First US Bancshares, Inc. — Q3 2021 Form 10-Q
Business context and reporting period. The filing covers the quarter and nine months ended September 30, 2021. First US Bancshares is a bank holding company operating First US Bank and finance subsidiary Acceptance Loan Company (ALC). Unless otherwise noted, amounts below are in U.S. dollars; financial statement amounts are in millions.
Financial performance and position
| Metric | Q3 2021 / September 30, 2021 | Comparable period / December 31, 2020 |
|---|---|---|
| Net income | $0.84 million; diluted EPS $0.13 | Q3 2020: $0.41 million; diluted EPS $0.06 |
| Nine-month net income | $2.74 million; diluted EPS $0.41 | Nine months 2020: $1.66 million; diluted EPS $0.25 |
| Net interest income | Q3: $9.34 million; nine months: $27.71 million | Q3 2020: $8.97 million; nine months 2020: $26.47 million |
| Net interest margin | Q3: 4.17%; nine months: 4.29% | Q3 2020: 4.56%; nine months 2020: 4.72% |
| Net interest income after provision | Nine months: $26.19 million | Nine months 2020: $24.00 million |
| Non-interest income | Nine months: $2.66 million | Nine months 2020: $4.00 million |
| Non-interest expense | Nine months: $25.34 million | Nine months 2020: $25.82 million |
| Total assets | $956.7 million | $890.5 million |
| Total loans | $708.9 million gross; $697.0 million net of allowance | $650.1 million gross; $638.4 million net |
| Deposits | $846.8 million | $782.2 million |
| Cash and cash equivalents | $75.3 million | $94.4 million |
| Short-term borrowings | $10.0 million | $10.0 million |
| Shareholders’ equity | $89.6 million, or 9.4% of assets | $86.7 million, or 9.7% of assets |
For the first nine months, operating cash flow was $7.1 million, investing cash outflow was $90.3 million, and financing cash flow was $64.1 million. Cash and cash equivalents declined by $19.2 million from year-end 2020. The loan-loss provision was $1.52 million, versus $2.48 million in the prior-year period. The allowance was $8.19 million, or 1.16% of gross loans.
At September 30, the Bank’s common equity Tier 1 and Tier 1 risk-based capital ratios were each 10.69%; total capital was 11.78% and Tier 1 leverage was 8.51%. Management said these ratios exceeded “well-capitalized” regulatory thresholds. Unused funding included $234.0 million of FHLB capacity subject to collateral, $44.8 million in correspondent-bank lines, and $1.1 million at the Federal Reserve discount window. Management stated liquidity was adequate for obligations and commitments over the next twelve months.
Material changes versus comparable periods
- Nine-month net income rose to $2.74 million from $1.66 million. Lower deposit interest expense and a smaller loan-loss provision supported results, while interest income was slightly lower and net interest margin compressed.
- Nine-month interest expense declined $1.48 million, reflecting deposit repricing; average total funding cost fell to 0.36% from 0.68%. Average loans increased $100.9 million, but their yield declined amid the low-rate environment.
- Non-interest income fell $1.35 million, chiefly because 2020 included securities and asset-sale gains, mortgage fees, and higher service-charge and credit-insurance income. The Bank’s mortgage division had been discontinued in Q4 2020.
- Gross loans grew $58.8 million from year-end, led by indirect consumer and real-estate lending. Deposits rose $64.6 million, including increases in both non-interest-bearing and interest-bearing balances; management attributed growth partly to pandemic-related liquidity preferences and stimulus receipts.
- Nonperforming assets were $3.34 million, or 0.35% of assets, versus $4.04 million, or 0.45%, at year-end. Nonaccrual loans declined to $0.97 million from $3.09 million. However, nonperforming assets increased from $2.13 million at June 30, 2021, principally because closed branch assets transferred to other real estate owned.
- COVID-related loan deferments declined to $0.8 million from $8.1 million at year-end; the identified high-risk portfolio declined to $11.6 million, or 1.6% of loans, from $13.5 million, or 2.1%.
Outlook, management commentary, risks and unusual items
- In September 2021, ALC stopped originating new business and closed its 20 Alabama and Mississippi branches to the public; it will service its remaining portfolio from Mobile. The closures eliminated 56 positions in Q3. The company also closed four Bank branches.
- ALC restructuring charges were approximately $0.55 million in Q3. Management expected about $0.5 million of additional costs, mainly in Q4 2021 and Q1 2022, and said ongoing expense savings were expected to offset the remaining one-time charges. The strategy is intended to reduce expenses, strengthen asset quality, and focus lending on Bank commercial and indirect consumer business.
- Management expects low interest rates to continue pressuring net interest income and margin. It plans to reprice deposits and deploy excess cash into loans or securities that meet credit standards, while noting competition for quality lending opportunities.
- Management considered the allowance adequate under the incurred-loss model as of September 30, but warned that further economic deterioration could require additional provision. The company had not yet adopted CECL and expected adoption on January 1, 2023; the transition impact was not yet known.
- COVID-19, borrower repayment capacity, collateral values, market and interest-rate changes, loan demand, cybersecurity, PPP-related risks, and LIBOR replacement are identified risks. The company had identified LIBOR-linked contracts and was evaluating replacement rates; impact was not yet determinable.
- On October 1, 2021, after quarter-end, the company issued $11.0 million of subordinated notes due 2031. The notes pay 3.50% for five years and then reset quarterly to three-month SOFR plus 275 basis points, subject to note terms. The company invested $5 million of proceeds in Bank capital surplus; proceeds may also support general corporate purposes, growth, or possible stock repurchases.
- The company declared a Q3 dividend of $0.03 per share. Ordinary-course litigation was not expected by management, in consultation with counsel, to have a material adverse effect. No material changes to the risk factors in the 2020 Form 10-K were reported.
Important facts for investors to verify
- Whether expected cost savings from ALC and Bank branch closures materialize, and whether remaining restructuring and lease-exit costs stay near management’s estimate.
- Whether margin pressure persists as lower asset yields, deposit repricing, liquidity deployment, and loan mix affect net interest income.
- Whether loan growth and indirect consumer exposure remain within credit standards; monitor delinquencies, charge-offs, nonperforming assets, and the allowance.
- How the $11.0 million subordinated-note issuance affects interest expense, capital, and any contemplated share repurchases.
- The eventual CECL adoption impact and completion of LIBOR contract remediation.
- Whether deposit growth and available collateral continue to support liquidity and planned lending; assess the effect of branch closures and changing economic conditions.