FIRST US BANCSHARES, INC. quarterly report, Q3 FY2022

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First US Bancshares, Inc. — Q3 2022 Form 10-Q

Reporting period: Quarter and nine months ended September 30, 2022. Amounts are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise. The company is a bank holding company operating First US Bank and Acceptance Loan Company (ALC).

Financial performance and condition

  • Q3 earnings: Net income was $1.86 million, versus $0.84 million in Q3 2021. Diluted EPS was $0.29, versus $0.13.
  • Nine-month earnings: Net income was $4.64 million, versus $2.74 million; diluted EPS was $0.71, versus $0.41.
  • Interest income and margin: Q3 net interest income was $9.52 million, compared with $9.34 million. For nine months, it was $27.05 million, down from $27.71 million. Net interest margin was 4.10% for Q3 (4.17% prior year) and 4.00% for nine months (4.29% prior year).
  • Credit costs: Nine-month provision for loan and lease losses was $2.78 million, versus $1.52 million. Net charge-offs were $2.3 million, versus $1.5 million. The allowance was $9.37 million, or 1.25% of loans, at September 30.
  • Expenses and other income: Nine-month non-interest expense fell to $20.97 million from $25.34 million, while non-interest income increased to $2.77 million from $2.66 million. Expense reductions reflect ALC’s closure and other efficiency measures.
  • Balance sheet: Total assets were $989.3 million, up 3.2% from year-end 2021. Loans were $751.9 million gross, up 5.8%; deposits were $846.5 million, up 1.0%. Shareholders’ equity was $83.1 million, down 7.7%.
  • Liquidity and cash flow: Cash and cash equivalents were $36.8 million, down from $61.2 million at year-end. Nine-month operating cash flow was $9.5 million; investing cash use was $67.4 million and financing cash provided was $33.4 million, resulting in a $24.4 million decrease in cash.
  • Borrowings and capital: Short-term borrowings were $40.1 million, compared with $10.0 million at year-end; long-term borrowings were $10.7 million, primarily subordinated notes. The Bank’s September 30 CET1 and Tier 1 risk-based ratios were each 11.09%, total capital was 12.23%, and Tier 1 leverage was 9.23%. Management reported these ratios exceeded “well-capitalized” thresholds.
  • Dividends and repurchases: Dividends were $0.03 per share for Q3 and $0.09 for nine months. The company repurchased 412,400 shares during the first nine months at a weighted average $10.87 per share, for $4.5 million total.

Material changes versus comparable periods

  • Profit improved year over year, primarily because nine-month non-interest expense declined $4.4 million. Salaries and benefits, occupancy, and other operating costs were lower following business restructuring.
  • Nine-month net interest income and margin declined, mainly because ALC’s runoff portfolio generated $3.1 million less interest and fees. Growth in other Bank loans and investment income partly offset the decline.
  • Higher provisions and charge-offs reflected ALC portfolio losses and management’s assessment of heightened inflation and economic uncertainty. ALC accounted for approximately 89% of company net charge-offs in the first nine months.
  • Rising rates drove available-for-sale securities’ gross unrealized losses to $11.0 million from $0.8 million at year-end 2021. Accumulated other comprehensive loss grew to $7.2 million from $0.3 million, contributing to the equity decline. The company reported no other-than-temporary impairment and said it intended and was able to hold the securities for recovery.
  • Nonperforming assets were $2.8 million, or 0.28% of assets, versus $4.2 million, or 0.43%, at year-end 2021; the reduction largely reflected OREO sales. Non-accrual loans increased during Q3, partly due to one commercial loan.

Outlook, risks, and contingencies

  • ALC stopped originating new business and closed its 20 lending branches in September 2021; it continues servicing its remaining portfolio. Management expects ongoing expense savings, but also expects ALC interest income to decline as loans run off. The timing and balance of these effects are uncertain.
  • Management cited inflation, rising interest rates, a flatter or inverted yield curve, competition for deposits, and geopolitical and pandemic-related uncertainty as risks to costs, credit quality, loan demand, securities values, and earnings. Further Federal Reserve rate increases were expected at the time of filing; the company provided no specific earnings or revenue guidance.
  • Interest-rate sensitivity simulations showed near-term margin and income effects vary by scenario. For example, a 3% immediate rate increase was modeled to reduce net interest income by $1.1 million over six months and $2.0 million over one year, while increasing it by $9.5 million over five years. These are modeled estimates, not guidance.
  • The company expected to adopt CECL on January 1, 2023 and anticipated a one-time allowance adjustment, but did not quantify it. It was assessing the impact. Other pending accounting standards were not expected to have a material effect, subject to future circumstances.
  • Commitments to extend credit were $212.6 million at September 30, 2022; the filing notes that many commitments may expire undrawn. Ordinary-course litigation was not expected by management, after consultation with counsel, to materially affect results. No material changes to the previously disclosed risk factors were reported.
  • Management stated that liquidity sources were adequate for contractual obligations and commitments over the next 12 months. Available funding includes deposits, securities, correspondent-bank lines, Federal Reserve access, and collateral-dependent FHLB capacity.

Important facts for investors to verify

  • Whether deposit pricing and reliance on short-term FHLB advances affect funding costs, liquidity, and net interest margin as rates change.
  • Whether loan growth—particularly indirect lending—and credit quality remain sustainable, and how ALC runoff affects charge-offs, provisions, and earnings.
  • The extent to which unrealized securities losses, any securities sales, or further rate movements affect equity and capital.
  • The eventual CECL adoption impact on the allowance, retained earnings, and reported credit costs.
  • Whether cost savings continue to offset lower ALC revenue and inflation-driven operating costs, and whether the company’s repurchase and dividend plans remain consistent with capital needs.