First US Bancshares, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. Unaudited consolidated results cover First US Bancshares, First US Bank and consumer-finance subsidiary Acceptance Loan Company (ALC). Dollar amounts below are in millions unless stated otherwise.
Financial performance and condition
- Earnings: Net income was $0.414 million, versus $0.404 million in Q1 2017; diluted EPS was $0.06 in both periods. Pretax income declined to $0.495 million from $0.534 million, while the effective tax rate fell to 16.4% from 24.3%, primarily reflecting the federal corporate tax-rate reduction.
- Interest income and margin: Interest income rose to $8.119 million from $7.510 million. Net interest income increased to $7.314 million from $6.919 million; reported net yield on interest-earning assets improved to 5.24% from 5.05%. Interest expense increased to $0.805 million from $0.591 million, and average funding cost rose to 0.72% from 0.54%.
- Credit costs and expenses: Provision for loan losses increased to $0.658 million from $0.515 million. Non-interest income was $1.140 million, down from $1.167 million; non-interest expense rose 3.8% to $7.301 million. Higher salaries and occupancy costs were partly offset by lower computer-services expense.
- Cash flow: Operating activities provided $1.350 million, compared with $1.473 million in Q1 2017. Cash and cash equivalents increased $7.349 million during the quarter to $34.473 million, supported by financing and investing cash flows.
- Balance sheet and lending: Total assets were $627.319 million at March 31, up from $625.581 million at year-end. Net loans increased $7.7 million to $353.8 million, or 8.9% annualized, and deposits rose $8.2 million to $525.3 million. Total shareholders’ equity was $75.5 million, or 12.0% of assets, versus $76.2 million, or 12.2%, at year-end.
- Debt and liquidity: Short-term borrowings were $10.3 million and long-term debt was $10.0 million. Cash and cash equivalents were $34.5 million. The company reported $167.6 million of remaining FHLB credit, subject to available collateral, and $18.8 million of unused federal-funds lines.
- Asset quality: Nonperforming assets were $5.38 million, or 0.86% of total assets, down from $5.94 million and 0.95% at year-end. The allowance for loan losses was $4.829 million, or 1.35% of loans, compared with 1.36% at year-end and 1.51% a year earlier. ALC recorded $0.765 million of charge-offs in the quarter, principally in consumer and indirect-sales lending.
Material changes versus comparable periods
- Loan growth helped increase net interest income, but higher loan-loss provision, funding costs and operating expenses weighed on pretax earnings.
- The Bank’s average loan yield increased to 4.39% from 4.06%; ALC’s declined to 18.47% from 19.11%, which management attributed partly to a shift toward lower-risk indirect lending.
- Non-interest income decreased 2.3%. Lower securities gains and ALC ancillary income were partly offset by $0.117 million of mortgage fees from the mortgage division launched in 2017.
- Unrealized losses on available-for-sale securities contributed to a $1.087 million other comprehensive loss; total comprehensive loss was $0.673 million, despite positive net income.
- Nonperforming assets and the allowance ratio were lower than a year earlier. Management attributed the lower allowance ratio in part to favorable Bank charge-off experience and ALC portfolio-mix changes.
Outlook, risks and unusual items
- Acquisition: After quarter-end, the company agreed to acquire The Peoples Bank for approximately $23 million, subject to adjustment. Consideration is expected to be 90% cash and 10% First US common stock. Closing is expected in Q3 2018, subject to customary conditions and regulatory approvals; the combined institution is expected to approach $800 million in assets. Management expects acquisition-related expenses in upcoming quarters.
- Management outlook: Management expects loan growth to support net interest income, while noting competition for creditworthy loans, potentially lower reinvestment yields and limited scope to reduce future funding costs. Provision expense is expected to generally rise with loan growth, potentially offset by continued credit-quality improvement. No specific full-year earnings guidance was provided.
- Risks and contingencies: Key risks include economic and local-market conditions, interest-rate movements, loan availability and quality, collateral values, credit concentrations and cybersecurity. Commitments to extend credit were $54.25 million; standby letters of credit were $0.18 million. These are contractual commitments, not necessarily expected cash outflows. The company reported ordinary-course litigation that management does not expect to materially affect results, and $0.2 million of self-insurance accruals.
- Other disclosures: Securities unrealized losses were attributed to interest rates, not issuer credit concerns; management reported intent and ability to hold the securities and recognized no other-than-temporary impairment. Disclosure controls were deemed effective, and management reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether The Peoples Bank acquisition receives regulatory approvals, closes on schedule and achieves expected integration benefits without materially higher costs.
- Whether loan growth—particularly ALC consumer and indirect lending—can continue without worsening delinquency, charge-offs or allowance adequacy.
- How rising deposit and borrowing costs, loan pricing competition and securities reinvestment yields affect future net interest income and margin.
- Whether available-for-sale securities’ unrealized losses recover or further reduce accumulated other comprehensive income and reported equity.
- Whether liquidity and capital remain adequate after the planned cash-funded portion of the acquisition and ongoing loan growth.