Business context and reporting period
United Security Bancshares, Inc. (the registrant; the supplied metadata identifies First US Bancshares) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2015. The company is the parent of First US Bank (FUSB), which operates a commercial bank, and Acceptance Loan Company (ALC), a consumer finance company.
Financial performance and position
Unless stated otherwise, dollar amounts are in millions; financial statement amounts are in thousands.
- Profit: Second-quarter net income was $0.774 million, or $0.12 diluted EPS, versus $1.218 million, or $0.20, in Q2 2014. First-half net income was $1.610 million, or $0.25 diluted EPS, versus $1.992 million, or $0.33.
- Interest income and margin: Q2 net interest income was $7.170 million, down 1.8% year over year; first-half net interest income was $13.877 million, down 4.3%. Net interest margin was 5.47% for Q2 (5.58% in 2014) and 5.29% for the first half (5.54% in 2014).
- Other income and expenses: Non-interest income was $1.068 million in Q2 and $2.359 million for the first half, compared with $1.485 million and $2.632 million, respectively, in 2014. Non-interest expense was $7.107 million in Q2 and $14.084 million in the first half, broadly level with the prior-year periods.
- Cash flow: First-half operating cash flow was $4.204 million, investing cash use was $1.106 million, and financing cash use was $12.211 million. Cash and cash equivalents fell $9.113 million to $25.053 million, primarily alongside a $12.518 million net decline in deposits and $0.242 million of dividends paid.
- Balance sheet and funding: At June 30, total assets were $560.650 million, down from $572.609 million at year-end 2014. Deposits were $471.141 million, down from $483.659 million. Loans, net of allowance, were $244.993 million, down from $259.516 million. Long-term debt was $5.0 million and short-term borrowings were $0.985 million. Shareholders’ equity was $75.783 million, or 13.5% of assets.
- Credit quality: The allowance for loan losses was $5.008 million, or 2.00% of loans, versus $6.168 million, or 2.32%, at year-end. Nonperforming assets were $10.987 million, 1.96% of assets, compared with $14.308 million, or 2.50%, at year-end. Other real estate owned was $7.168 million.
- Capital and liquidity: The Bank’s June 30 Basel III ratios were 23.53% common equity Tier 1, 23.53% Tier 1 risk-based capital, 24.79% total capital, and 12.93% Tier 1 leverage; management said each exceeded the well-capitalized threshold. The Bank reported $18.8 million in available federal funds lines and $168.1 million in FHLB credit capacity, subject to collateral. The filing does not provide a consolidated regulatory capital ratio.
Material changes versus comparable periods
- Lower earnings reflected weaker net interest income and the absence of approximately $0.5 million of nonrecurring Q2 2014 gains: proceeds from dissolving a limited partnership and a vendor reimbursement. Higher securities-sale gains in 2015 partly offset the decline.
- FUSB’s net loans fell $22.5 million in the first half as payoffs and paydowns exceeded new lending. ALC’s net loans grew about $8.0 million, principally from point-of-sale consumer lending; its strategy shifted toward consumer loans with higher credit quality and lower yields.
- The company increased its securities holdings as loans declined. Total investment securities were $246.176 million at June 30, including $43.929 million classified as held-to-maturity, up from $29.120 million at year-end.
- Asset quality improved overall: nonperforming assets and the allowance ratio declined. ALC nevertheless recorded $1.0 million in first-half net charge-offs, and its allowance remained higher as a percentage of loans than FUSB’s.
- The company declared dividends of $0.02 per share in Q2 and $0.04 per share for the first half; no dividends were reported for the comparable 2014 periods.
Outlook, commentary, risks and contingencies
- Management reported no numerical earnings or revenue guidance. It said loan growth remains challenging amid strong competition for creditworthy borrowers, particularly at FUSB, and that pressure on net interest income could continue from competition and lower reinvestment yields.
- Management said reductions in the Bank’s loan-loss reserve are not expected to continue at a significant level. Allowance adequacy depends on estimates and may be affected by economic conditions, local real estate markets, collateral values and borrower performance.
- Management described liquidity as ample, but deposits declined during the half. Access to FHLB funding is subject to available collateral, and the filing notes that deposit flows and loan prepayments are difficult to predict.
- OREO valuation and disposition remain risks; weaker economic or local property conditions could require further write-downs or increase foreclosures and carrying costs. The company reported $1.1 million of foreclosed residential real estate and $0.5 million of consumer mortgage loans in foreclosure.
- A borrower lawsuit alleges wrongful foreclosure and seeks unspecified damages. Discovery was ongoing, and the company said it could not assess the likelihood or potential outcome. Management said other litigation was not expected to have a material adverse effect.
- Management cited ongoing technology and facility investments, including renovations expected to be completed in the second half of 2015. ALC relocated its headquarters during Q1 and closed one office after quarter-end.
Important facts for investors to verify
- Confirm the registrant and security being analyzed: the filing is for United Security Bancshares, Inc.; First US Bank is a subsidiary, despite the supplied company metadata.
- Review subsequent-period results for whether FUSB loan production improves and ALC’s consumer-loan growth and credit performance persist.
- Track deposit trends, cash balances, funding capacity and collateral availability, along with the effect of securities reinvestment yields on net interest income.
- Assess charge-offs, nonaccrual loans, OREO sales and write-downs, and the assumptions supporting the allowance for loan losses.
- Monitor the wrongful-foreclosure lawsuit and other contingencies; the filing gives no clear estimate of potential damages or loss exposure for the principal case.
- Check whether the stated capital ratios remain above regulatory thresholds and whether planned branch and technology investments deliver expected benefits.