United Security Bancshares, Inc. — FY 2015 Form 10-K
Reporting period: Year ended December 31, 2015. The filing identifies the registrant as United Security Bancshares, Inc. (NASDAQ: USBI), not First US Bancshares, Inc.; its banking subsidiary is First US Bank. The company operates a commercial bank in Alabama and consumer lender Acceptance Loan Company (ALC) in Alabama and southeast Mississippi.
Financial performance and condition
| Metric | 2015 | 2014 |
|---|---|---|
| Total assets | $575.8 million | $572.6 million |
| Net interest income | $27.6 million | $28.8 million |
| Net interest margin | 5.36% | 5.53% |
| Net income | $2.6 million | $3.5 million |
| Diluted earnings per share | $0.41 | $0.57 |
| Operating cash flow | $7.4 million | $8.6 million |
| Total deposits | $479.3 million | $483.7 million |
- Interest income fell 4.7% to $29.9 million; interest expense declined 10.3% to $2.3 million. The $1.2 million reduction in net interest income primarily reflected lower average loan volume at the Bank.
- Provision for loan losses was $216,000, compared with a $74,000 reserve release in 2014. Net charge-offs declined to $2.6 million from $3.2 million.
- Non-interest income fell 11.0% to $4.5 million, including lower deposit fees and credit insurance income, as well as the absence of approximately $0.5 million of nonrecurring 2014 gains. Non-interest expense decreased 0.8% to $28.4 million.
- Return on average assets was 0.46% (0.63% in 2014); return on average equity was 3.41% (4.88%). The filing does not provide a single consolidated operating-margin measure.
- Net loans were $255.4 million, versus $259.5 million; the allowance for loan losses was $3.8 million, down from $6.2 million. Nonperforming assets were $9.1 million, or 1.59% of assets, compared with $14.3 million, or 2.50%.
- Cash and cash equivalents increased to $44.1 million from $34.2 million. Year-end short-term borrowings rose to $7.4 million from $0.4 million; long-term debt was $5.0 million in both years. Shareholders’ equity was $76.3 million, 13.3% of assets.
Material changes and management commentary
- Asset-quality measures improved as management tightened credit standards and resolved problem assets. The Bank moved approximately $16.5 million of loans that did not meet current standards off its balance sheet through repayment, charge-off, or transfer to foreclosed real estate. Its net loans fell to $173.7 million from $187.5 million.
- ALC’s net loans increased to $81.7 million from $72.0 million, led by point-of-sale lending arrangements. Management said these loans generally have better credit quality but lower yields; ALC’s average loan yield decreased to 20.67% from 22.52%.
- The Bank reported a $16.8 million increase in net loan volume during Q4, which management attributed to renewed lending focus after credit-quality progress. It opened a second full-service Tuscaloosa branch in October 2015.
- Core deposits were $454.2 million, or 94.8% of deposits. Management cited excess funding capacity, a liquid securities portfolio and access to FHLB advances and federal funds lines. Available FHLB credit, subject to collateral, was $152.5 million; unused federal funds lines were $18.8 million.
- In March 2016, after year-end, the Bank elected to proceed with a $2.95 million purchase of approximately 2.92 acres near U.S. Highway 280 for a planned office complex and retail branch. Management expected closing within 30 days of its March 8 notice; the balance was to be funded from cash.
Outlook, risks and unusual items
- No formal earnings or revenue guidance is provided. Management aims to grow commercial lending while maintaining credit standards, but notes soft loan demand, strong competition, and expected lower yields on new loans and securities reinvestments.
- Interest-rate sensitivity simulations showed net interest income declines under a 1% rate decrease of $354,000 over six months, $914,000 over one year, and $2.389 million cumulatively over two years; outcomes depend on stated assumptions and are not forecasts.
- Key risks include loan losses and collateral values, geographic and real-estate concentration, interest-rate movements, deposit competition and liquidity access, regulatory and compliance costs, and operational, cyber, and third-party systems risks. Management cautions that the Bank’s reserve releases are not expected to continue at significant levels.
- The Bank and holding company were classified as well-capitalized at year-end. The Bank’s total risk-based capital ratio was 23.35% and Tier 1 leverage ratio was 13.02%. The company declared dividends of $0.08 per share for 2015; future dividends remain subject to earnings, capital, liquidity, and regulatory restrictions.
- Management reported effective internal control over financial reporting; the independent auditor issued an unqualified opinion on the consolidated financial statements. The auditor did not attest to internal controls, consistent with the company’s smaller-reporting-company status. Ordinary-course litigation was not expected by management to have a material adverse effect.
Most important facts for investors to verify
- Whether Q4 loan growth at the Bank continued after year-end, and whether it can be sustained without weakening underwriting or capital ratios.
- Whether asset-quality improvement persists, especially given the sharp reduction in the Bank’s allowance-to-loans ratio to 0.76% from 1.83%, and the level of future charge-offs and provisions.
- Whether ALC’s point-of-sale growth delivers lower credit losses sufficient to offset reduced loan yields and credit-insurance income.
- Liquidity and funding developments, including the increase in short-term borrowings, large time-deposit maturities, and availability of collateral for FHLB capacity.
- The funding, timing, expected costs, and leasing assumptions for the planned $2.95 million land purchase and office project.