First US Bancshares, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023; balance-sheet comparisons are to December 31, 2022. First US Bancshares is a bank holding company operating First US Bank, with consumer indirect lending and a legacy finance-company portfolio. Dollar amounts below are in millions unless stated otherwise.
Financial results and key metrics
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Interest income | $13.9 | $10.7 | $38.9 | $29.6 |
| Net interest income | $9.5 | $9.5 | $28.2 | $27.1 |
| Provision for credit losses | $0.2 | $1.2 | $0.8 | $2.8 |
| Non-interest income | $0.8 | $1.1 | $2.5 | $2.8 |
| Non-interest expense | $7.3 | $7.0 | $21.7 | $21.0 |
| Net income | $2.1 | $1.9 | $6.2 | $4.6 |
| Diluted earnings per share | $0.33 | $0.29 | $0.97 | $0.71 |
- Margins and funding costs: Net interest margin was 3.79% in Q3 2023 versus 4.10% in Q3 2022; for the first nine months it was 3.93% versus 4.00%. Nine-month total funding cost rose to 1.53% from 0.39%, as deposit costs increased faster than asset yields.
- Balance sheet: Total assets were $1,065.2 million, up 7.1% from year-end 2022. Loans were $815.3 million, up 5.4%; deposits were $927.0 million, up 6.6%. Shareholders’ equity was $87.4 million, or 8.2% of assets.
- Cash flow: For the nine months, operating activities provided $11.0 million, investing activities used $41.1 million, and financing activities provided $66.1 million. Cash and cash equivalents increased $36.0 million to $66.1 million.
- Debt and liquidity: Short-term borrowings were $30.0 million, compared with $20.0 million at year-end; long-term borrowings were $10.8 million, primarily subordinated notes. Management reported $343.1 million of readily available liquidity, a non-GAAP measure, versus $166.4 million at year-end. The Bank’s regulatory capital ratios were above well-capitalized thresholds: CET1 and Tier 1 risk-based, 10.81% each; total capital, 12.06%; Tier 1 leverage, 9.09%.
- Credit: Allowance for credit losses was $11.4 million, or 1.40% of loans, versus $9.4 million, or 1.22%, at year-end; the year-over-year comparison is affected by CECL adoption. Nine-month net charge-offs were $0.7 million versus $1.7 million. Nonaccrual loans rose to $2.4 million from $1.7 million at year-end, primarily due to one commercial real estate loan moving to nonaccrual in Q3.
Material changes versus comparable periods
- Nine-month net income increased 33.9%; higher loan interest income and lower credit-loss provision more than offset sharply higher deposit interest expense and modestly higher operating expenses.
- Average loans grew to $795.0 million from $713.0 million, while average interest-earning asset yield rose to 5.41% from 4.37%. Net interest margin nonetheless compressed as funding costs increased.
- Loan growth was led by indirect consumer lending and construction lending. Indirect consumer loans were $310.2 million at quarter-end; construction, land development and other land loans rose to $90.1 million from $53.9 million at year-end.
- Deposits shifted toward interest-bearing balances: non-interest-bearing deposits fell to $157.7 million from $169.8 million, while interest-bearing deposits increased. Core deposits were 84.9% of total deposits, down from 89.4%; the company added $30.2 million of brokered deposits during the first nine months.
- Available-for-sale securities had $12.8 million of gross unrealized losses, up from $11.1 million at year-end; accumulated other comprehensive loss was $8.9 million. Management attributed securities losses to interest rates, not issuer credit, and reported no securities credit-loss allowance.
Outlook, commentary, risks and unusual items
- No specific earnings or revenue guidance is provided. Management says it expects core deposits to remain its primary funding source, will continue monitoring liquidity and deposit levels, and does not expect significant near-term growth in non-interest income. It also expects inflation to continue pressuring expenses.
- Management emphasized industry liquidity uncertainty, intensified deposit competition, elevated interest rates and inflation. These conditions could pressure margins, raise operating costs, weaken borrowers’ ability to repay and increase future credit-loss provisions.
- In response to 2023 banking-industry liquidity events, the company held more cash and expanded collateralized Federal Reserve borrowing capacity. Discount-window capacity based on pledged collateral rose to $146.6 million from $1.2 million; this capacity depends on eligible collateral. Estimated uninsured or uncollateralized deposits were $173.0 million, or 18.7% of deposits.
- CECL adoption on January 1, 2023 increased the allowance for loan losses by about $2.1 million and established a $0.3 million reserve for unfunded commitments; the after-tax retained-earnings reduction was $1.8 million. Subsequent nine-month provision was $0.8 million.
- Effective October 1, 2023, ALC’s remaining loans were transferred to the Bank in an intercompany transaction. ALC had ceased new lending in 2021; the Bank intends to manage the remaining portfolio through final resolution.
- The company terminated four interest-rate swaps in February 2023 and entered three new fair-value hedges in June. Gains from terminated swaps are being reclassified into income over the original contract terms.
- Commitments to extend credit totaled $155.6 million; standby performance letters of credit totaled $0.7 million. The company reported ordinary-course litigation, which management does not expect to materially affect results. It identified potential industry-wide effects from bank failures, funding disruption, increased regulation and FDIC assessments as risks.
Important facts for investors to verify
- Whether deposit pricing and competition continue to raise funding costs faster than asset yields, affecting net interest margin.
- How the deposit mix evolves, including brokered deposits, core-deposit share and uninsured or uncollateralized balances.
- Credit performance in indirect consumer and commercial real estate portfolios, including the new nonaccrual loan and adequacy of CECL reserves.
- Availability of reported borrowing capacity under actual collateral requirements and the sustainability of the company’s liquidity position.
- Progress in resolving ALC’s remaining loans and any resulting charge-offs or expenses.
- Changes in securities fair values and accumulated other comprehensive loss if interest rates or liquidity needs shift.