First US Bancshares, Inc. — Q2 2020 Form 10-Q
Business context and period. The filing covers the quarter and six months ended June 30, 2020. First US Bancshares is a bank holding company operating First US Bank and consumer finance subsidiary Acceptance Loan Company (ALC). Figures are consolidated and, unless stated otherwise, in millions of dollars.
Financial performance and position
| Metric | Q2 2020 / June 30, 2020 | Comparable period / prior year-end |
|---|---|---|
| Net interest income | $8.623; Q2 net interest margin 4.65% | $9.233; Q2 2019 margin 5.21% |
| Provision for loan and lease losses | $0.850 for Q2; $1.430 for six months | $0.715 and $1.115, respectively, in 2019 |
| Net income / diluted EPS | $0.404 / $0.06 for Q2; $1.251 / $0.19 for six months | $1.005 / $0.15 for Q2 2019; $2.239 / $0.33 for six months 2019 |
| Total assets | $845.747 | $788.738 at December 31, 2019 |
| Loans, net of allowance | $566.062 | $545.243 at December 31, 2019 |
| Deposits | $738.290 | $683.662 at December 31, 2019 |
| Cash and cash equivalents | $108.268 | $57.030 at December 31, 2019 |
| Short-term borrowings | $10.334 | $10.025 at December 31, 2019; no long-term FHLB advances outstanding |
| Shareholders’ equity | $85.281, or 10.1% of assets | $84.748, or 10.7% of assets, at December 31, 2019 |
For the six months, operating cash flow was $2.407; investing activities used $5.284 and financing activities provided $54.115. Cash and cash equivalents increased $51.238. The Bank reported a 12.84% common equity Tier 1 ratio, 13.94% total capital ratio and 9.36% Tier 1 leverage ratio, each above the applicable well-capitalized threshold, according to management.
Material changes versus comparable periods
- Q2 net income declined about 60% year over year; first-half net income declined about 44%. First-half net interest income decreased $0.897, while the net interest margin fell 38 basis points to 4.81%.
- Management attributed margin pressure to rapid asset repricing after Federal Reserve rate cuts and increased low-yield cash balances. Average loan yields also declined. Funding costs fell, but did not offset the decline in asset yields.
- First-half provision expense increased to $1.430 from $1.115 as management raised qualitative allowance factors for pandemic uncertainty. The allowance was $6.423; management reported coverage of 1.15% of loans excluding SBA-guaranteed PPP loans.
- Deposits rose $54.628 and total assets increased $57.009 from year-end. Management linked deposit growth to customer liquidity preferences, deferrals, stimulus payments and lower spending.
- Gross loans increased $21.8 from year-end. Indirect sales loans grew $44.4, while real estate, commercial and industrial, and consumer balances declined in aggregate. The company transferred $45.5 of indirect loans from ALC to the Bank effective January 1, 2020, affecting segment comparisons.
- Non-interest income increased modestly, with $0.326 in securities gains offsetting lower service charges and credit insurance income. Non-interest expense was broadly stable at $17.075 for the first half.
- Nonperforming assets decreased to $4.418, or 0.52% of assets, from $4.801, or 0.61%, at year-end. Total past-due loans were $2.879, or 0.50% of loans, at June 30.
Outlook, risks and notable items
- COVID-19 credit exposure: At June 30, 864 loans totaling $95.244 remained under payment deferment, equal to 16.5% of the loan portfolio. Management said most deferments were generally 90 days or less and expected additional requests in Q3. Deferrals were generally not treated as troubled debt restructurings or past due during the relief period under applicable guidance.
- Management identified $14.869 of high-risk loans (hotels/motels and dine-in restaurants) and $61.787 of moderate-risk loans (fast-food restaurants, retail and 1–4 family investment properties). Management cautioned that these categories reflect heightened monitoring and are not necessarily evidence of deterioration.
- The company had originated 158 PPP loans totaling $13.8. Loans carry an SBA guarantee, subject to program requirements; the filing notes potential exposure to disputes, compliance issues, guarantee denials or reduced recoveries.
- Management considered the allowance sufficient for conditions at June 30 but warned that further deterioration could require additional provisioning. It also anticipated continued near-term pressure on non-interest income and acknowledged that pandemic-related costs could rise.
- Management expects to continue repricing interest-bearing liabilities lower if the rate environment persists, but noted that margin and earnings remain exposed to low rates, competition for quality loans and deposits, and pandemic uncertainty. No quantified earnings or margin guidance was provided.
- Liquidity resources included $216.5 of available FHLB credit, subject to collateral, and $61.7 of unused correspondent bank and Federal Reserve lines. Management said liquidity was adequate for contractual obligations and commitments over the next 12 months.
- Goodwill was $7.435 and was not tested for impairment at June 30; management said sustained earnings or stock-price weakness could prompt interim testing. The company had $3.4 of non-accrual loans and $1.0 of other real estate owned. Ordinary-course litigation was not expected by management to have a material adverse effect.
- The company paid dividends of $0.06 per share for the first half and repurchased 38,604 shares at a weighted-average $11.70. A July 2020 permanent closure of one Thomasville, Alabama banking office occurred after quarter-end.
Important facts for investors to verify
- How deferment borrowers perform after relief expires, especially exposures to hotels, dine-in restaurants, retail and commercial real estate; and whether further allowance increases are needed.
- Whether deposit balances remain elevated and whether excess cash can be redeployed into loans without weakening underwriting or liquidity.
- The sustainability of net interest margin and earnings as assets and liabilities reprice, and the effect of any further rate or market changes.
- PPP forgiveness, fee recognition and SBA guarantee compliance, including any related litigation or servicing exposure.
- Future capital, dividend and repurchase decisions, and any interim goodwill impairment assessment if business conditions or the stock price weaken.