First US Bancshares, Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. Unaudited consolidated results cover the Bank and Acceptance Loan Company (ALC). Amounts are in U.S. dollars; financial statement amounts below are in millions unless noted.
Business context
First US Bancshares is an Alabama-focused bank holding company. The Bank provides commercial banking services; ALC makes and purchases consumer loans, including indirect point-of-sale lending. At quarter-end, the Bank operated 16 offices and ALC operated 21 offices, with indirect lending in 10 states. The company reported 257 full-time equivalent employees.
Financial performance and condition
| Metric | Q2 2018 / June 30, 2018 | Comparable period / prior date |
|---|---|---|
| Interest income | $8.390 million for Q2; $16.509 million for H1 | Q2 2017: $7.683 million; H1 2017: $15.193 million |
| Net interest income | $7.502 million for Q2; $14.816 million for H1 | Q2 2017: $7.057 million; H1 2017: $13.976 million |
| Provision for loan losses | $0.702 million for Q2; $1.360 million for H1 | Q2 2017: $0.576 million; H1 2017: $1.091 million |
| Non-interest income / expense | $1.132 million / $7.492 million for Q2; $2.272 million / $14.793 million for H1 | Q2 2017: $0.930 million / $6.863 million; H1 2017: $2.097 million / $13.900 million |
| Net income | $0.359 million Q2; $0.773 million H1 | Q2 2017: $0.416 million; H1 2017: $0.820 million |
| Diluted earnings per share | $0.06 Q2; $0.12 H1 | Q2 2017: $0.06; H1 2017: $0.13 |
| Net yield on interest-earning assets | 5.31% Q2; 5.28% H1 | Q2 2017: 5.09%; H1 2017: 5.07% |
| Total assets / shareholders’ equity | $634.036 million / $75.634 million at June 30 | $625.581 million / $76.208 million at Dec. 31, 2017 |
| Net loans / deposits | $355.529 million / $531.428 million at June 30 | $346.121 million / $517.079 million at Dec. 31, 2017 |
| Cash flow, six months | Operating $3.747 million; investing $2.049 million; financing $8.878 million; cash and equivalents increased $14.674 million to $41.798 million | 2017: operating $3.620 million; investing used $7.401 million; financing $6.978 million |
Material changes versus comparable periods
- Q2 net income declined about 14% year over year and H1 net income about 6%, despite higher net interest income. Higher loan-loss provision and non-interest expense more than offset the improvement.
- H1 net interest income increased about 6%. Management attributed the growth mainly to higher average loan balances and better yields on most earning-asset categories; funding costs also rose. H1 average cost of interest-bearing liabilities increased to 0.74% from 0.55%.
- H1 non-interest income rose about 8%, led by secondary-market mortgage fees and investment-security gains. H1 non-interest expense rose about 6%, primarily due to Pump House Plaza staffing, occupancy, and operating costs.
- Loans grew $9.4 million from year-end, with ALC contributing $9.3 million; Bank loan balances were relatively flat. Deposits increased 2.8%. Available-for-sale securities declined to $141.4 million from $153.9 million, in part as securities cash flows supported loan growth.
- Asset quality improved: nonaccrual loans were $1.713 million, down from $2.148 million at year-end; nonperforming assets were 0.61% of total assets versus 0.95% at year-end. The allowance was $4.952 million, or 1.37% of loans, versus 1.36% at year-end.
- Shareholders’ equity fell to $75.6 million from $76.2 million, mainly reflecting a $1.319 million H1 other comprehensive loss associated chiefly with unrealized available-for-sale securities losses, partly offset by retained earnings.
Outlook, risks, contingencies, and unusual items
- Acquisition: On April 16, 2018, the company agreed to acquire The Peoples Bank, headquartered in Rose Hill, Virginia, for approximately $23 million, subject to adjustments and regulatory approvals. The expected consideration is 90% cash and 10% company shares. Management expected a 2018 closing and a combined institution approaching $800 million in assets. It anticipated added transaction expenses; the target reported approximately $150 million in loans and $137 million in deposits as of June 30, 2018.
- Interest-rate swaps: After quarter-end, the Bank voluntarily settled two swaps and paid down the associated variable-rate FHLB advances. The company expected to recognize approximately $1.0 million pre-tax ($0.7 million after tax) as gains in Q3 2018 from amounts previously recorded in accumulated other comprehensive income.
- Pump House Plaza lease: After quarter-end, the Bank agreed to lease all remaining unused office space. The lease was scheduled to begin in Q4 2018, with annual rent expected to exceed $0.75 million and an initial term exceeding 10 years. The Bank estimated a one-time tenant build-out cost of approximately $2.8 million.
- Credit and concentration risks: 55% of loans were secured by real estate located primarily in one U.S. region. ALC’s consumer and indirect portfolios drove most of the provision increase; management expects provision expense generally to rise with loan growth. The allowance is based on estimates and may prove inadequate if economic or local conditions deteriorate.
- Market and funding risks: Management identified competition for quality loans and deposits, changing interest rates, collateral values, and cybersecurity threats as risks. Securities had $4.067 million of gross unrealized losses in the available-for-sale portfolio at June 30; management attributed losses to interest rates, not issuer credit, and reported no other-than-temporary impairment.
- Liquidity and debt: Deposits were the primary funding source. Short-term borrowings were $10.366 million and long-term debt $10.0 million. The Bank reported $168.1 million of remaining FHLB credit, subject to collateral, and $18.8 million of unused correspondent-bank and Federal Reserve lines. Management believed liquidity was adequate for the next 12 months, including planned needs.
- The company reported ordinary-course litigation that management, after consulting counsel, did not expect to have a material adverse effect. It also disclosed $42.875 million in commitments to extend credit and $0.180 million in standby letters of credit; commitments are not necessarily expected to be drawn. Disclosure controls were deemed effective, with no material control changes during the quarter.
- No specific earnings guidance was provided. Management expected loan growth to support net interest income, while noting competition, potential rising funding costs, acquisition expenses, and uncertainty in non-interest income.
Key facts for investors to verify
- Whether The Peoples Bank acquisition received approvals and closed on the anticipated terms, and the actual financing, integration costs, and realized benefits.
- Whether the Pump House Plaza lease commenced as scheduled, the actual build-out cost, and rent received compared with management’s expectations.
- Whether the expected Q3 swap-settlement gain was recognized as estimated, and the effects of paying down the related FHLB advances on interest income and expense.
- Subsequent trends in ALC indirect-loan growth, charge-offs, nonaccruals, and allowance adequacy, as well as Bank commercial loan growth.
- Changes in net interest yield, deposit pricing and retention, securities values, and available liquidity as interest rates and competition evolve.
- The filing’s reported financial statements do not provide a clear regulatory capital ratio; verify applicable bank and holding-company capital measures separately.