FIRST US BANCSHARES, INC. quarterly report, Q3 FY2014

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Business context and reporting period

This is United Security Bancshares, Inc.’s unaudited Form 10-Q for the quarter ended September 30, 2014, not a filing under the name “First US Bancshares, Inc.” The company is the parent of First United Security Bank (FUSB), which operates in Alabama, and Acceptance Loan Company (ALC), a consumer finance subsidiary operating in Alabama and southeast Mississippi. Unless otherwise stated, financial amounts below are in millions of dollars.

Financial results and position

  • Earnings: Third-quarter net income was $0.837 million, or $0.13 diluted EPS, versus $0.904 million and $0.15 a year earlier. Nine-month net income was $2.829 million, or $0.46 per diluted share, versus $2.972 million and $0.49.
  • Revenue and margin: Interest income was $7.899 million for the quarter and $23.675 million for nine months. Net interest income was $7.257 million and $21.758 million, respectively. Net yield on interest-earning assets was 5.13% in the quarter and 5.56% for nine months.
  • Credit costs and expenses: The quarter recorded a $55,000 reduction in the loan-loss provision; nine-month provision expense was $95,000. Non-interest expense was $7.242 million for the quarter and $21.349 million for nine months.
  • Cash flow: Operating activities provided $7.309 million in the first nine months, compared with $11.362 million in 2013. Cash declined $13.189 million to $34.531 million.
  • Balance sheet and liquidity: Total assets were $562.741 million at September 30, down from $569.801 million at year-end 2013. Deposits were $474.518 million, down 2.0%; the loan-to-deposit ratio was 55.9%, versus 62.1%. Cash and cash equivalents totaled $34.531 million; investment securities totaled $215.870 million.
  • Loans and credit quality: Net loans fell to $265.170 million from $300.927 million. Nonperforming assets were $16.681 million, or 5.90% of net loans and OREO, versus $21.536 million and 6.74% at year-end. The allowance for loan losses was $7.416 million, down from $9.396 million.
  • Debt and capital: Long-term debt was $5.0 million; short-term borrowings were $0.755 million. Shareholders’ equity was $73.891 million, 13.1% of assets. The company reported compliance with regulatory capital requirements. FHLB borrowing capacity was subject to available collateral, and the Bank also had $18.8 million in federal funds lines.

Material changes versus comparable periods

  • Quarterly and nine-month net income declined year over year. Net interest income fell 4.1% for the quarter and 5.7% for nine months, primarily reflecting lower FUSB loan volume and lower ALC loan yields. Net yield on earning assets also declined year over year.
  • FUSB net loans declined $38.4 million from year-end, including significant loan payoffs, weak local loan demand, and problem loans paid off, charged off, or transferred to OREO. ALC net loans increased to $70.0 million from $67.5 million, driven by point-of-sale consumer lending.
  • Investment securities grew to $215.9 million from $170.8 million as the company redeployed funds amid declining loan balances. Interest income on investments increased 42.7% for the first nine months.
  • Nonperforming assets declined 22.5% from year-end. Non-accrual loans decreased to $4.903 million from $10.565 million. ALC’s consumer loans rose as a share of its portfolio, while its allowance ratio declined to 3.6% from 4.4%.
  • Nine-month non-interest expense declined 4.0%, largely due to lower OREO and foreclosure expense. Salaries and benefits increased, including approximately $0.3 million of non-cash stock-option expense not present in 2013.

Outlook, commentary, risks and unusual items

  • Management reported weak loan demand in FUSB’s markets and a highly competitive lending environment. It expects quality loan growth to remain challenging; continued loan contraction could reduce interest income and net income.
  • Management is focused on resolving nonperforming assets, maintaining credit standards, growing ALC’s point-of-sale consumer lending, and managing investment duration and liquidity. It said liquidity remained supported by deposits, a liquid securities portfolio, FHLB access, and federal funds lines.
  • Management cautioned that net interest income may face pressure from competition for quality loans, lower securities reinvestment yields, and limited opportunity to reduce funding costs. It also noted that economic weakness or lower real estate values could lead to additional loan losses, OREO write-downs, or carrying costs.
  • A $0.221 million gain was recorded following dissolution of an affordable-housing partnership, which returned $1.0 million to the company. The third quarter was the company’s ninth consecutive profitable quarter. A dividend of $0.01 per share was reported for 2014; none was reported for 2013.
  • The Bank is defending a wrongful-foreclosure lawsuit seeking unspecified damages; management said it could not assess the likelihood of resolution or an unfavorable outcome. A separate ALC civil action was settled and dismissed with prejudice in September 2014.
  • The filing provides no specific earnings or loan-growth guidance. Forward-looking results are subject to economic, credit, real estate, interest-rate, and competitive risks.

Important facts for investors to verify

  1. Confirm the registrant identity: the supplied filing is for United Security Bancshares, Inc., parent of First United Security Bank.
  2. Review the continued decline in FUSB lending and net interest income, and whether ALC consumer-loan growth offsets that weakness.
  3. Track nonperforming assets, OREO levels, charge-offs, and the adequacy of the reduced loan-loss allowance.
  4. Assess liquidity and securities interest-rate exposure, including the large securities portfolio and reliance on collateral-supported borrowing capacity.
  5. Monitor the wrongful-foreclosure litigation and any changes in expected loss, alongside the company’s progress in sustaining earnings and dividends.