Business context and reporting period
United Security Bancshares, Inc. (USBI), parent of First US Bank and Acceptance Loan Company (ALC), filed this unaudited Form 10-Q for the quarter ended September 30, 2015. The company operates a commercial bank and a consumer finance business, primarily in Alabama and southeast Mississippi. The filing’s registrant is United Security Bancshares, Inc.; this differs from the company name in the request metadata.
Financial and operating performance
Amounts below are in millions of dollars except per-share data and percentages.
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net interest income | $6.767 | $7.257 | $20.644 | $21.758 |
| Net interest margin/yield on earning assets | 5.31% | 5.13% | 5.33% | 5.56% |
| Provision (reduction) for loan losses | $(0.078) | $(0.055) | $(0.199) | $0.095 |
| Non-interest income | $0.996 | $1.180 | $3.355 | $3.812 |
| Non-interest expense | $7.090 | $7.242 | $21.174 | $21.349 |
| Net income | $0.544 | $0.837 | $2.154 | $2.829 |
| Diluted EPS | $0.09 | $0.13 | $0.34 | $0.46 |
At September 30, 2015, total assets were $548.5 million, down from $572.6 million at year-end 2014. Deposits were $463.3 million, versus $483.7 million; net loans were $237.7 million, versus $259.5 million; and shareholders’ equity was $76.3 million, versus $75.2 million. Cash and cash equivalents totaled $27.6 million, down from $34.2 million.
For the first nine months, operating cash flow was $6.1 million, investing activities provided $12.4 million, and financing activities used $25.0 million. Cash decreased by $6.6 million. The investing cash inflow included $19.8 million from the net change in the loan portfolio.
Material changes and management commentary
- Year-to-date net income fell 24% and Q3 net income fell 35% year over year. Management attributed lower net interest income principally to declining loan volume at the Bank and, to a lesser extent, lower ALC loan yields.
- Non-interest income declined 12% year to date, partly because approximately $0.5 million of gains recorded in 2014 from a partnership dissolution and vendor reimbursement did not recur. Lower deposit overdraft/NSF fees and credit insurance income also weighed on results.
- The allowance for loan losses fell to $4.3 million from $6.2 million at year-end 2014. The Bank recorded reserve reductions as credit quality improved; ALC continued to record provisions. Management said the Bank’s reserve releases are not expected to continue at a significant level.
- Consolidated nonperforming assets declined to $10.9 million from $14.3 million at year-end 2014; nonperforming assets were 1.98% of total assets, compared with 2.50%. Management cautioned that the pace of future improvement is likely to slow.
- Loan balances declined at the Bank, while ALC net loans increased to $80.8 million from $72.0 million at year-end. ALC growth was driven by higher-quality point-of-sale consumer lending, which management expects to continue lowering ALC yields in the near term.
- Capital spending was $3.1 million in the first nine months, mainly for Thomasville and Tuscaloosa facilities, technology, and other operating improvements. One additional Tuscaloosa banking office opened after quarter-end.
Liquidity, debt, risks and contingencies
The company reported $1.2 million of short-term borrowings, consisting of repurchase agreements, and no long-term debt at September 30, 2015; the $5.0 million FHLB advance outstanding at year-end had been repaid. Available capacity included $164.5 million of FHLB credit, subject to collateral, and $18.8 million of federal funds lines. Management described liquidity as ample. Bank regulatory capital ratios were 23.76% for common equity Tier 1 and Tier 1 risk-based capital, 25.02% total capital, and 13.02% Tier 1 leverage; management said each exceeded the well-capitalized threshold.
Credit and valuation risks remain important: 59.9% of the loan portfolio was secured by real estate, primarily in one U.S. region. The company held $6.7 million in other real estate owned. Management noted that weaker economic conditions or falling local property values could increase credit losses, OREO write-downs, and foreclosure costs. Securities unrealized losses were attributed to interest rates, not issuer credit; management reported no other-than-temporary impairment.
The Bank had $39.7 million of commitments to extend credit and $0.7 million of standby letters of credit. A borrower’s lawsuit alleging wrongful foreclosure seeks unspecified damages; discovery was ongoing and the company could not assess the likelihood or potential outcome. Management considered other litigation not expected to have a material adverse effect. No specific earnings or financial guidance was provided. Management identified economic growth, loan demand, credit quality, collateral values, interest rates, and competition as uncertainties. Disclosure controls were judged effective, with no material control changes reported for the quarter.
Most important facts for investors to verify
- Confirm the filing entity: the 10-Q is for United Security Bancshares, Inc., while First US Bank is its subsidiary.
- Track whether earnings and net interest income stabilize as Bank loan balances contract and ALC grows lower-yielding consumer loans.
- Assess the sustainability of lower nonperforming assets and the reduced loan-loss allowance, including charge-offs and future provision needs.
- Monitor deposit outflows, liquidity capacity and collateral availability for FHLB borrowing.
- Review developments in the wrongful-foreclosure lawsuit, property values, and the company’s OREO balance and valuation assumptions.