FIRST US BANCSHARES, INC. quarterly report, Q3 FY2016

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First US Bancshares, Inc. — Q3 2016 Form 10-Q

Reporting period: Quarter and nine months ended September 30, 2016; unaudited. The company is a bank holding company operating First US Bank, which provides commercial banking, and Acceptance Loan Company, which focuses on consumer lending. Financial amounts below are in millions unless stated otherwise.

Financial performance and condition

  • Q3 earnings: Net income was $0.55 million, or $0.09 per diluted share, versus $0.54 million and $0.09 per diluted share in Q3 2015. Net interest income rose to $7.17 million from $6.77 million; the loan-loss provision was $0.68 million versus a $0.08 million reserve reduction a year earlier.
  • Nine-month earnings: Net income declined to $1.33 million ($0.21 per diluted share) from $2.15 million ($0.34). Net interest income edged up to $20.75 million from $20.64 million, but the loan-loss provision swung to $1.38 million from a $0.20 million reserve reduction.
  • Revenue and expenses: Nine-month non-interest income increased 20% to $4.04 million, including $0.66 million in securities gains. Non-interest expense rose 2.3% to $21.67 million. Q3 non-interest income was $1.57 million versus $1.00 million; Q3 expenses were $7.35 million versus $7.09 million.
  • Margins: Net yield on interest-earning assets was 5.16% for the first nine months, down from 5.33% in 2015. Loan growth supported net interest income, while loan yields declined in the low-rate environment.
  • Balance sheet at September 30: Total assets were $600.3 million, compared with $575.8 million at year-end 2015. Net loans were $317.1 million versus $255.4 million; deposits were $493.8 million versus $479.3 million. Shareholders’ equity was $78.8 million, or 13.1% of assets, versus $77.0 million, or 13.4%.
  • Funding and liquidity: Cash and cash equivalents were $26.1 million, down from $44.1 million at year-end. Short-term borrowings were $5.3 million and long-term debt $15.0 million, together $20.3 million versus $12.4 million. The company reported $160.4 million in remaining FHLB credit, subject to collateral, and $18.8 million in unused federal funds lines. Core deposits were 93.9% of deposits.
  • Cash flow, nine months: Operating activities provided $5.34 million, versus $6.07 million. Investing activities used $45.51 million, compared with providing $12.40 million; financing activities provided $22.19 million, versus using $25.02 million. Cash and cash equivalents decreased $17.98 million.
  • Asset quality: Nonperforming assets declined to $7.66 million, or 1.28% of assets, from $9.14 million and 1.59% at year-end 2015. Non-accrual loans were $2.27 million and other real estate owned (OREO) $5.39 million. The allowance for loan losses was $3.67 million; the Bank’s allowance was 0.52% of its loans and ALC’s was 2.78%.

Material changes and management commentary

  • Net loans grew $61.7 million, or 23.4%, from year-end. Most growth was in the Bank’s commercial and real estate lending; ALC’s growth included point-of-sale consumer loans. Management said it redeployed investment assets to meet loan demand, and the investment portfolio declined to $209.6 million from $231.2 million.
  • Nine-month earnings fell primarily because of higher loan-loss provisioning following loan growth and the end of prior-period reserve releases. Management said significant further Bank reserve reductions are not expected to continue.
  • Credit quality improved on selected measures: nonperforming assets and non-accrual loans declined, and the filing reported net recoveries at the Bank for the first nine months. ALC recorded $1.7 million in net charge-offs over the same period; its consumer portfolio had $2.65 million past due at least 30 days.
  • Q3 other income included approximately $0.2 million from settlement of previously disputed litigation. Securities gains and ancillary-service income also contributed to higher non-interest income; these sources may not recur at the same level.
  • The company entered a seven-year, $10 million cash-flow hedge in April 2016, paying a fixed 1.46% rate on a variable-rate FHLB advance. The filing reported an $82,000 after-tax accumulated loss related to the hedge at September 30.

Outlook, risks and contingencies

  • Outlook: The filing provides no quantified earnings or revenue guidance. Management expects quality loan growth to support net interest income, but cautions that new-loan yields may be below existing portfolio yields. Competition for sound loans, lower reinvestment yields, and limited scope to reduce funding costs could pressure net interest income.
  • Business and credit risks: A substantial portion of the loan portfolio is real-estate-secured and concentrated primarily in one U.S. region. Management identifies economic conditions, local real-estate values, collateral values, loan demand, and the adequacy of the loan-loss allowance as risks.
  • Construction commitment: The Bank began construction of a Birmingham-area office complex expected to be completed in 2017. Remaining contractor commitments were $8.6 million, with an additional estimated $4.0 million for finishes and related costs. The Bank expects to use about 25% of the space and lease the remainder; full lease-up and timing are not assured. Estimated annual depreciation after opening is about $0.4 million.
  • Operations and legal matters: A Bank branch closed in July, and management anticipated additional branch closures in Q4 2016. The company is involved in ordinary-course litigation and stated, based on consultation with counsel, that it does not expect a material adverse effect.
  • Interest rates and accounting: The company monitors interest-rate sensitivity through simulation; the filing gives no scenario results in this text. Management was evaluating the future impact of newly issued accounting standards, including the expected-credit-loss standard.

Investor verification priorities

  1. Review loan growth and composition, particularly commercial real estate, construction, C&I, and ALC point-of-sale lending, alongside underwriting standards and portfolio concentration.
  2. Track ALC charge-offs, past-due consumer loans, allowance adequacy, and whether declining nonperforming assets continue.
  3. Assess whether earnings depend on nonrecurring securities gains or the litigation settlement, and whether expense growth moderates.
  4. Verify funding needs and liquidity as loan growth continues, including the cost and availability of FHLB capacity and the effect of lower cash balances.
  5. Monitor the Birmingham construction budget, tenant leasing, total project costs, and expected depreciation and operating expenses.
  6. Confirm subsequent developments in branch closures, interest-rate exposure, and implementation impacts of new accounting standards.