First US Bancshares, Inc. — Q2 2017 Form 10-Q
Business context and reporting period. This unaudited consolidated filing covers the quarter and six months ended June 30, 2017, compared with the corresponding 2016 periods. First US Bancshares operates First US Bank, a commercial bank, and Acceptance Loan Company (ALC), a consumer finance company. Unless indicated otherwise, financial figures below are in millions of dollars.
Financial results and condition
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Interest income | $7.683 | $7.478 | $15.193 | $14.674 |
| Net interest income | $7.057 | $6.917 | $13.976 | $13.578 |
| Provision for loan losses | $0.576 | $0.536 | $1.091 | $0.703 |
| Non-interest income | $0.930 | $1.480 | $2.097 | $2.469 |
| Non-interest expense | $6.863 | $7.255 | $13.900 | $14.321 |
| Net income | $0.416 | $0.462 | $0.820 | $0.779 |
| Diluted EPS | $0.06 | $0.07 | $0.13 | $0.12 |
Q2 net income decreased about 10% year over year, while first-half net income rose about 5%. Net interest income increased 2.0% in Q2 and 2.9% for the first half. The annualized net yield on interest-earning assets was 5.09% in Q2 2017 versus 5.19% in Q2 2016, and 5.07% for the first half versus 5.15%. The filing does not present a single consolidated revenue measure beyond its reported interest and non-interest income lines.
| Balance-sheet measure | June 30, 2017 | December 31, 2016 |
|---|---|---|
| Total assets | $616.2 | $606.9 |
| Net loans | $330.5 | $322.8 |
| Deposits | $509.2 | $497.6 |
| Cash and cash equivalents | $26.7 | $23.5 |
| Short-term borrowings | $10.7 | $10.1 |
| Long-term debt | $10.0 | $15.0 |
| Shareholders’ equity | $78.4 | $76.2 |
For the six months, operating cash flow was $3.6 million, investing cash outflow was $7.4 million, and financing cash flow was $7.0 million. Cash and cash equivalents increased $3.2 million. First-half capital expenditures for premises and equipment were $7.85 million.
Material changes versus comparable periods
- Net loans increased $7.8 million from year-end and $31.6 million from June 2016. Management attributed growth chiefly to commercial lending at the Bank, particularly in Birmingham and Tuscaloosa. Average loans for the first half rose to $325.4 million from $268.0 million.
- Management shifted funds from maturing or prepaid securities into loans. Average investment securities declined to $209.9 million in the first half from $236.1 million a year earlier.
- Q2 non-interest income fell $0.55 million year over year, chiefly because securities gains were $0.395 million lower. First-half securities gains and prepayment income were $0.05 million versus $0.398 million in 2016; no securities were sold in the first half of 2017.
- First-half non-interest expense declined $0.421 million, or 2.9%, as lower insurance and regulatory assessments, occupancy, professional fees, and other costs more than offset higher salaries and benefits.
- The first-half loan-loss provision rose to $1.091 million from $0.703 million, partly because 2016 included reserve releases at the Bank that did not recur. The allowance was $4.905 million, or 1.46% of loans, versus $4.856 million at year-end.
Outlook, risks, contingencies, and unusual items
- Management outlook: Management expects quality loan growth to support net interest income as assets shift toward higher-yielding loans, but cited competition for creditworthy borrowers, lower reinvestment yields, and limited opportunities to reduce funding costs as potential pressures. No formal earnings or revenue guidance is provided.
- Credit quality: Nonperforming assets declined to $6.2 million, or 1.01% of total assets, from $7.3 million and 1.20% at year-end 2016. Nonaccrual loans were $1.847 million, versus $2.417 million. ALC’s consumer lending remains a key credit-risk area: it recorded $1.539 million in gross charge-offs and $0.380 million in recoveries during the first half. Management considers the allowance adequate, while noting that economic and local-market changes could affect losses and reserve adequacy.
- Portfolio concentration: 54.7% of loans were secured by real estate located primarily in one U.S. geographic region. Management also noted that ALC’s shift toward point-of-sale retail lending supports credit quality but carries lower yields.
- Liquidity and funding: Core deposits were $476.2 million, or 93.5% of deposits. The company reported $165.8 million of unused FHLB capacity, subject to available collateral, and $18.8 million of unused federal funds lines. Management believes liquidity is sufficient for obligations and commitments over the next 12 months.
- Birmingham office complex: Construction was nearing completion after the reporting date. Approximately $10.1 million of cost had been incurred by June 30, with $0.6 million of contractor commitments remaining. Management estimated about $0.5 million of annual depreciation once placed in service; it expects lease revenue to recover most costs over time but gave no assurance on full lease-up or timing.
- Commitments and legal matters: Commitments to extend credit totaled $57.476 million, compared with $41.267 million at year-end; standby letters of credit were $0.180 million. The company is involved in ordinary-course litigation and believes it will not materially affect results, based on consultation with counsel. The filing also identifies uncertainty in self-insurance claims and estimates.
- Securities and interest-rate risk: Available-for-sale securities had $1.106 million of gross unrealized losses at June 30. Management attributed securities’ loss positions to interest rates, not issuer creditworthiness, and recorded no other-than-temporary impairment. The company’s market-risk assessment found no significant increase in exposure from year-end 2016. A $10 million interest-rate swap hedges a variable-rate FHLB advance through 2023.
- Other items: Shareholders’ equity increased partly due to unrealized gains on available-for-sale securities, which may fluctuate with interest rates. The company adopted ASU 2016-09 without material impact; it is evaluating the impact of other pending accounting standards, including the expected-credit-loss standard.
Important facts for investors to verify
- Whether commercial loan growth continues without weakening underwriting or increasing provisions and charge-offs, particularly at ALC.
- Whether the allowance for loan losses remains adequate as loan balances and portfolio mix change.
- Whether deposit growth, funding costs, and available borrowing capacity support loan growth and the Birmingham project.
- Whether the office complex is placed in service and leased as expected, and whether rental income offsets its depreciation and operating costs.
- How changes in interest rates affect net interest yield, securities’ fair values, and reported equity.
- Whether the $57.476 million of credit commitments are drawn and the resulting effect on liquidity and credit exposure.