First US Bancshares, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. First US Bancshares is a bank holding company operating First US Bank and Acceptance Loan Company (ALC). ALC stopped originating new loans and closed its branch lending locations in 2021; it continues to service its remaining portfolio. Unless stated otherwise, financial amounts below are in millions of dollars.
Financial performance and position
| Metric | Q2 2023 / June 30, 2023 | Comparable period / prior year-end |
|---|---|---|
| Net income | $2.02; diluted EPS $0.31 | Q2 2022: $1.42; diluted EPS $0.22 |
| Six-month net income | $4.10; diluted EPS $0.64 | First half 2022: $2.78; diluted EPS $0.42 |
| Net interest income | Q2: $9.32; first half: $18.76 | Q2 2022: $8.83; first half 2022: $17.54 |
| Net interest margin | Q2: 3.88%; first half: 4.00% | Q2 2022: 3.91%; first half 2022: 3.94% |
| Provision for credit losses | Q2: $0.30; first half: $0.57 | Q2 2022: $0.90; first half 2022: $1.62 |
| Total assets | $1,068.1 | $994.7 at December 31, 2022 |
| Total loans, gross | $814.5 | $773.9 at December 31, 2022 |
| Total deposits | $932.6 | $870.0 at December 31, 2022 |
| Cash and cash equivalents | $74.7 | $30.2 at December 31, 2022 |
| Borrowings | $30.0 short-term FHLB advances; $10.8 subordinated debt, net | $20.0 short-term advances; $10.7 subordinated debt, net, at December 31, 2022 |
| Shareholders’ equity | $85.7; 8.0% of assets | $85.1; 8.6% of assets, at December 31, 2022 |
- For the six months, net income increased about 48% year over year. Net interest income rose 7.0%; interest income grew $6.1 million, while interest expense increased $4.8 million. Management attributed the gains to higher asset yields and loan growth, partly offset by sharply higher funding costs.
- Six-month operating cash flow was $7.0 million, investing cash flow was negative $34.4 million, and financing cash flow was positive $72.0 million. Financing included $62.6 million of deposit growth and a $10.0 million net increase in short-term borrowings. Cash and cash equivalents increased $44.5 million.
- Loan growth was 5.2% from year-end, led by construction and indirect consumer lending. The allowance for credit losses was $11.5 million, or 1.42% of gross loans, versus $9.4 million, or 1.22%, at year-end.
- Past-due loans were 0.16% of loans; nonaccrual loans were $1.0 million. Nonperforming assets were $1.6 million, or 0.15% of assets, compared with $2.3 million, or 0.24%, at year-end. Six-month net charge-offs were 0.14% of average loans versus 0.34% a year earlier.
- Bank regulatory capital ratios at June 30 were 10.96% for common equity Tier 1 and Tier 1 risk-based capital, 12.21% for total capital, and 9.19% for Tier 1 leverage. The Bank reported these ratios remained above “well-capitalized” requirements.
Material changes versus comparable periods
- Q2 net income increased to $2.02 million from $1.42 million, although Q2 net interest margin edged down to 3.88% from 3.91%. For the first half, margin improved to 4.00% from 3.94%.
- Interest expense rose substantially as deposit and borrowing costs repriced upward. First-half average funding cost increased to 1.37% from 0.32%; average earning-asset yield increased to 5.33% from 4.25%.
- Deposits rose $62.6 million from year-end, including $40.2 million of wholesale brokered deposits. Core deposits were $785.7 million, or 84.2% of total deposits, down from 89.4% at year-end. Noninterest-bearing deposits decreased $9.3 million.
- Unrealized losses on available-for-sale securities increased to $12.6 million from $11.1 million at year-end. The company attributed the losses to interest rates, not issuer credit quality, and recorded no securities credit-loss allowance. The securities-related accumulated other comprehensive loss contributed to a $1.4 million increase in accumulated other comprehensive loss during the half.
- Effective January 1, 2023, the company adopted CECL. The transition increased the credit-loss allowance by about $2.1 million and established a $0.3 million reserve for unfunded commitments, reducing retained earnings by $1.8 million after tax. The June 30 reserve for unfunded commitments was $0.4 million.
Outlook, risks and unusual items
- The filing provides no specific earnings, revenue, or margin guidance. Management says it will continue to assess investment of excess cash against loan growth and liquidity needs, and expects core deposits to remain its primary funding source.
- Management describes heightened banking-sector liquidity concerns, more intense competition for deposits, elevated inflation, and uncertain interest-rate and economic conditions. It warns that higher funding costs may pressure margins and that inflation, rising rates, or weaker borrower conditions could increase credit losses and operating expenses.
- Management reported $184.2 million of readily available liquidity, a non-GAAP measure, compared with $165.2 million at year-end. This includes cash, federal funds sold, estimated liquidity from pledgeable securities, unused FHLB lendable collateral, and unsecured bank lines. The company also has access to Federal Reserve facilities; it reported no outstanding discount-window or Bank Term Funding Program borrowings.
- Estimated uninsured deposits were $161.7 million, or 17.3% of deposits, versus $148.3 million, or 17.1%, at year-end. Management expressed confidence in the core deposit base and stated it believed liquidity was adequate for contractual obligations and commitments over the next 12 months.
- Other notable items: the company terminated four interest-rate swaps in February, generating gains that will be reclassified into income over the original contract terms, and entered three new fair-value hedges on fixed-rate indirect consumer loans. It reported ordinary-course litigation that management does not expect to materially affect results. The filing identifies potential additional regulatory scrutiny and FDIC assessments as industry risks.
Key facts for investors to verify
- Whether deposit pricing and funding costs continue to outpace asset-yield increases, and the resulting effect on net interest margin.
- Deposit composition and retention, including brokered deposits, the share of core deposits, uninsured deposits, and the availability of collateral-backed borrowing capacity.
- Credit performance in the rapidly growing indirect consumer portfolio, ALC’s runoff portfolio, and construction and commercial real estate lending; also monitor allowance assumptions under CECL.
- The effect of interest-rate changes on available-for-sale securities’ unrealized losses, liquidity options, and capital.
- Whether loan and deposit growth, expenses, and dividend payments remain consistent with capital and liquidity objectives. The Board retains discretion over future dividends.