FIRST US BANCSHARES, INC. quarterly report, Q3 FY2013

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Filing identity and reporting period

This is a Form 10-Q for the quarter ended September 30, 2013, filed November 13, 2013. The filing identifies the registrant as United Security Bancshares, Inc., parent of First United Security Bank and Acceptance Loan Company (ALC). This differs from the requested company name, First US Bancshares, Inc.; verify the issuer before relying on this summary. Unless otherwise stated, amounts below are in millions of dollars.

Financial performance and condition

  • Third quarter: Net income was $0.904 million, down from $1.179 million in Q3 2012; diluted EPS was $0.15 versus $0.20. Net interest income fell 8.8% to $7.568 million. Net interest margin was 5.89%, compared with 6.04%.
  • Nine months: Net income rose to $2.972 million from $1.312 million; diluted EPS was $0.49 versus $0.22. Net interest income decreased 9.2% to $23.068 million, and net interest margin declined to 5.97% from 6.07%.
  • Income and costs: Interest income decreased 11.3% in Q3 and 13.0% for the nine months, primarily from lower average loan volume and yields. Interest expense fell 31.9% and 39.3%, respectively, as deposit balances and rates declined. Nine-month non-interest income increased 2.1% to $4.142 million; this included a non-recurring $0.484 million mortgage-pool prepayment penalty. Non-interest expense declined 10.5% to $22.233 million for the nine months, while salaries and benefits increased $1.1 million.
  • Credit and losses: The nine-month loan-loss provision fell to $0.799 million from $3.175 million. Net charge-offs, however, rose to $10.8 million from $5.6 million, mainly due to charge-downs of several large Bank commercial real estate loans. The allowance was $9.282 million, or 3.0% of loans net of unearned income, versus $19.278 million, or 5.4%, at year-end 2012. Non-performing assets fell to $25.975 million from $38.475 million; non-accrual loans were $12.750 million versus $23.618 million.
  • Balance sheet and liquidity: Total assets were $560.002 million, down $7.1 million from year-end; deposits were $476.020 million, down 2.7%. Net loans were $304.778 million, while investment securities rose to $156.852 million. Cash and cash equivalents were $43.478 million, down from $54.126 million. Shareholders’ equity was $69.407 million. Borrowings comprised $1.777 million short-term and $5.000 million long-term, compared with no long-term borrowings at year-end.
  • Cash flow: Operating activities provided $11.231 million in the first nine months, versus $11.391 million in 2012. Investing activities used $15.135 million and financing activities used $6.744 million, producing a $10.648 million decrease in cash and cash equivalents.

Changes, outlook, and risks

  • Management attributed higher nine-month earnings primarily to lower OREO impairment and lower loan-loss provisions; these benefits were partly offset by lower interest income. OREO impairment was $0.577 million for the nine months, down from $3.241 million.
  • Management said loan demand remained weak amid challenging local economic conditions. It expected net interest margin to remain near current levels until Federal Reserve rate changes, while noting there was no assurance about market rates.
  • Management warned that weak economic conditions and depressed local real estate values could hinder OREO dispositions and lead to further impairment or losses. It also cautioned that additional loan-loss provisions may be needed and that future losses could exceed the allowance.
  • Real estate-secured loans represented 69.3% of the portfolio and were concentrated primarily in one geographic region. The allowance-to-non-performing-assets coverage ratio declined to 35.7% from 50.1% at year-end.
  • The company reported $31.363 million of commitments to extend credit and $0.946 million of standby letters of credit. It reported available capacity of $163.0 million from the FHLB and $17.8 million in correspondent-bank federal funds lines. The Bank and holding company were in compliance with regulatory capital requirements; capital ratios are not stated in the provided text.
  • Litigation includes a continuing ALC dispute with Graves Automotive; the outcome was described as uncertain. A former employee’s claims against the Bank were settled on November 12, 2013, with remaining claims due to be dismissed with prejudice. The Russell litigation was concluded after an appellate affirmance on October 25, 2013. The company said other litigation was not expected to have a material adverse effect.
  • The company had a $7.1 million net deferred tax asset and recorded no valuation allowance despite a three-year cumulative loss position, citing projected taxable income and other positive evidence. Realization depends on those projections being achieved.
  • No dividend was declared for the periods shown. No shares were repurchased in Q3; 242,303 shares remained available under the repurchase program through December 31, 2013.

Most important facts for investors to verify

  1. Confirm the issuer: the supplied filing is for United Security Bancshares, Inc., not the requested First US Bancshares, Inc.
  2. Review the scale and composition of charge-offs, non-performing loans, collateral valuations, and the reduced allowance, particularly commercial real estate exposures.
  3. Assess whether declining loan balances, deposits, interest income, and net interest margin persist, and whether the prepayment penalty materially affects comparisons.
  4. Evaluate the assumptions supporting deferred-tax-asset realization and the potential for future OREO write-downs or additional credit provisions.
  5. Check subsequent developments in the Graves Automotive litigation and completion of the former-employee settlement and dismissal.