First US Bancshares, Inc. — Q2 2019 Form 10-Q
Business context and period: Unaudited results for the quarter and six months ended June 30, 2019. The company operates First US Bank and consumer lender Acceptance Loan Company (ALC). Comparisons with 2018 are affected by the August 2018 acquisition of The Peoples Bank (TPB), which added significant loans, deposits, employees and operating costs.
Financial results and position
Income statement: Dollars are in millions unless stated otherwise.
- Q2 net income was $1.005 million, or $0.15 diluted EPS, versus $0.359 million and $0.06 in Q2 2018. First-half net income was $2.239 million, or $0.33 diluted EPS, versus $0.773 million and $0.12.
- First-half net interest income rose 24.2% to $18.406 million. Net interest margin was 5.19%, compared with 5.28% a year earlier; higher asset yields were more than offset by increased funding costs.
- First-half non-interest income rose 12.5% to $2.556 million, including $0.421 million of lease income. Non-interest expense rose 14.6% to $16.957 million, primarily due to TPB-related staffing, facilities and services.
- First-half provision for loan losses was $1.115 million, down from $1.360 million. Effective tax rate increased to 22.5% from 17.3%.
Balance sheet at June 30, 2019: Total assets were $777.2 million, down from $791.9 million at year-end 2018. Net loans were $511.5 million versus $514.9 million; deposits were $682.8 million versus $704.7 million; shareholders’ equity was $83.7 million versus $79.4 million.
- Cash and cash equivalents were $44.9 million and federal funds sold were $15.1 million. First-half operating cash flow was $5.3 million; cash and cash equivalents declined $4.7 million to $44.9 million, with financing cash outflow of $22.6 million, largely reflecting deposit reductions.
- Short-term borrowings were $0.073 million; no long-term FHLB advances were outstanding. Available unused funding included $238.5 million of FHLB capacity, subject to collateral, and $72.0 million of federal funds lines.
- Bank regulatory capital ratios were 12.86% for common equity Tier 1 and Tier 1 risk-based capital, 13.76% total capital and 9.43% Tier 1 leverage. Management said these exceeded well-capitalized requirements.
Material changes and credit quality
- TPB acquisition effects drove much of the year-over-year growth in average loans and interest income. First-half average loans were $512.7 million versus $355.7 million in 2018; average interest-bearing liabilities also increased, to $586.6 million from $458.7 million.
- Management allowed $28.3 million of brokered deposits to mature without renewal to reduce funding costs. Organic Bank deposit growth partially offset the decline; brokered deposits stood at $5.0 million at quarter-end.
- Nonperforming assets fell to $2.7 million, or 0.35% of assets, from $4.3 million, or 0.54%, at year-end 2018. Nonaccrual loans declined to $1.5 million from $2.8 million.
- The allowance for loan and lease losses was $5.1 million, or 0.98% of gross loans. Management reported a 1.07% remaining fair-value discount on acquired loans and an additional allowance of about $50,000 on that portfolio; it considers the allowance adequate, while noting estimates and economic conditions may change loss experience.
Outlook, risks and unusual items
- No quantified earnings or revenue guidance is provided. Management expects quality loan growth to support net interest income, but cites competition for sound loans and deposits, interest-rate movements and potential pressure on funding costs. It expects provisions to generally rise with loan growth.
- Management stated that liquidity should be adequate for contractual obligations and commitments over the next 12 months. Commitments to extend credit were $102.8 million at June 30; these are not necessarily expected to be fully drawn.
- Key disclosed risks include economic and local-market conditions, loan demand and credit quality, collateral values, interest-rate sensitivity, the LIBOR transition, cybersecurity and integration of TPB. The company also cautions that the TPB integration may involve disruption, customer loss, costs or credit-risk changes.
- Adoption of lease accounting brought a $3.8 million right-of-use asset and $3.8 million lease liability onto the balance sheet; management said the adoption did not materially affect income or expense. A proposed delay to the expected-credit-loss standard (CECL) was under consideration; the company’s expected transition adjustment was not yet quantifiable.
- The company reported ordinary-course litigation, which it believes will not materially affect results. Management concluded disclosure controls were effective as of June 30, 2019.
Important facts for investors to verify
- How sustainable the earnings improvement is after separating TPB acquisition effects from organic growth and recurring performance.
- Whether rising deposit costs and the lower first-half net interest margin continue to pressure net interest income.
- Trends in ALC consumer-loan charge-offs, acquired-loan fair-value discounts, allowance adequacy and nonperforming assets.
- Whether deposit runoff, loan growth and available borrowing capacity remain consistent with management’s liquidity assessment.
- The eventual CECL implementation date and the size of any transition adjustment, which the filing says is not yet known.