First US Bancshares, Inc. — Q1 2019 Form 10-Q
Business and period: Unaudited consolidated results for the three months ended March 31, 2019, compared with Q1 2018; balance sheet comparisons are against December 31, 2018. The company operates First US Bank and consumer lender Acceptance Loan Company (ALC). The prior-year comparison predates the August 2018 acquisition of The Peoples Bank (TPB), so year-over-year growth reflects the acquired business as well as operating changes.
Financial results and position
- Earnings: Net income was $1.234 million, versus $0.414 million; diluted EPS was $0.18, versus $0.06. Income before taxes was $1.585 million, versus $0.495 million.
- Interest and revenue: Interest income rose to $10.813 million from $8.119 million, while net interest income increased 25.4% to $9.173 million from $7.314 million. Non-interest income was $1.265 million, up from $1.140 million.
- Margins and costs: Net interest margin declined to 5.17% from 5.24%. Interest expense more than doubled to $1.640 million from $0.805 million; non-interest expense increased 15.8% to $8.453 million from $7.301 million. Management attributed much of the expense increase to TPB-related employees, facilities and services. The effective tax rate was 22.1%, compared with 16.4%.
- Credit costs: Loan-loss provision decreased to $0.400 million from $0.658 million. The allowance was $4.924 million, or 0.97% of gross loans, at quarter-end. Nonaccrual loans were $1.864 million, down from $2.759 million, and nonperforming assets were $3.086 million, or 0.39% of assets, versus $4.264 million, or 0.54%.
- Balance sheet: Total assets were $795.334 million, up from $791.939 million. Net loans were $502.760 million, down from $514.867 million; deposits were $703.361 million, down from $704.725 million. Cash and cash equivalents were $60.046 million, compared with $49.599 million. Investment securities totaled $148.025 million, down from $153.949 million.
- Cash flow: Operating activities provided $2.081 million, investing activities provided $10.383 million, and financing activities used $2.017 million. Cash and cash equivalents increased $10.447 million during the quarter. Investing inflows included an $11.440 million net decrease in loans; financing included a $1.364 million net decrease in deposits.
- Debt, liquidity and capital: No short- or long-term borrowings were outstanding at March 31, 2019. Unused FHLB credit was $237.5 million, subject to available collateral, and unused federal funds lines were $72.1 million. Bank regulatory ratios were 12.81% for common equity Tier 1 and Tier 1 risk-based capital, 13.69% total capital, and 9.22% Tier 1 leverage. Shareholders’ equity was $81.573 million, or 10.3% of assets.
- Other: The quarterly dividend was $0.02 per share, unchanged from Q1 2018. Operating cash flows are not the same as net income and are affected by working-capital movements.
Material changes and management commentary
- Management attributed higher net interest income primarily to TPB-related loan growth: average loans rose to $512.0 million from $353.3 million. Higher funding costs partly offset the benefit; management reported loan yields up 28 basis points and funding costs up 40 basis points year over year.
- Quarter-end net loans declined, chiefly following the payoff of a significant Bank loan relationship and softer commercial lending, plus seasonal reductions at ALC. ALC’s indirect-sales portfolio grew $1.7 million in Q1 2019, compared with $5.1 million in Q1 2018.
- Core deposits increased to $648.3 million, or 92.2% of deposits, from $634.1 million, or 90.0%, at year-end; this was offset by a decrease in wholesale brokered deposits. Management says it expects deposits to remain a primary funding source and believes liquidity is adequate for contractual obligations and commitments over the next 12 months.
- The company adopted lease accounting on January 1, 2019, recognizing a $3.945 million right-of-use asset and $3.953 million lease liability. Management reported no material income-statement impact from adoption.
- Management expects quality loan growth to support net interest income, but cautions that competition for sound loans and deposits, rising deposit rates, interest-rate movements and economic conditions could pressure margins and credit quality. There is no specific earnings or revenue guidance in the filing.
Risks, contingencies and unusual items
- Real-estate-secured loans represented 62.3% of the loan portfolio. Management says the allowance is adequate, but notes that economic or local-market deterioration could affect loan quality and reserve needs. The allowance-to-loans ratio is lower than a year earlier, partly because acquired TPB loans were recorded at fair value without an acquired allowance; the remaining purchased-loan fair-value discount was $1.6 million.
- Commitments to extend credit were $96.331 million at March 31, 2019, up from $85.972 million at year-end; standby letters of credit and performance letters totaled $0.832 million. Commitments may expire undrawn and do not necessarily represent future cash requirements.
- The company reported ordinary-course litigation and does not expect it to have a material adverse effect. Self-insurance accruals were $0.2 million. Management identifies risks including credit and collateral values, interest rates, deposit competition, economic conditions, cybersecurity and integration of TPB.
- Unrealized losses on investment securities were attributed by management to interest rates rather than issuer credit; no other-than-temporary impairment was recorded. The expected-credit-loss accounting standard (CECL) was still being evaluated; the company expected a transition adjustment but had not determined its amount.
- Management reported disclosure controls were effective as of March 31, 2019, with no material change in internal control over financial reporting during the quarter.
Investor verification checklist
- Separate organic performance from TPB acquisition effects, particularly in loan growth, net interest income and operating expenses.
- Track net interest margin, deposit pricing and mix, brokered-deposit movements, and funding costs.
- Review loan trends and credit quality by segment, especially real-estate concentration, ALC charge-offs, nonaccruals and reserve adequacy for acquired loans.
- Confirm the sustainability of cash generation and liquidity, including the effect of loan repayments, deposit flows and available collateral for borrowing capacity.
- Monitor CECL implementation and the eventual size of its transition adjustment, along with lease liabilities and other commitments.