Liquidity and capital capacity under stress, including collateral availability for FHLB facilities and potential draws on credit commitments.
- Performance and credit quality of the transferred indirect-sales portfolio and the PPP portfolio, including SBA guarantee and forgiveness outcomes.