United Security Bancshares, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2012. The filing identifies the registrant as United Security Bancshares, Inc. (USBI), parent of First United Security Bank and Acceptance Loan Company, Inc. (ALC); this differs from the company name in the request metadata. Financial amounts below are in millions of dollars unless otherwise noted.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Interest income | $9.33 | $10.70 | $29.09 | $31.75 |
| Net interest income | $8.30 | $8.97 | $25.42 | $26.38 |
| Provision for loan losses | $0.49 | $2.26 | $3.18 | $5.18 |
| Non-interest income | $1.45 | $1.60 | $4.06 | $4.98 |
| Non-interest expense | $7.56 | $10.59 | $24.83 | $26.18 |
| Net income (loss) attributable to USBI | $1.18 | ($1.31) | $1.31 | $0.41 |
| Basic and diluted earnings (loss) per share | $0.20 | ($0.22) | $0.22 | $0.07 |
- Reported net interest margin was 6.04% in Q3 2012 versus 6.19% a year earlier, and 6.07% for the first nine months versus 6.18%.
- Q3 results improved to profitability from a year-earlier loss, primarily as provision expense and other-real-estate impairment charges declined. Year-to-date earnings increased, but remained modest.
- Nine-month cash provided by operating activities was $11.39 million, compared with $12.15 million in 2011. Investing activities provided $37.01 million, while financing activities used $39.36 million. Cash and cash equivalents rose by $9.04 million to $61.84 million.
Financial condition, liquidity and credit
- At September 30, 2012, total assets were $584.32 million, down from $621.81 million at December 31, 2011. Deposits were $506.63 million, down from $527.07 million; shareholders’ equity was $68.09 million, up from $66.21 million.
- Net loans were $344.73 million, down from $381.09 million. Management cited weak loan demand and continuing difficult economic conditions. Loans were concentrated in real estate: 71.3% of the portfolio.
- Available-for-sale securities were $102.57 million and held-to-maturity securities $12.19 million. The company reported no other-than-temporary impairment on securities in unrealized loss positions.
- Long-term debt was zero at quarter-end, compared with $20.0 million at year-end 2011; short-term borrowings were $1.33 million. The Bank reported $175.3 million of available FHLB credit and $17.8 million in correspondent-bank federal funds lines. USBI and the Bank were in compliance with regulatory capital requirements; capital ratios were not stated in the supplied filing text.
- The allowance for loan losses was $19.89 million, or 5.5% of loans net of unearned income, versus $22.27 million and 5.5% at year-end 2011. Allowance coverage of non-performing assets fell to 42.1% from 62.5%.
- Non-performing assets increased to $47.27 million, or 12.50% of net loans and other real estate, from $35.61 million, or 8.48%, at year-end. Non-accrual loans rose to $31.58 million from $16.50 million, primarily because one large relationship reached 90 days past due. Management said the relationship was already included in its impairment analysis and no additional provision was indicated at quarter-end.
- Net charge-offs were $5.6 million for the first nine months, down from $10.9 million in the comparable 2011 period. The filing also reports $58.0 million in impaired loans at quarter-end. Real estate acquired in settlement of loans was $13.61 million, down from $16.77 million.
Material changes, outlook and risks
- Interest income declined as average loan and investment balances and yields fell. Interest expense also declined as deposits and borrowings repriced at lower rates; management said it expected funding costs to continue declining while rates remained low and expected net interest margin to stay near current levels.
- Management reported reduced loan-loss provisions and lower OREO impairment charges versus 2011. It said substantially all Bank OREO had been reappraised in Q1 and did not anticipate significant Q4 impairment, but approximately $2.0 million of foreclosed property was still scheduled for Q4 appraisal and could require additional charges.
- Management stated that the large delinquent loan relationship might return to accrual status in Q4, with interest and fees paid, while noting there could be no assurance. The filing gives no formal earnings or revenue guidance.
- Real estate development, raw-land and residential-lot exposures remain a key credit risk. The Bank said it generally no longer makes such development loans, except in limited circumstances. Further economic weakness, declining collateral values, delinquencies or charge-offs could require additional loan-loss provisions or OREO write-downs.
- Deferred tax assets were $9.3 million, with no valuation allowance recorded, despite a cumulative pretax loss over the trailing three years. Management judged realization more likely than not; the filing warns that insufficient future profitability could require an allowance and materially reduce earnings and net assets.
- Contingencies include a pending ALC lawsuit involving breach-of-contract and unjust-enrichment claims, with a motion to dismiss pending, and an OSHA complaint by a former Bank employee. The filing says it was too early to assess the likelihood of an unfavorable outcome. A separate Russell lawsuit was resolved by summary judgment for the Bank and an officer on October 29, 2012.
- Management reported effective disclosure controls as of September 30, 2012, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the large delinquent relationship returned to accrual status and whether associated past-due balances, non-accrual loans and non-performing assets subsequently improved.
- Results of the pending Q4 OREO appraisals, including any additional impairment charges, and the pace and realized proceeds of property sales.
- Credit quality trends, charge-offs and reserve adequacy, especially for real estate development and commercial real estate exposures; confirm the basis for the 42.1% allowance coverage of non-performing assets.
- Deposit trends, loan balances and funding costs, as well as continued access to FHLB and correspondent-bank facilities.
- Evidence supporting realization of the $9.3 million deferred tax asset and any updates on the disclosed litigation and OSHA matter.