First US Bancshares(US:FUSB)2023-05-14 16:00PART I. FINANCIAL INFORMATION Financial Statements The unaudited interim condensed consolidated financial statements for First US Bancshares, Inc. as of March 31, 2023, reflect the company's financial position, results of operations, and cash flows, highlighting the adoption of CECL and increased net income Interim Condensed Consolidated Balance Sheets Total assets increased to $1.027 billion from $994.7 million, driven by higher cash, while deposits grew and shareholders' equity slightly decreased Consolidated Balance Sheet Highlights (Unaudited) | (In Thousands) | March 31, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Total Assets | $1,026,658 | $994,667 | | Total cash and cash equivalents | $68,427 | $30,152 | | Net loans and leases held for investment | $764,290 | $764,451 | | Total Liabilities | $941,901 | $909,532 | | Total deposits | $897,885 | $870,025 | | Short-term borrowings | $25,000 | $20,038 | | Total Shareholders' Equity | $84,757 | $85,135 | Interim Condensed Consolidated Statements of Operations Net income for Q1 2023 increased 52% to $2.1 million, driven by higher net interest income and a lower provision for credit losses, leading to increased diluted EPS Statement of Operations Summary (Unaudited) | (In Thousands, Except Per Share Data) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :--- | :--- | :--- | | Net Interest Income | $9,434 | $8,709 | | Provision for credit losses | $269 | $721 | | Non-interest Income | $829 | $829 | | Non-interest Expense | $7,270 | $7,056 | | Net Income | $2,072 | $1,361 | | Diluted Net Income Per Share | $0.33 | $0.20 | | Dividends per share | $0.05 | $0.03 | Interim Condensed Consolidated Statements of Comprehensive Income (Loss) Total comprehensive income for Q1 2023 was $1.6 million, a significant improvement from a $1.2 million loss in Q1 2022, primarily due to a smaller other comprehensive loss Comprehensive Income (Loss) Summary (Unaudited) | (In Thousands) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :--- | :--- | :--- | | Net Income | $2,072 | $1,361 | | Other Comprehensive Loss | $(473) | $(2,590) | | Total Comprehensive Income (Loss) | $1,599 | $(1,229) | Interim Condensed Consolidated Statements of Changes in Shareholders' Equity Shareholders' equity slightly decreased to $84.8 million due to a $1.8 million CECL adjustment and other comprehensive loss, partially offset by $2.1 million in net income - The adoption of the Current Expected Credit Loss (CECL) accounting model resulted in a cumulative-effect adjustment that decreased retained earnings by $1.8 million, net of tax18 - Net income of $2.1 million partially offset the decrease in equity, along with a $0.1 million impact from stock-based compensation plans18 Interim Condensed Consolidated Statements of Cash Flows Cash and cash equivalents increased by $38.3 million in Q1 2023, primarily driven by $32.5 million from financing activities, including higher deposits and short-term borrowings Cash Flow Summary (Unaudited) | (In Thousands) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $3,585 | $846 | | Net cash provided by investing activities | $2,187 | $21,867 | | Net cash provided by financing activities | $32,503 | $13,882 | | Net increase in cash and cash equivalents | $38,275 | $36,595 | | Cash and cash equivalents, end of period | $68,427 | $97,839 | Notes to Interim Condensed Consolidated Financial Statements (Unaudited) The notes detail significant accounting policies, including the adoption of CECL, which increased the allowance for credit losses, and provide breakdowns of the investment and loan portfolios, borrowings, and segment performance - On January 1, 2023, the Company adopted ASC 326 (CECL), replacing the "incurred loss" model with an "expected loss" model. This resulted in a $2.4 million increase in the allowance for credit losses (including loans and unfunded commitments) and a $1.8 million after-tax decrease to retained earnings2627 - As of March 31, 2023, the investment portfolio had gross unrealized losses of $11.5 million in available-for-sale securities, primarily attributed to the interest rate environment, not credit issues5258 - During Q1 2023, the Company terminated its remaining four interest rate swap agreements (two cash flow hedges, two fair value hedges) with a total notional amount of $40.0 million, resulting in unrealized gains that will be recognized over the original terms of the contracts123124 - The company operates two reportable segments: the Bank and Acceptance Loan Company, Inc. (ALC). ALC ceased new business development in Q3 2021 and is servicing its remaining loan portfolio22130 Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) MD&A highlights a strong Q1 2023 with net income rising to $2.1 million due to increased net interest income and lower credit loss provision, improved asset quality from ALC wind-down, and enhanced liquidity Executive Overview Net income for Q1 2023 increased to $2.1 million ($0.33 diluted EPS) from $1.4 million, driven by higher net interest income, lower credit loss provision, and improved asset quality from the ALC wind-down Financial Highlights Q1 2023 vs Q1 2022 | (In Thousands, Except Per Share Data) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :--- | :--- | :--- | | Net Interest Income | $9,434 | $8,709 | | Provision for credit losses | $269 | $721 | | Net Income | $2,072 | $1,361 | | Diluted Net Income Per Share | $0.33 | $0.20 | - The strategic cessation of new business at the ALC subsidiary has led to improved asset quality. Net charge-offs from ALC loans fell to $0.1 million in Q1 2023 from $0.5 million in Q1 2022179180 - The company adopted the CECL accounting standard on January 1, 2023, which increased the allowance for credit losses by $2.1 million and established a $0.3 million reserve for unfunded commitments188 - To enhance liquidity amid banking sector turmoil, the company acquired $35.0 million in brokered deposits, increasing cash and cash equivalents by $38.3 million during the quarter193194 Results of Operations Net interest income for Q1 2023 increased to $9.4 million, expanding net interest margin to 4.13%, while provision for credit losses decreased due to lower charge-offs, despite a rise in non-interest expense Net Interest Margin Analysis | For the Three Months Ended | March 31, 2023 | March 31, 2022 | | :--- | :--- | :--- | | Average Interest-Earning Assets | $926,521 | $888,591 | | Net Interest Income | $9,434 | $8,709 | | Net Interest Margin | 4.13% | 3.97% | - The provision for credit losses decreased from $0.7 million in Q1 2022 to $0.3 million in Q1 2023, driven by a reduction in net charge-offs from $0.6 million to $0.2 million187207 - Non-interest expense increased by 3.0% YoY, primarily due to non-recurring gains on property sales in 2022 that were not repeated in 2023. This was partially offset by a 2.5% decrease in salaries and employee benefits212213 Balance Sheet Analysis Total loans remained stable at $775.9 million, while the allowance for credit losses increased to 1.49% due to CECL adoption, nonperforming assets decreased, and total deposits grew, though core deposits declined Allowance for Credit Losses (ACL) Trend | As of | ACL ($ in Thousands) | ACL as % of Loans | | :--- | :--- | :--- | | March 31, 2023 | $11,599 | 1.49% | | December 31, 2022 | $9,422 | 1.22% | - Nonperforming assets decreased to $1.8 million, or 0.18% of total assets, at March 31, 2023, compared to $2.3 million, or 0.24% of total assets, at December 31, 2022224 - Core deposits (excluding time deposits >$250k and brokered deposits) decreased to $761.7 million (84.8% of total deposits) from $778.1 million (89.4% of total deposits) at year-end 2022226 Liquidity and Capital Resources The company maintains a strong liquidity position with $181.8 million in readily available liquidity, proactively enhanced in response to banking turmoil, and remains well-capitalized with robust regulatory capital ratios - The Bank's regulatory capital ratios as of March 31, 2023, remained well above the levels required to be considered "well-capitalized," with a Tier 1 leverage ratio of 9.36% and a total capital ratio of 12.41%196 - In response to Q1 2023 liquidity events in the banking sector, the company enhanced its on-balance sheet liquidity, reviewed collateral pledging capacity, and introduced promotional deposit rates237238240 Readily Available Liquidity | (In Thousands) | March 31, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Liquidity from cash and federal funds sold | $68,690 | $31,920 | | Liquidity from pledgeable investment securities | $65,872 | $70,107 | | Liquidity from unused lendable collateral (loans) at FHLB | $19,228 | $18,215 | | Unsecured lines of credit with banks | $28,000 | $45,000 | | Total readily available liquidity | $181,790 | $165,242 | Quantitative and Qualitative Disclosures About Market Risk The company manages interest rate risk using financial simulation models, showing asset sensitivity to small rate increases but negative impacts from larger increases or any decreases on net interest income Cumulative Change in Net Interest Income from Level Rate Forecast (pre-tax) | Rate Scenario | 1 Year ($ in thousands) | 2 Years ($ in thousands) | | :--- | :--- | :--- | | +3% | $(1,112) | $(1,530) | | +2% | $250 | $1,013 | | +1% | $459 | $1,154 | | -1% | $(946) | $(2,135) | | -2% | $(2,419) | $(5,542) | | -3% | $(4,097) | $(9,171) | - The company uses financial simulation models as its primary tool to measure interest rate exposure, running various scenarios to understand the potential impact on net interest income246 Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of March 31, 2023, with no material changes to internal control over financial reporting during the quarter - Management concluded that as of March 31, 2023, the company's disclosure controls and procedures were effective at the reasonable assurance level250 - No material changes to the internal control over financial reporting occurred during the quarter ended March 31, 2023251 PART II. OTHER INFORMATION Legal Proceedings The company is involved in ordinary course litigation, which management believes will not have a material adverse effect on its financial condition or results of operations - The Company is involved in ordinary course litigation but does not expect it to have a material adverse effect on its financial statements254 Risk Factors The company highlights new and updated risk factors, including potential material effects from adverse developments in the financial services industry and the risk of a U.S. government debt ceiling failure - A new risk factor highlights that adverse developments in the financial services industry, such as the recent failures of Silicon Valley Bank and others, could cause market-wide liquidity problems and lead to losses for the Company256 - The company identifies the risk that a failure by the U.S. government to increase the debt ceiling could lead to a default on its debts, potentially increasing interest rates and negatively impacting the company's access to debt markets257 Unregistered Sales of Equity Securities and Use of Proceeds During Q1 2023, 9,004 shares were purchased by the 401(k) Plan trustee, with no repurchases under the company's program, leaving 596,813 shares authorized for repurchase - No shares were repurchased under the company's publicly announced share repurchase program in Q1 2023260 - An independent trustee for the company's 401(k) Plan purchased 9,004 shares in open-market transactions during the quarter259 - As of March 31, 2023, the company was authorized to repurchase up to 596,813 additional shares under its existing program260 Exhibits This section lists the exhibits filed with the Form 10-Q, including corporate governance documents, incentive plans, change in control agreements, CEO/CFO certifications, and financial statements in Inline XBRL - The report includes standard exhibits such as the CEO/CFO certifications (31.1, 31.2, 32), corporate bylaws, and financial data in Inline XBRL format (101, 104)262