FIRST US BANCSHARES, INC. quarterly report, Q2 FY2013

Business context and reporting period

This is United Security Bancshares, Inc.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2013. The filing identifies the company as parent of First United Security Bank and Acceptance Loan Company, Inc. (ALC). Amounts below are in U.S. dollars; financial-statement amounts are generally in thousands unless stated otherwise.

Financial performance and condition

Metric	Q2 2013	Six months 2013	Comparable 2012
Interest income	$8.432 million	$17.026 million	$9.748 million / $19.758 million
Net interest income	$7.695 million	$15.500 million	$8.571 million / $17.121 million
Net income	$1.182 million	$2.068 million	$1.371 million / $0.133 million
Basic and diluted EPS	$0.20	$0.34	$0.23 / $0.02
Provision for loan losses	$53,000	$559,000	$468,000 / $2.683 million
Non-interest income	$1.228 million	$2.851 million	$1.331 million / $2.605 million
Non-interest expense	$7.176 million	$14.868 million	$7.440 million / $17.270 million

Net interest margin was 5.97% in Q2 2013 versus 6.16% a year earlier, and 6.02% for the first half versus 6.09%. Management estimates a roughly 30% effective tax rate for 2013 year-to-date.

At June 30, total assets were $555.7 million, down $11.4 million from year-end 2012; liabilities were $486.7 million and shareholders’ equity was $69.0 million.
Net loans were $312.0 million, down from $337.4 million at year-end; deposits were $478.1 million, down 2.2%. Investment securities totaled $137.7 million, up about $24.0 million.
Cash and cash equivalents were $49.0 million. Six-month operating cash flow was $8.320 million; investing activities used $2.337 million and financing activities used $11.130 million, producing a $5.147 million decline in cash.
Short-term borrowings were $456,000; no FHLB advances or other long-term debt were outstanding. Available borrowing capacity was $166.7 million from the FHLB and $17.8 million in correspondent federal-funds lines.
Regulatory capital requirements were met. The filing does not provide specific capital ratios in the supplied text.

Changes versus prior periods

Q2 net income declined 13.8% year over year as interest income fell $1.2 million, partly offset by lower interest expense. First-half net income improved from $133,000 to $2.068 million, principally reflecting lower OREO impairment and loan-loss provisions.
Interest income declined 13.5% in Q2 and 13.8% for the first half, reflecting lower average loan volumes and yields and lower investment yields. Interest expense fell 37.4% and 42.1%, respectively, as deposit volumes and rates decreased.
First-half net charge-offs rose to $8.2 million from $4.8 million, including charge-downs on several large nonperforming commercial real-estate loans. The provision was lower because management said appropriate allowances had already been allocated.
Non-interest expense fell 13.9% year to date, mainly because OREO impairment expense declined by about $2.5 million. Salaries and employee benefits increased $498,000.
Available-for-sale securities had a $1.704 million after-tax unrealized loss in first-half 2013, reducing accumulated other comprehensive income from $3.139 million to $1.435 million.

Outlook, risks, contingencies and unusual items

No earnings or revenue guidance was provided. Management reported weak loan demand amid challenging local economic conditions and expected net interest margin to remain near current levels until the Federal Reserve changes rates.
Nonperforming assets were $28.9 million, down from $38.5 million at year-end 2012; they equaled 8.60% of net loans and OREO. Nonaccrual loans were $14.8 million, and OREO was $12.4 million. Management warned that weak real-estate markets could pressure collateral values, impede OREO sales and cause further impairment or losses.
The allowance for loan losses fell to $11.6 million, or 3.6% of loans net of unearned income, from $19.3 million, or 5.4%. Coverage of nonperforming assets declined to 40.3% from 50.1%. Management cautioned that estimates depend on economic conditions, borrower finances and collateral values, and future provisions may be required.
A $484,000 mortgage-backed-security prepayment penalty recognized in Q1 2013 boosted first-half other income and was described as nonrecurring.
The company recorded no other-than-temporary impairment on securities in unrealized-loss positions, which management attributed to interest-rate movements rather than issuer credit concerns and its intent and ability to hold them for recovery.
The company reported a $7.5 million net deferred tax asset and no valuation allowance, despite a three-year cumulative loss position. Management cited projected taxable income and other positive evidence; realization remains dependent on future results.
Material litigation includes a continuing ALC contract/unjust-enrichment case, an appeal following summary judgment for the Bank in a separate case, and a former employee’s remaining whistleblower claim. Management intends to defend the matters; the outcome of the employee claim was described as too early to assess.
Commitments to extend credit were $29.5 million and standby letters of credit were $1.0 million at June 30. These are off-balance-sheet exposures, not amounts necessarily expected to be drawn.

Important facts for investors to verify

Confirm the filing identity: the registrant is United Security Bancshares, Inc.; the supplied request metadata names First US Bancshares, Inc.
Review loan charge-offs, nonperforming assets, commercial real-estate concentrations and collateral appraisals, especially given higher net charge-offs alongside a lower allowance balance.
Assess whether deposit contraction, weak lending demand and falling loan yields continue to pressure net interest income and margin.
Track OREO dispositions, valuation reductions and the potential for further losses in the company’s local real-estate markets.
Evaluate the deferred tax asset’s recoverability against actual future taxable income and monitor the identified legal proceedings.