Business context and reporting period
This is the unaudited Form 10-Q for the quarter ended June 30, 2014, filed August 13, 2014. The registrant named in the filing is United Security Bancshares, Inc., parent of First United Security Bank and Acceptance Loan Company (ALC). This differs from the request metadata’s company name, First US Bancshares, Inc.; verify the intended issuer.
The company operates a commercial bank and a consumer finance company, primarily in Alabama and southeast Mississippi. Dollar amounts below are in millions unless noted.
Financial performance and condition
- Second-quarter earnings: Net income was $1.218 million, versus $1.182 million in Q2 2013; diluted EPS was $0.20 in both periods. Six-month net income was $1.992 million, versus $2.068 million, and EPS was $0.33 versus $0.34.
- Revenue and margins: Q2 net interest income was $7.300 million, down 5.1% year over year; six-month net interest income was $14.501 million, down 6.5%. Six-month interest income declined 7.3%, partly offset by a 16.5% reduction in interest expense. Yield on average earning assets was 6.06% for Q2 (6.49% in Q2 2013) and 6.03% for the first half (6.07% in 2013). Average funding cost fell to 0.59% in Q2 from 0.69%, and to 0.60% for the first half from 0.73%.
- Other income and expenses: First-half non-interest income was $2.632 million, down 7.7%; non-interest expense was $14.107 million, down 5.1%. Q2 non-interest income increased 20.9%, including nonrecurring items described below. Return on average assets was 0.71% for the first half (0.74% in 2013); return on average common equity was 6.79% (6.04%).
- Assets and lending: Total assets were $570.7 million, little changed from year-end 2013. Net loans were $272.1 million on the balance sheet; the MD&A’s loans net of unearned interest and fees were $279.8 million, down 9.9% from $310.3 million. The bank’s loan balance contracted, while ALC’s increased modestly. Securities rose 22.9% to $209.9 million.
- Credit quality: The allowance for loan losses was $7.7 million, down from $9.4 million; it equaled 2.74% of loans net of unearned income, versus 3.03% at year-end. First-half provision was $0.150 million, versus $0.559 million in 2013. Net charge-offs were $1.9 million for the first half, versus $8.2 million. Nonperforming assets declined to $16.6 million, or 5.72% of net loans and OREO, from $21.5 million and 6.74% at year-end. Nonaccrual loans fell to $4.8 million from $10.6 million; OREO increased to $10.3 million from $9.3 million.
- Deposits, liquidity and debt: Deposits were $483.3 million, slightly below $484.3 million at year-end; core deposits were $398.2 million, or 82.4% of deposits. Cash and cash equivalents were $41.4 million, down from $47.7 million. Short-term borrowings were $0.6 million and long-term FHLB advances were $5.0 million. The bank reported $166.2 million of remaining FHLB capacity, subject to collateral, and $18.8 million of federal funds lines. Total risk-based capital was 21.3%, above the 10% threshold cited for “well-capitalized.”
- Cash flow: First-half operating cash flow was $6.3 million, investing cash outflow was $10.9 million, and financing cash outflow was $1.6 million, producing a $6.3 million net decrease in cash. Investing activity included substantial securities purchases and $24.4 million of net loan portfolio cash inflow.
- Equity: Shareholders’ equity was $73.2 million, or 12.8% of assets, versus $70.1 million, or 12.3%, at year-end. Book value was $12.15 per share versus $11.63.
Material changes versus comparable periods
- Q2 net income edged higher year over year, but first-half earnings and net interest income declined. The company attributed pressure on interest income to lower loan balances and a shift toward lower-yielding securities.
- The loan portfolio contracted substantially, principally at the bank, while securities holdings expanded. Management cited loan payoffs, migration of problem loans to OREO, weak local demand and intense competition.
- Credit indicators improved: nonperforming assets and nonaccrual loans decreased, and first-half net charge-offs were markedly lower than in 2013. However, OREO rose during the first half and remained a material asset-quality exposure.
- Accumulated other comprehensive income increased as unrealized gains on available-for-sale securities improved; securities valuations remain sensitive to interest rates.
Outlook, commentary, risks and unusual items
- Management reported modest national economic improvement but weak local loan demand and fierce competition. It emphasized disciplined underwriting, problem-asset resolution and quality loan growth; no quantified earnings or revenue guidance was provided.
- Management said lower reinvestment yields, competition for quality loans and limited scope for further funding-cost reductions could continue to pressure net interest income. It expected non-interest income from certain fee sources, including credit insurance, to remain constrained.
- Q2 other income included approximately $0.2 million from dissolution of an affordable-housing partnership and approximately $0.2 million of vendor reimbursement for previously returned customer fees. The filing cautions that revenue from these sources may not recur. The company reported no remaining cash commitments to those partnerships.
- Real estate concentration is significant: 70.8% of the loan portfolio was secured by real estate, primarily in a single geographic region. Management warned that weaker economic conditions or lower property values could increase loan losses, OREO write-downs and carrying costs. Management considered the allowance adequate but noted estimates are subjective and actual losses may differ.
- Investment securities had $0.6 million of gross unrealized losses in the available-for-sale portfolio and $0.6 million in held-to-maturity securities at June 30. Management attributed losses to interest rates, reported no other-than-temporary impairment, and said it intended and was able to hold affected securities for recovery.
- Commitments included $24.2 million to extend credit and $0.9 million of standby letters of credit. Two described lawsuits remained outstanding: a dispute involving ALC and Graves Automotive, with a hearing scheduled for August 26, 2014, and a wrongful-foreclosure claim against the Bank. The filing said outcomes were not yet assessable for the ALC matter; the Bank denied the other allegations.
- Management stated disclosure controls were effective as of June 30, 2014, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm the issuer identity: the filing is for United Security Bancshares, Inc., not the company name in the request metadata.
- Track whether loan balances stabilize and whether the bank can grow quality loans amid weak demand and competition.
- Monitor nonperforming assets, OREO dispositions, delinquency trends, charge-offs and whether the reduced allowance remains adequate.
- Assess the sustainability of earnings given declining net interest income and the nonrecurring Q2 income items.
- Verify securities’ interest-rate sensitivity, liquidity capacity subject to collateral, and progress and potential exposure in the disclosed litigation.