First US Bancshares(FUSB) - 2023 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Financial Statements The unaudited interim condensed consolidated financial statements reflect the company's financial position as of June 30, 2023, and its performance for the three and six months then ended, highlighting asset growth, increased net income, and the adoption of the CECL accounting standard Interim Condensed Consolidated Balance Sheets Interim Condensed Consolidated Balance Sheets Summary (in thousands) | Metric | June 30, 2023 (Unaudited) | December 31, 2022 | | :--- | :--- | :--- | | Total Assets | $1,068,126 | $994,667 | | Net Loans and Leases | $802,958 | $764,451 | | Total Deposits | $932,628 | $870,025 | | Total Liabilities | $982,401 | $909,532 | | Total Shareholders' Equity | $85,725 | $85,135 | - Total assets grew by 7.4% from $994.7 million at the end of 2022 to $1.07 billion as of June 30, 2023, primarily driven by a 5.0% increase in net loans and a 7.2% increase in total deposits[12] Interim Condensed Consolidated Statements of Operations Interim Condensed Consolidated Statements of Operations Summary (in thousands) | Metric | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--- | :--- | :--- | | Net Interest Income | $18,757 | $17,535 | | Provision for Credit Losses | $569 | $1,616 | | Net Income | $4,095 | $2,776 | | Diluted EPS | $0.64 | $0.42 | - Net income for the first six months of 2023 increased by 47.5% year-over-year, driven by a 7.0% increase in net interest income and a significant 64.8% decrease in the provision for credit losses[14] Notes to Interim Condensed Consolidated Financial Statements - On January 1, 2023, the Company adopted the CECL accounting standard (ASC 326), resulting 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 earnings[29][52] - As of June 30, 2023, the loan portfolio was concentrated in real estate, comprising 53.4% of total loans. The total loan portfolio grew to $814.5 million from $773.9 million at year-end 2022[70] - In February 2023, the Company terminated four interest rate swap agreements with an aggregate notional amount of $40.0 million, resulting in unrealized gains that will be reclassified to interest income and expense over the original terms of the contracts[123] - The Bank segment generated $4.5 million in net income for the first six months of 2023, while the ALC segment, which ceased new business in 2021, contributed $0.3 million[131] Management's Discussion and Analysis of Financial Condition and Results of Operations Management's discussion highlights a significant increase in six-month net income driven by strategic initiatives, improved asset quality, and balance sheet expansion, alongside proactive measures to enhance liquidity in response to industry-wide concerns Executive Overview - A key strategic initiative has been the cessation of new business at the ALC subsidiary since Q3 2021. This has led to a significant improvement in asset quality, with ALC's loan portfolio decreasing from $20.2 million at year-end 2022 to $14.2 million as of June 30, 2023[179][180] - The company's overall asset quality has substantially improved, with nonperforming assets as a percentage of total assets decreasing to 0.15% at June 30, 2023, from 0.24% at December 31, 2022. Net charge-offs as a percentage of average loans fell to 0.14% for the first six months of 2023 from 0.34% in the prior year period[181] Key Financial Performance Metrics (in millions) | Metric | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--- | :--- | :--- | | Net Income | $4.1 | $2.8 | | Diluted EPS | $0.64 | $0.42 | Results of Operations - Net interest income for the first six months of 2023 increased by $1.2 million (7.0%) year-over-year, driven by loan growth and higher asset yields. However, this was partially offset by a $4.8 million increase in interest expense due to rising funding costs[185][186] - The provision for credit losses decreased significantly to $0.6 million for the first half of 2023 from $1.6 million in the same period of 2022, primarily due to reduced charge-offs from the shrinking ALC loan portfolio[187][209] - Non-interest expense increased by 3.5% year-over-year for the six-month period, mainly because nonrecurring gains on property sales in 2022 were not repeated in 2023. This increase was partly offset by a 2.3% reduction in salaries and benefits expense[215] Balance Sheet Analysis - Total loans grew by $40.6 million (5.2%) in the first half of 2023, driven by construction, indirect consumer, and commercial real estate lending[223] - The allowance for credit losses as a percentage of total loans increased to 1.42% as of June 30, 2023, from 1.22% at December 31, 2022, largely due to the adoption of the CECL accounting standard[211][224] - Total deposits increased by 7.2% to $932.6 million. Core deposits, which exclude large time deposits and brokered deposits, represented 84.2% of total deposits, down from 89.4% at year-end 2022, reflecting a strategic use of brokered deposits for liquidity[228] Liquidity and Capital Resources - In response to Q1 2023 banking industry turmoil, management enhanced the company's liquidity position by increasing on-balance sheet cash and utilizing wholesale deposits. Estimated uninsured deposits were 17.3% of total deposits as of June 30, 2023[241] Liquidity Sources (in millions) | Liquidity Source | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Cash and federal funds sold | $75.4 | $31.9 | | Unused FHLB credit (subject to collateral) | $248.0 | $246.8 | | Unused federal funds lines | $28.0 | $45.0 | - The Bank maintained capital ratios well above the 'well-capitalized' regulatory requirements as of June 30, 2023, with a Tier 1 leverage ratio of 9.19% and a total capital ratio of 12.21%[197] Quantitative and Qualitative Disclosures About Market Risk The company manages interest rate risk through financial simulation models, which indicate that net interest margin is most sensitive to falling interest rates, with a projected decline in a negative rate shock scenario Projected Impact of Interest Rate Changes on Net Interest Margin and Income | Interest Rate Scenario | 1-Year Change in Net Interest Margin (bps) | 1-Year Change in Net Interest Income (in millions) | | :--- | :--- | :--- | | +3% | (8) | $(0.8) | | +2% | 5 | $0.5 | | +1% | 5 | $0.5 | | -1% | (8) | $(0.9) | | -2% | (20) | $(2.2) | | -3% | (33) | $(3.6) | Controls and Procedures Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded that they were effective at a reasonable assurance level as of June 30, 2023 - Based on an evaluation as of June 30, 2023, the CEO and CFO concluded that the company's disclosure controls and procedures were effective[250] - No changes in internal control over financial reporting occurred during the quarter ended June 30, 2023, that have materially affected, or are reasonably likely to materially affect, these controls[251] PART II. OTHER INFORMATION Legal Proceedings The company is involved in ordinary course litigation and, based on consultation with legal counsel, does not expect the outcomes to have a material adverse effect on its financial condition or results of operations - The Company is party to ordinary course litigation but does not believe the outcomes will have a material adverse effect on its financial statements[253] Risk Factors The company notes no material changes to its previously disclosed risk factors, except for adding a new risk concerning adverse developments in the financial services industry - A new risk factor was added regarding adverse developments in the financial services industry, citing the potential for market-wide liquidity issues, increased regulatory scrutiny, and higher costs following the bank failures in March and April 2023[255] Unregistered Sales of Equity Securities and Use of Proceeds During the second quarter of 2023, no shares were repurchased under the company's publicly announced share repurchase program, though some shares were purchased for the 401(k) Plan - No shares were repurchased under the company's publicly announced share repurchase program during the second quarter of 2023[257] - As of June 30, 2023, the company had authorization to repurchase up to 596,813 additional shares of common stock under its program, which extends through December 31, 2023[257] Exhibits This section lists the exhibits filed with the Form 10-Q, including corporate governance documents, the 2023 Incentive Plan, CEO/CFO certifications, and financial statements formatted in Inline XBRL