First US Bancshares, Inc. (Nasdaq: FUSB) (the “Company”), the parent company of First US Bank (the “Bank”), reported net income of $1.9 million, or $0.29 per diluted share, for the quarter ended September 30, 2022 (“3Q2022”), compared to $0.8 million, or $0.13 per diluted share, for the quarter ended September 30, 2021 (“3Q2021”) and $1.4 million, or $0.22 per diluted share, for the quarter ended June 30, 2022 (“2Q2022”). Net income totaled $4.6 million for the nine months ended September 30, 2022, compared to $2.7 million for the nine months ended September 30, 2021. Diluted earnings per share totaled $0.71 for the nine months ended September 30, 2022, compared to $0.41 per diluted share during the corresponding period of 2021.
Earnings improvement, comparing both 3Q2022 and the nine months ended September 30, 2022 to corresponding periods in 2021, was driven primarily by reductions in non-interest expense following strategic initiatives that were initiated by the Company beginning in the third quarter of 2021. The strategic initiatives included the cessation of new business development at the Bank’s wholly owned subsidiary, Acceptance Loan Company, Inc. (“ALC”), as well as efforts to reorganize the Bank’s retail banking, technology and deposit operations functions. As a result of these efforts, non-interest expense was reduced by $1.5 million, or 17.7%, comparing 3Q2022 to 3Q2021 and by $4.4 million, or 17.3%, comparing the nine months ended September 30, 2022, to the nine months ended September 30, 2021. Comparing 3Q2022 to 2Q2022, non-interest expense decreased by $0.2 million, or 2.2%.
“The business simplification efforts that we launched in 2021, combined with solid loan growth during the past two quarters have contributed to strong earnings growth both in the third quarter and for the year,” stated James F. House, President and CEO of the Company. “As we move forward, our team remains very focused on the economic challenges that have emerged, including the potential impacts of inflation, rising interest rates and a slowing economy on our borrowers and depositors. We believe that our balance sheet is well-positioned for the volatile environment that we are entering,” continued Mr. House.
Other Second Quarter Financial Highlights
Loan Growth – The table below summarizes loan balances by portfolio category at the end of each of the most recent five quarters as of September 30, 2022.
|(Dollars in Thousands)|
|Real estate loans:|
|Construction, land development and other land loans||$||36,740||$||40,625||$||52,817||$||67,048||$||58,175|
|Secured by 1-4 family residential properties||84,911||69,098||69,760||72,727||73,112|
|Secured by multi-family residential properties||72,446||66,848||50,796||46,000||51,420|
|Secured by non-farm, non-residential properties||200,505||187,041||177,752||197,901||198,745|
|Commercial and industrial loans||65,920||65,792||67,455||72,286||73,777|
|Paycheck Protection Program (“PPP”) loans||31||116||643||1,661||3,902|
|Less unearned interest, fees and deferred costs||1,581||1,142||1,738||2,594||3,729|
|Allowance for loan and lease losses||9,373||8,751||8,484||8,320||8,193|
The Company’s total loan portfolio increased by $36.1 million, or 5.0%, during 3Q2022. Loan volume increases resulted from growth primarily in the Bank’s residential (secured by multi-family and 1-4 family residential properties), commercial real estate (secured by non-farm, non-residential properties), and consumer indirect categories. Growth in these categories was consistent with continued commercial economic activity and resiliency in consumer demand during the quarter. Loan growth was partially offset by decreases in the construction, direct consumer, and branch retail categories. The decreases in direct consumer and branch retail loans were consistent with management’s expectations related to the Company’s business cessation strategy at ALC. As of September 30, 2022, loans totaled $751.9 million, an increase of $40.9 million, or 5.8%, since December 31, 2021.
Net Interest Income and Margin – Net interest income totaled $9.5 million in 3Q2022, compared to $9.3 million in 3Q2021 and $8.8 million in 2Q2022. The improvement compared to both prior quarters resulted from loan growth, as well as margin expansion as earning assets repriced faster than interest-bearing liabilities amid the rising interest rate environment. For the nine months ended September 30, 2022, net interest income totaled $27.1 million, compared to $27.7 million for the nine months ended September 30, 2021. The decrease comparing the nine months ended September 30, 2022 to the corresponding period of 2021, was attributable to reductions in interest and fees on ALC loans in connection with the ALC cessation of business strategy. Interest and fees on ALC loans decreased by $3.1 million comparing the nine months ended September 30, 2022 to the corresponding period of 2021. The decrease related to ALC loans was partially offset by interest income in the Bank’s other earning asset categories, which increased by $2.7 million comparing the nine months ended September 30, 2022 to the nine months ended September 30, 2021. As ALC’s loan portfolio continues to pay down, there will be continued reduction in interest and fees attributable to ALC’s loans. The reductions in loans at ALC have put downward pressure on total loan yield and net interest margin. As a result of the changing mix of earning assets, the Company’s net interest margin was reduced to 4.10% in 3Q2022, compared to 4.17% in 3Q2021. For the nine months ended September 30, 2022, net interest margin was 4.00%, compared to 4.29% for the nine months ended September 30, 2021. Though net interest income and margin have decreased as a result of the cessation of ALC’s business, significant non-interest expense savings have also developed, and ultimately, reductions in losses and loan loss provisioning are also expected. Historically, ALC’s loan portfolio has represented both the Company’s highest yielding loans, as well as the portfolio with the highest level of credit losses. Accordingly, while interest earned on these loans has decreased, losses and loan loss provision expense are expected to decrease in the future after the portfolio has paid down. As the pay down continues, management is continuing efforts to grow earning assets in the Bank’s other loan and investment categories, while at the same time maintaining pricing discipline on deposit costs and earning asset yields consistent with the current interest rate environment. As of September 30, 2022, remaining loans, net of unearned interest and fees, in ALC’s portfolio totaled $23.8 million. This amount represents 49.7% of the total loans in ALC’s portfolio as of September 30, 2021, immediately following implementation of the cessation of business strategy.
Deposit Growth and Deployment of Funds – Deposits totaled $846.5 million as of September 30, 2022, compared to $838.1 million as of December 31, 2021, an increase of $8.4 million, or 1.0%. Total average funding costs, including both interest- and noninterest-bearing deposits and borrowings, was 0.51% in 3Q2022, compared to 0.32% in 3Q2021. For the nine months ended September 30, 2022, average funding costs totaled 0.39%, compared to 0.36% during the corresponding period of 2021. In the current rising interest rate environment, management continues to seek to deploy earning assets in an efficient manner, including growth in both loans and investment securities. Investment securities, including both the available-for-sale and held-to-maturity portfolios totaled $145.9 million as of September 30, 2022, compared to $134.3 million as of December 31, 2021. The expected average life of securities in the investment portfolio as of September 30, 2022 was 3.59 years. Management maintains the portfolio with average durations that are expected to provide monthly cash flows that can be utilized to reinvest in earning assets at current market rates.
Loan Loss Provision – Loan loss provisions totaled $1.2 million in 3Q2022, compared to $0.6 million in 3Q2021. For the nine months ended September 30, 2022, loan loss provisions totaled $2.8 million, compared to $1.5 million for the nine months ended September 30, 2021. The increase in provision expense comparing both the quarter and nine months ended September 30, 2022 to the corresponding periods of 2021 reflected both an increase in charge-offs associated with ALC’s loan portfolio, as well as qualitative adjustments applied to the portfolio in response to heightened inflationary trends and other economic uncertainties that have emerged in 2022. In management’s view, the combination of the business cessation strategy, coupled with deteriorating economic conditions, including elevated inflation levels, has increased overall credit risk during 2022, particularly in ALC’s loan portfolio. Loan loss provisions recorded by the Company during the first nine months of 2022 included expense of $1.6 million associated with ALC’s loans and $1.2 million associated with the Bank’s portfolio. While loan loss provisions at ALC resulted primarily from increased charge-offs and heightened economic risk factors, provisions at the Bank resulted primarily from loan growth. Management will continue to closely monitor the impact of changing economic circumstances on the Company’s loan portfolio and will adjust the allowance accordingly. Due to its classification as a smaller reporting company by the Securities and Exchange Commission, the Company is not required to adopt the Current Expected Credit Loss (CECL) model to account for credit losses until January 1, 2023. Management is continuing to evaluate the impact that the adoption of CECL will have on the Company’s financial statements.
Non-interest Income – Non-interest income totaled $1.1 million in 3Q2022, compared to $0.9 million in 3Q2021. For the nine months ended September 30, 2022, non-interest income totaled $2.8 million, compared to $2.7 million for the corresponding period of 2021.
Non-interest Expense – Non-interest expense totaled $7.0 million in 3Q2022, compared to $8.5 million in 3Q2021. For the nine months ended September 30, 2022, non-interest expense totaled $21.0 million, compared to $25.3 million for the nine months ended September 30, 2021. The expense decreases in 2022 have resulted primarily from the cessation of ALC’s business, as well as other efficiency efforts conducted by the Bank. As a result of these efforts, significant expense reductions were realized associated with salaries and employee benefits, occupancy and equipment, and other expenses associated with technology and professional services. Non-interest expense during the nine months ended September 30, 2022 was further reduced by $0.3 million in nonrecurring net gains on the sale of other real estate owned (OREO). Due primarily to significant reduction in non-interest expense, the Company’s efficiency ratio improved to 66.3% in 3Q2022, compared to 83.5% in 3Q2021.
Asset Quality – The Company’s nonperforming assets, including loans in non-accrual status and OREO, totaled $2.8 million as of September 30, 2022, compared to $1.7 million as of June 30, 2022, and $4.2 million as of December 31, 2021. The increase in nonperforming assets during 3Q2022 resulted primarily from two loan relationships (one from the commercial and industrial category and one from the secured by 1-4 family category) that moved into nonaccrual status during the quarter. The reduction in nonperforming assets during the first nine months of 2022 resulted from the sale of OREO properties during the period. Reductions in OREO totaled $1.5 million and included the sale of banking centers that were closed in 2021. As a percentage of total assets, non-performing assets totaled 0.28% as of September 30, 2022, compared to 0.18% as of June 30, 2022, and 0.43% as of December 31, 2021.
Shareholders’ Equity – As of September 30, 2022, shareholders’ equity totaled $83.1 million, compared to $90.1 million as of December 31, 2021. The decrease in shareholders’ equity resulted from reductions in accumulated other comprehensive income due to declines in the market value of the Company’s available-for-sale investment portfolio, as well as repurchases of shares of the Company’s common stock during the nine months ended September 30, 2022. The market value declines in investment securities available-for-sale were the direct result of the increasing interest rate environment in 2022. No other-than-temporary impairment was recognized in the portfolio, and the Company has both the intent and ability to retain the investments for a period of time sufficient to allow for the full recovery of all market value decreases. The market value decrease in available-for-sale securities was partially offset by an increase in the market value of cash flow derivative instruments that hedge certain deposits and borrowings on the Company’s balance sheet.
Share Repurchases – During 3Q2022, the Company completed share repurchases totaling 64,000 shares of its common stock at a weighted average price of $10.20 per share. For the nine months ended September 30, 2022, the Company repurchased a total of 412,400 shares of its common stock at a weighted average price per share of $10.87. The repurchases were completed under the Company’s existing share repurchase program, which was amended in April 2021 to allow for the repurchase of additional shares through December 31, 2022. As of September 30, 2022, 596,813 shares remained available for repurchase under the program.
Cash Dividend – The Company declared a cash dividend of $0.03 per share on its common stock in 3Q2022. The dividend was consistent with dividends paid during the prior two quarters of 2022 and all four quarters of 2021.
Regulatory Capital –During 3Q2022, the Bank continued to maintain capital ratios at higher levels than required to be considered a “well-capitalized” institution under applicable banking regulations. As of September 30, 2022, the Bank’s common equity Tier 1 capital and Tier 1 risk-based capital ratios were each 11.09%. Its total capital ratio was 12.23%, and its Tier 1 leverage ratio was 9.23%.
Liquidity – As of September 30, 2022, the Company continued to maintain excess funding capacity sufficient to provide adequate liquidity for loan growth, capital expenditures and ongoing operations. The Company benefits from a strong core deposit base, a liquid investment securities portfolio and access to funding from a variety of sources, including federal funds lines, Federal Home Loan Bank advances and brokered deposits.