First US Bancshares, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022; balance sheet compared with December 31, 2021. Unless stated otherwise, dollar amounts below are in millions. The company is a bank holding company operating First US Bank and Acceptance Loan Company (ALC).
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net interest income | $8.83 | $9.31 | $17.54 | $18.38 |
| Provision for loan losses | $0.90 | $0.50 | $1.62 | $0.90 |
| Non-interest income | $0.86 | $0.81 | $1.69 | $1.76 |
| Non-interest expense | $6.88 | $8.40 | $13.93 | $16.80 |
| Net income | $1.42 | $0.95 | $2.78 | $1.90 |
| Diluted earnings per share | $0.22 | $0.14 | $0.42 | $0.28 |
- Q2 and first-half net income each rose about 46% year over year, primarily reflecting lower operating expenses after ALC’s branch closures and other efficiency measures.
- Net interest income declined 5.2% in Q2 and 4.6% for the first half. Six-month net interest margin was 3.94%, down from 4.35%; Q2 margin was 3.91%, down from 4.31%.
- First-half loan interest income fell $1.57 million year over year, including a $1.9 million decline in interest and fees from ALC. Investment securities income and income from other Bank lending partly offset the decrease.
- First-half provision expense rose to $1.62 million from $0.90 million. Net charge-offs were $1.2 million versus $0.6 million; management attributed increased credit costs chiefly to ALC runoff and inflation-related economic uncertainty.
- Cash flow from operations was $5.18 million, versus $5.19 million in the first half of 2021. Investing activities used $34.72 million, and financing activities provided $2.06 million. Cash and cash equivalents declined $27.48 million to $33.76 million.
Financial condition, capital and liquidity
- Total assets were $955.4 million, down 0.3% from year-end 2021. Total loans were $715.8 million, up $4.8 million; deposits were $844.3 million, up $6.2 million. Non-interest-bearing deposits were $179.9 million.
- Shareholders’ equity declined to $82.6 million from $90.1 million, largely because rising interest rates reduced the fair value of available-for-sale securities. Accumulated other comprehensive loss was $6.58 million, compared with $0.28 million at year-end.
- Available-for-sale securities had $9.6 million of gross unrealized losses, up from $0.8 million at year-end. Management attributed the losses to interest rates, reported no other-than-temporary impairment, and stated it intended and was able to hold the securities through anticipated recovery.
- The allowance for loan and lease losses was $8.75 million, or 1.22% of total loans. Nonperforming assets were $1.73 million, or 0.18% of assets, versus $4.16 million and 0.43% at year-end; the decrease chiefly reflected sales of foreclosed properties. Nonaccrual loans were $1.46 million.
- Bank regulatory capital ratios remained above the thresholds for “well-capitalized” status: common equity Tier 1 and Tier 1 risk-based capital, 11.45% each; total capital, 12.56%; Tier 1 leverage, 9.33%.
- Borrowings included $10.1 million short-term and $10.7 million long-term, the latter net of issuance costs on subordinated notes. The company reported available unused correspondent-bank lines of $45.0 million and FHLB capacity of $250.4 million, subject to collateral. Management said liquidity was adequate for contractual obligations and commitments over the next twelve months.
- Off-balance-sheet commitments to extend credit totaled $199.6 million; standby performance letters of credit were $0.6 million.
Material changes, outlook and risks
- ALC stopped originating new business and closed its 20 Alabama and Mississippi branches in September 2021. It continued servicing its remaining portfolio, which declined to $28.1 million net of unearned interest and fees from $40.8 million at year-end. ALC first-half non-interest expense fell to $1.0 million from $3.6 million, while ALC net charge-offs rose to $1.9 million from $0.4 million and its loan-loss provision rose to $1.3 million from $0.1 million.
- Management expects ALC runoff to continue reducing its interest income and pressuring loan yield and margin; it also expects expense savings to continue and ALC credit costs to ease as the portfolio pays down. The filing provides no quantified earnings or revenue guidance. Management noted that inflation may offset expense savings.
- Rising rates and inflation, a potentially flattening or inverted yield curve, geopolitical and COVID-related uncertainty, deposit-pricing competition, and possible deterioration in borrower credit quality are identified risks. Rising rates also reduced securities values and may further affect the economy, loan demand and borrowers.
- The company repurchased 348,400 shares during the first half for $3.83 million at a weighted average $10.99 per share; 660,813 shares remained authorized for repurchase at June 30. Dividends were $0.06 per share for the half-year.
- The company expects to adopt CECL on January 1, 2023. Management was assessing the impact; the amount of any initial allowance adjustment was not yet known. Most restructuring charges related to ALC’s closure had been incurred; $0.16 million was recorded in the first half of 2022.
- The company reported ordinary-course litigation that management did not expect to have a material adverse effect. It reported no material change in previously disclosed risk factors and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether ALC runoff, higher charge-offs and elevated inflation will continue to affect credit costs, earnings and the pace of margin decline.
- The market, liquidity and capital implications of the $9.6 million in unrealized securities losses, including the company’s ability to hold the securities until recovery.
- The assumptions and eventual transition impact of CECL adoption, including the still-undetermined opening allowance adjustment.
- Whether deposit costs, loan growth and interest-rate changes evolve as management anticipates; the filing’s rate-sensitivity scenarios show differing effects over time and by rate shock.
- How planned share repurchases and dividends will be balanced against capital needs, liquidity and the company’s stated growth priorities.