Business context and reporting period
This unaudited Form 10-Q covers the quarter and six months ended June 30, 2011. 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 company name in the request and should be verified. Dollar amounts below are in millions unless stated otherwise.
Financial performance and condition
| Metric | Q2 2011 | First six months 2011 | Comparable 2010 |
|---|---|---|---|
| Net interest income | $8.83 | $17.41 | $8.65 Q2; $16.99 six months |
| Provision for loan losses | $1.61 | $2.91 | $3.68 Q2; $5.43 six months |
| Non-interest income | $2.20 | $3.39 | $1.44 Q2; $7.04 six months |
| Non-interest expense | $8.15 | $15.59 | $7.24 Q2; $14.47 six months |
| Net income attributable to USBI | $0.90 ($0.15/share) | $1.72 ($0.29/share) | $(0.35) Q2; $2.94 six months |
| Net interest margin | 6.17% | 6.18% | 5.73% Q2; 5.61% six months |
- Q2 moved from a loss to a profit, helped by lower loan-loss provision and higher non-interest income. First-half earnings declined year over year, partly because 2010 included a $4.2 million insurance settlement at ALC.
- Six-month operating cash flow was $8.36 million, versus $10.48 million in 2010. Cash and cash equivalents rose to $32.14 million from $13.53 million at year-end, including a $21.17 million increase in deposits; financing cash flow was $11.07 million.
- At June 30, assets were $632.69 million, deposits $524.70 million, total liabilities $554.79 million, and shareholders’ equity $77.90 million. Long-term debt was $20.0 million, down from $30.0 million at year-end; short-term borrowings were $1.11 million.
- Loans, net of allowance, were $390.65 million, up from $387.48 million at year-end. The allowance for loan losses was $19.01 million, or 4.6% of loans net of unearned income, compared with $20.94 million, or 5.1%, at year-end. First-half net charge-offs were $4.84 million.
- Non-performing assets rose to $57.61 million, or 13.24% of net loans and other real estate, from $44.44 million, or 10.24%, at year-end. Nonaccrual loans increased to $28.93 million from $13.57 million; management attributed much of the increase to 12 commercial real estate loans totaling $19.7 million placed on nonaccrual.
Material changes, outlook and risks
- Management said weak loan demand and lower yields on loans and investments reduced interest income; lower funding costs supported the higher net interest margin. It expected the margin to remain near current levels until the Federal Reserve changes rates. Management estimated a 2011 effective tax rate of approximately 30%; no earnings guidance was provided.
- Management warned that weak economic conditions and a severely depressed real estate market could pressure collateral values and hinder reductions in non-performing assets. Allowance adequacy depends on estimates of economic conditions, borrowers’ financial condition and collateral values; further provisions may be needed.
- The Bank reported compliance with regulatory capital requirements and cited available borrowing capacity of $169.5 million from the FHLB and $7.8 million in federal funds lines. Management said it knew of no current condition adversely affecting liquidity, capital resources or operations.
- CEO R. Terry Phillips resigned effective June 30, 2011. An Executive Management Committee was placed in charge pending appointment of a permanent successor; the filing identifies leadership continuity and succession as a risk.
- The company disclosed a material weakness identified in Q1 2011 involving delayed communication of updated collateral values on impaired loans. It described new monitoring, third-party appraisal and review procedures, and an Asset Quality Committee. Management concluded disclosure controls were effective at June 30, 2011.
- The 2010 annual report and financial statements were amended and restated after updated appraisals showed lower collateral values on certain impaired loans that had not been reflected in the earlier allowance. The filing’s description of the amendment date appears inconsistent, so the precise date should be checked against the amended annual report.
- Litigation includes claims against ALC relating to loan balances and claims involving foreclosure and mortgage transactions. Management said outcomes of the unresolved matters could not yet be assessed. Off-balance-sheet commitments included $32.13 million of commitments to extend credit and $1.33 million of standby letters of credit.
- The company paid dividends of $0.04 per share in the first half of 2011, versus $0.22 in the first half of 2010. Q2 dividends were zero, versus $0.11 per share in Q2 2010.
Important facts for investors to verify
- Confirm the registrant identity: the filing names United Security Bancshares, Inc., not First US Bancshares, Inc.
- Review the amended 2010 Form 10-K and subsequent control disclosures to assess the collateral-valuation weakness, restatement adjustments and remediation.
- Track nonaccrual loans, non-performing assets, commercial real estate exposure, charge-offs and allowance coverage in subsequent filings.
- Monitor CEO succession, regulatory capital and actual availability of stated borrowing facilities.
- Check the status and potential financial exposure of the pending lawsuits, and confirm the filing’s apparent inconsistency in the stated restatement amendment date.