Business context and reporting period
This filing is the Form 10-K of United Security Bancshares, Inc. (USBI), for the fiscal year ended December 31, 2013, with 2012 comparisons. The supplied request identifies First US Bancshares, Inc.; that does not match the registrant named in the filing and should be verified. USBI operates First United Security Bank, an Alabama community bank, and Acceptance Loan Company, a consumer finance subsidiary, among other subsidiaries. The filing also provides unaudited quarterly results, including fourth-quarter 2013.
Financial results and condition
Amounts below are in millions of dollars unless noted. The company reported improved annual earnings, although net interest income and loan balances contracted.
| Metric | 2013 | 2012 |
|---|---|---|
| Net income | $3.927 | $2.195 |
| Basic and diluted EPS | $0.65 | $0.36 |
| Net interest income | $30.731 | $34.197 |
| Net interest margin | 5.95% | 6.21% |
| Provision for loan losses | $(0.642) credit | $4.338 expense |
| Non-interest income | $4.865 | $5.565 |
| Non-interest expense | $30.802 | $32.484 |
| Operating cash flow | $10.923 | $16.141 |
- Total assets were $569.8 million, up 0.5%; deposits were $484.3 million, down 1.0%.
- Loans, net of unearned interest and fees, fell 13.0% to $310.3 million. Real estate represented 69.2% of loans.
- Shareholders’ equity was $70.1 million (12.3% of assets), versus $68.6 million. Book value was $11.63 per share.
- Cash and cash equivalents declined to $47.7 million from $54.1 million. Investing cash flow was $(18.2) million and financing cash flow was $0.8 million; the net cash decrease was $6.4 million.
- Total investment securities increased to $170.8 million from $113.7 million. Available-for-sale securities had $0.5 million of after-tax unrealized gains in equity, down from $3.1 million.
- Year-end borrowings included $1.2 million short-term and $5.0 million long-term FHLB advances. The company reported $165.9 million of additional FHLB borrowing capacity and $18.8 million in federal funds lines.
- Regulatory capital remained strong: company total risk-based capital was 19.20%, Tier 1 risk-based capital 17.93%, and Tier 1 leverage 10.88%. The Bank was classified as well-capitalized.
Material changes and notable items
- Net income rose 79%, mainly because the loan-loss provision shifted from $4.3 million expense to a $0.6 million credit, alongside lower non-interest expense. Net interest income fell 10.1%, and margin declined 26 basis points.
- Credit costs remain material despite lower problem assets: net charge-offs increased to $9.2 million from $7.3 million, and the allowance fell to $9.4 million from $19.3 million. Nonperforming assets declined to $21.5 million from $38.5 million, or 6.74% of loans and OREO versus 10.40%.
- OREO declined to $9.3 million from $13.3 million; write-down expense fell to $2.4 million from $4.9 million. Further write-downs remain possible if local property values weaken.
- Non-interest income included a one-time approximately $0.6 million refund of previously recognized customer fees and an approximately $0.5 million fee related to early payoff of a mortgage-backed pool. These items affected reported fee trends.
- Annual efficiency ratio worsened to 86.5% from 81.7%, despite lower total operating expenses; salaries and benefits increased 11.5%.
- Fourth-quarter 2013 net income was $0.955 million, or $0.16 per share, versus $0.883 million, or $0.15 per share, in fourth-quarter 2012. Q4 2013 included a $1.441 million provision credit; quarterly non-interest income was $0.723 million versus $1.507 million a year earlier.
- The company recorded a $10.8 million net deferred tax asset and no valuation allowance, relying on forecast taxable income and other positive evidence despite a three-year cumulative pretax loss position of $2.6 million (excluding nondeductible goodwill impairment).
Outlook, risks and contingencies
No specific earnings or revenue guidance is provided. Management says quality loan growth and continued problem-asset resolution are priorities; it expects growth to be challenging amid competition and economic conditions. The Bank intends to emphasize owner-occupied and income-producing commercial real estate while reducing reliance on development lending. ALC has shifted its portfolio toward consumer lending and suspended new real estate lending in 2012.
- Key risks include local economic weakness, real estate collateral values, loan losses, concentration in real estate lending, competition, interest-rate changes, deposit funding and liquidity, and increasing regulatory and consumer-compliance costs.
- Interest-rate simulations show potential pressure under larger rate shocks, particularly over longer horizons; management cautions that gap analysis is limited and does not rely on it alone.
- Two disclosed lawsuits remain unresolved: a long-running dispute against ALC, with a motion hearing scheduled for May 20, 2014, and a December 2013 wrongful-foreclosure claim against the Bank. The filing says outcomes cannot yet be assessed.
- Commitments included $28.9 million to extend credit and $0.9 million in standby letters of credit. The filing reports no material off-balance-sheet arrangements beyond disclosed commitments and leases.
- No cash dividends were declared in 2013 or 2012; the filing says dividends have not been paid since the first quarter of 2011 and are subject to legal, regulatory, earnings, capital and liquidity constraints.
The independent auditor issued an unqualified opinion on the consolidated financial statements. Management concluded internal control over financial reporting was effective; the auditor did not provide an internal-control attestation, consistent with the company’s smaller-reporting-company status.
Important facts for investors to verify
- Confirm the intended company: the filing is for United Security Bancshares, Inc., not First US Bancshares, Inc.
- Assess whether the large reduction in the allowance and the 2013 provision credit are supportable given $9.2 million of net charge-offs and continuing real-estate-related credit exposure.
- Review loan growth prospects and the quality, collateral values, and geographic concentration of the real estate portfolio; also monitor OREO dispositions and impairment risk.
- Evaluate sustainability of earnings given declining net interest income and margin, one-time revenue items, and higher personnel costs.
- Review the deferred tax asset’s recoverability and the assumptions supporting management’s forecast taxable income.
- Track the two lawsuits, upcoming regulatory requirements, deposit trends, liquidity sources, and the absence of dividends.