First US Bancshares, Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017; unaudited. Comparisons are with the same 2016 periods, except balance-sheet comparisons, which are with December 31, 2016. Amounts are in millions of dollars unless stated otherwise. The company operates First US Bank and consumer-finance subsidiary Acceptance Loan Company (ALC).
Financial performance and condition
- Q3 earnings: Net income was $0.635 million, up from $0.550 million; diluted earnings per share were $0.10 versus $0.09. For the first nine months, net income was $1.455 million versus $1.329 million, and diluted EPS was $0.22 versus $0.21.
- Interest income and margin: Q3 net interest income was $7.135 million versus $7.173 million; nine-month net interest income rose to $21.111 million from $20.751 million. Nine-month net yield on interest-earning assets declined to 5.08% from 5.16% (Q3: 5.11% versus 5.20%).
- Other income and expenses: Non-interest income fell to $1.236 million in Q3 from $1.567 million and to $3.333 million for nine months from $4.036 million. Nine-month non-interest expense declined to $21.090 million from $21.669 million. Loan-loss provision was $0.373 million for Q3 and $1.464 million year to date, compared with $0.680 million and $1.383 million, respectively.
- Balance sheet at September 30: Total assets were $614.6 million, compared with $606.9 million at year-end 2016. Net loans were $338.0 million, up $15.3 million; deposits were $508.4 million, up $10.8 million. Shareholders’ equity was $78.9 million, or 12.8% of assets, versus $76.2 million, or 12.6%.
- Cash flow, first nine months: Operating activities provided $5.380 million; investing activities used $2.296 million; financing activities provided $5.940 million. Cash and equivalents increased $9.024 million to $32.554 million.
- Debt and liquidity: Short-term borrowings were $10.635 million and long-term debt $10.0 million, totaling $20.635 million, versus $25.119 million at year-end. The company reported $164.8 million in remaining FHLB credit, subject to available collateral, and $18.8 million in unused federal-funds lines. Management stated it believed liquidity was adequate for obligations and commitments over the next 12 months.
- Credit quality: Nonperforming assets were $5.775 million, or 0.94% of assets, versus $7.275 million and 1.20% at year-end 2016. The allowance for loan losses was $4.808 million, or 1.40% of loans, compared with $4.856 million and 1.48%. ALC continued to account for most non-accrual loans and loan charge-offs.
Material changes and management commentary
- Management attributed higher year-to-date net interest income primarily to loan growth and redeployment of maturing or prepaid securities into loans. Average loans rose to $327.3 million from $283.0 million; average investment securities declined to $205.2 million from $227.9 million.
- Non-interest income fell mainly because securities gains were lower by $0.429 million year to date, credit insurance income declined, and 2016 included settlement collections that did not recur. Lower regulatory assessments, insurance, occupancy, professional-services, and other expenses helped reduce operating costs.
- Commercial lending growth was concentrated in Birmingham and Tuscaloosa. Total loans were concentrated in real estate collateral located primarily in one U.S. region: 54.8% of the portfolio at September 30, down from 56.6% at year-end.
- The Birmingham office complex was substantially completed in Q3, and company and Bank headquarters relocated there. Premises and equipment rose $7.9 million from year-end; nine-month capital additions were $8.681 million. Management estimated approximately $0.5 million in additional annual depreciation once the complex is in service and expects lease revenue to offset most costs upon full lease-up, but provided no assurance about lease-up timing or completion.
- Management expects loan growth to support net interest income, but noted competition for quality loans, lower reinvestment yields, and limited scope to reduce funding costs could pressure results. Management expects loan-loss provision to generally rise with loan growth, partly offset if credit quality improves.
Risks, contingencies, and unusual items
- Commitments to extend credit totaled $53.231 million; standby letters of credit totaled $0.180 million. These are off-balance-sheet commitments and do not necessarily represent future cash outflows.
- Ordinary-course litigation is ongoing; the company said, based on consultation with counsel, it did not expect a material adverse effect. Remaining construction commitments for the Birmingham complex were $0.3 million.
- OREO was $3.819 million. The company recorded $0.171 million of OREO impairment in the first nine months and warned that weaker economic conditions or falling property values could lead to further write-downs or higher foreclosures.
- Available-for-sale securities had $1.023 million of gross unrealized losses at September 30. Management attributed losses to interest rates rather than issuer credit, reported intent and ability to hold the securities, and recognized no other-than-temporary impairment.
- The company uses a $10 million interest-rate swap as a cash-flow hedge of a variable-rate FHLB advance through April 2023. Management reported no material increase in market-risk exposure from year-end 2016.
- No formal earnings or financial guidance was provided. Forward-looking statements are subject to risks including economic conditions, loan demand, credit quality, real-estate markets and collateral values. Management reported disclosure controls were effective and no material quarterly change in internal control over financial reporting.
Most important facts for investors to verify
- Whether commercial and ALC loan growth can continue without deterioration in delinquencies, charge-offs, or the allowance’s adequacy.
- How ALC’s consumer and indirect-sales lending mix, yields, nonperforming loans, and credit costs evolve.
- Whether the Birmingham complex is leased as expected and whether rental income offsets added depreciation and operating costs.
- Whether lower securities gains and other non-interest income persist, and how funding costs and net interest margin respond to rate changes.
- The company’s geographic real-estate concentration, valuation of OREO and securities, and available borrowing capacity subject to collateral.