First US Bancshares, Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. The company operates First US Bank, a commercial bank, and Acceptance Loan Company, a consumer finance business. Unless stated otherwise, dollar amounts below are in millions.
Key financial results
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net interest income | $8.33 | $7.14 | $23.14 | $21.11 |
| Provision for loan losses | $0.79 | $0.37 | $2.15 | $1.46 |
| Non-interest income | $2.11 | $1.24 | $4.38 | $3.33 |
| Non-interest expense | $9.14 | $7.19 | $23.94 | $21.09 |
| Net income | $0.24 | $0.64 | $1.01 | $1.46 |
| Diluted earnings per share | $0.03 | $0.10 | $0.15 | $0.22 |
- Net income fell about 62% year over year in Q3 and 30% for the nine-month period. Q3 pre-tax income was $0.51 million; the effective tax rate was 52.8%, including approximately $0.2 million of additional tax expense tied to acquisition costs. The nine-month effective tax rate was 29.8%, versus 23.0%.
- Net interest margin, reported as net yield on interest-earning assets, was 5.25% in Q3 versus 5.11%; for the nine months it was 5.27% versus 5.08%.
- Nine-month operating cash flow was $7.56 million; investing cash flow was negative $9.44 million and financing cash flow was positive $24.84 million. Cash and cash equivalents ended at $50.08 million, up from $27.12 million at year-end 2017.
Balance sheet, liquidity and capital
- At September 30, 2018, total assets were $802.6 million, deposits $715.8 million, net loans $519.8 million and shareholders’ equity $77.5 million. Assets and deposits rose 28.3% and 38.4%, respectively, from December 31, 2017, primarily reflecting the acquisition of The Peoples Bank (TPB).
- Short-term borrowings were $0.2 million and long-term debt was zero, compared with $15.6 million and $10.0 million, respectively, at year-end 2017. Available unused credit included $231.0 million from the FHLB, subject to collateral, and $46.8 million in established federal funds lines.
- The allowance for loan and lease losses was $5.1 million, or 0.97% of gross loans, versus 1.36% at year-end. Management attributed the lower ratio largely to acquired TPB loans being recorded at fair value without an acquisition-date allowance; the acquired-loan discount remaining was $2.3 million.
- Nonperforming assets were $5.27 million, or 0.66% of assets, versus $5.94 million, or 0.95%, at year-end. Nonaccrual loans increased to $3.78 million from $2.15 million, including $2.2 million of acquired credit-impaired loans; other real estate owned fell to $1.49 million from $3.79 million.
- Bank capital ratios were 12.28% for common equity Tier 1 and Tier 1 risk-based capital, 13.20% total capital and 8.78% Tier 1 leverage. Management said these exceeded “well-capitalized” regulatory thresholds. Shareholders’ equity was 9.7% of assets, down from 12.2% at year-end.
Material changes and unusual items
- The company acquired and merged TPB into First US Bank on August 31, 2018. TPB contributed approximately $166.5 million of assets, including $156.8 million of pre-discount gross loans, and $140.0 million of deposits. Preliminary purchase accounting recorded $7.6 million of goodwill and a $2.0 million core deposit intangible; fair-value estimates remain subject to refinement.
- Reported results included approximately $1.5 million of nonrecurring acquisition expenses, including about $0.7 million for early termination of TPB’s core-processing contract. The company also recognized a $0.98 million pre-tax gain from settling two interest-rate swaps, which were settled alongside repayment of the associated variable-rate FHLB advances. These items materially affect comparisons and reported earnings.
- Organic loan growth was reported at $18.6 million, or 7.2% annualized, for the nine months. Net interest income also benefited from acquired TPB loans. The portfolio remained concentrated in real-estate-secured lending, which represented 63.6% of loans.
- Available-for-sale securities had $4.03 million of gross unrealized losses at quarter-end, mainly attributed by management to interest rates rather than issuer credit. Accumulated other comprehensive loss was $2.88 million, compared with $0.87 million at year-end.
Outlook, risks and contingencies
- No specific earnings or growth guidance was provided. Management expects quality loan growth to support net interest income, while noting competition for both creditworthy loans and deposit funding may pressure results. Management expects loan-loss provision expense to generally rise with loan growth.
- A lease for unused space at Pump House Plaza is scheduled to commence in Q4 2018. Management expects annual lease revenue of more than $0.7 million; the bank expects to fund a one-time tenant build-out estimated at approximately $2.8 million.
- Management said liquidity was adequate for contractual obligations and commitments over the next 12 months. Risks highlighted include integration costs and disruption from the TPB acquisition, credit quality and allowance estimates, interest-rate and market exposure, deposit competition, and economic conditions. The company was still evaluating the acquisition’s effect on market risk.
- Commitments to extend credit were $72.2 million and standby letters of credit were $0.9 million at September 30. Ordinary-course litigation was not expected by management to have a material adverse effect. Disclosure controls were assessed as effective, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- How TPB integration progresses, whether preliminary purchase accounting changes, and whether anticipated benefits offset acquisition costs.
- Underlying earnings after excluding the $0.98 million swap-settlement gain and $1.5 million of acquisition expenses.
- Credit performance of acquired loans and ALC consumer lending, including nonaccrual trends, charge-offs and the adequacy of the allowance and acquired-loan discount.
- Whether the Pump House Plaza lease begins as scheduled, achieves expected rental income, and remains within the estimated build-out cost.
- Capital and liquidity trends following the acquisition, including deposit mix, funding costs and the company’s interest-rate exposure.