First US Bancshares, Inc. — Q3 2019 Form 10-Q
Business context and reporting period
Quarter ended September 30, 2019; unaudited consolidated results cover First US Bancshares, Inc., First US Bank and Acceptance Loan Company (ALC). The Bank provides commercial banking services, while ALC provides consumer lending, including indirect retail financing. The company reported 20 banking offices and 21 ALC branches at quarter-end.
Financial performance and condition
Amounts below are in millions of dollars unless stated otherwise. Income-statement and cash-flow comparisons are for the three or nine months ended September 30; balance-sheet comparisons are to December 31, 2018.
| Metric | Q3 / September 2019 | Comparable period / prior year-end |
|---|---|---|
| Interest income | Q3: $11.0; nine months: $32.8 | Q3 2018: $9.5; nine months 2018: $26.0 |
| Net interest income | Q3: $9.3; nine months: $27.8 | Q3 2018: $8.3; nine months 2018: $23.1 |
| Net interest margin | Q3: 5.23%; nine months: 5.20% | Q3 2018: 5.25%; nine months 2018: 5.27% |
| Net income | Q3: $1.1; nine months: $3.4 | Q3 2018: $0.2; nine months 2018: $1.0 |
| Diluted earnings per share | Q3: $0.16; nine months: $0.49 | Q3 2018: $0.03; nine months 2018: $0.15 |
| Provision for loan losses | Q3: $0.9; nine months: $2.0 | Q3 2018: $0.8; nine months 2018: $2.1 |
| Non-interest income / expense | Q3: $1.4 / $8.5; nine months: $4.0 / $25.5 | Q3 2018: $2.1 / $9.1; nine months 2018: $4.4 / $23.9 |
| Total assets | $771.9 | $791.9 |
| Loans, net of allowance | $544.5 | $514.9 |
| Deposits | $677.6 | $704.7 |
| Shareholders’ equity | $83.8 | $79.4 |
For the nine months, operating cash flow was $8.6 million (versus $7.6 million in 2018); investing cash flow was positive $5.8 million (versus negative $7.1 million); financing cash flow was negative $28.6 million (versus positive $22.5 million). Cash and cash equivalents ended at $35.4 million, down from $49.6 million at year-end 2018.
Gross loans were $555.3 million and the allowance for loan and lease losses was $5.6 million, or 1.02% of gross loans, compared with 0.97% at December 31, 2018. Nonperforming assets were $2.7 million (0.35% of assets), down from $4.3 million (0.54%); nonaccrual loans were $1.5 million, down from $2.8 million. Real-estate-secured loans represented 62.9% of the portfolio.
Short-term borrowings were $0.2 million; there were no long-term FHLB advances. The Bank reported $233.0 million of remaining FHLB credit, subject to collateral, and $61.8 million of unused correspondent-bank and Federal Reserve lines. Bank capital ratios were 12.66% for common equity Tier 1 and Tier 1 risk-based capital, 13.62% total capital, and 9.55% Tier 1 leverage. The company declared a $0.02-per-share quarterly dividend.
Material changes versus comparable periods
- Nine-month net interest income rose 19.9%, primarily reflecting higher average loan balances after the August 2018 acquisition of The Peoples Bank (TPB). The 2019 period includes nine months of TPB operations, versus only one month in the 2018 comparison, limiting comparability.
- Net interest margin declined to 5.20% from 5.27% for the nine months. Higher asset yields were offset by higher funding costs; management cited a 36-basis-point increase in rates on interest-bearing liabilities.
- Nine-month non-interest income declined $0.4 million, principally because 2018 included a $1.0 million derivative-settlement gain. 2019 included $0.6 million of rental income from leased headquarters space.
- Nine-month non-interest expense increased $1.6 million, mainly from the additional employees, facilities and services associated with TPB. The 2018 quarter also included $1.5 million of acquisition expenses, explaining why Q3 2019 expense was lower year over year.
- Deposits declined $27.1 million, including $25.9 million of brokered deposits allowed to mature without renewal. Loans grew $29.7 million net of allowance, while the investment portfolio declined to $114.3 million from $153.9 million as maturities and sales funded other earning assets and liquidity needs.
- Shareholders’ equity increased, supported by retained earnings and a reduction in accumulated other comprehensive loss. The company repurchased 84,200 shares during the first nine months of 2019 for $0.8 million.
Outlook, commentary, risks and unusual items
- Management said it expects loan growth, subject to credit quality and competition, to support net interest income; it also expects loan-loss provision expense generally to rise with loan growth. No numerical earnings or revenue guidance is provided.
- On October 25, 2019, the company announced plans to transfer ALC’s indirect lending portfolio to the Bank effective January 1, 2020. Management described indirect loans as generally higher-credit-quality but lower-yielding than other ALC consumer loans.
- Interest-rate risk is managed through modeling and hedging. During Q3, the Bank entered two $10 million cash-flow swaps on variable-rate deposits and two $10 million fair-value swaps on fixed-rate commercial real-estate loans. The filing flags the pending discontinuation of LIBOR and the need for a comparable benchmark rate.
- Key risks cited include economic and market conditions, interest-rate changes, availability of quality loans, credit-sector and real-estate conditions, collateral values, cybersecurity threats, deposit competition, and integration of TPB. Management stated that it considered the allowance adequate, while noting that estimates and economic changes could affect asset quality and reserve adequacy.
- The company adopted lease accounting in 2019, recording a right-of-use asset of $3.6 million and lease liability of $3.6 million; management said the adoption did not materially affect income or expenses. Expected credit-loss standard adoption was delayed three years for smaller reporting companies; the eventual adjustment to the allowance is not yet known.
- Ordinary-course litigation was not expected by management, after consultation with counsel, to have a material adverse effect. Commitments to extend credit were $103.4 million; standby letters of credit and performance letters totaled $0.8 million. The filing also notes uncertainty in self-insurance estimates.
Important facts for investors to verify
- Whether loan growth and post-TPB integration translate into sustainable earnings, given that the prior-year comparison includes only one month of TPB operations.
- Trends in deposit balances, funding costs and net interest margin, including the effects of brokered-deposit runoff and rate changes.
- Credit quality, especially the allowance relative to loan growth, ALC consumer charge-offs, nonperforming assets and real-estate concentrations.
- Execution and financial effects of moving ALC’s indirect portfolio to the Bank in January 2020, including any operational, customer or credit-risk consequences.
- The LIBOR transition, swap performance and related interest-rate exposure; the filing does not provide a clear numerical sensitivity result in the text supplied.
- Future capital and liquidity capacity, including use of available credit lines, share repurchases and dividends, and the eventual impact of the expected-credit-loss accounting standard.