Business Context and Reporting Period
Company: United Security Bancshares, Inc. (d/b/a First US Bancshares, Inc.)
Reporting Period: Fiscal Year Ended December 31, 2009
Business Overview: A bank holding company operating primarily in Alabama and Southeast Mississippi through its subsidiary, First United Security Bank (the "Bank"), and its finance company subsidiary, Acceptance Loan Company, Inc. ("ALC"). The Bank operates 19 offices, while ALC operates 22 offices focusing on consumer and real estate loans.
Key Financial Metrics
| Metric | 2009 | 2008 |
|---|---|---|
| Total Assets | $691.8 million | $668.0 million |
| Total Loans (Net) | $402.5 million | $399.5 million |
| Total Deposits | $513.1 million | $485.1 million |
| Net Interest Income | $34.3 million | $35.2 million |
| Provision for Loan Losses | $9.1 million | $8.9 million |
| Net Income | $4.8 million | $5.4 million |
| Diluted EPS | $0.79 | $0.89 |
| Shareholders' Equity | $81.5 million | $78.7 million |
| Return on Average Assets | 0.70% | 0.80% |
| Return on Average Equity | 5.90% | 6.83% |
| Net Interest Margin | 5.58% | 5.86% |
| Non-Performing Assets (NPA) | $42.3 million (9.75% of net loans/OREO) | $37.7 million (8.85%) |
| Allowance for Loan Losses | $10.0 million (2.4% of loans) | $8.5 million |
Material Changes vs. Prior Period
- Profitability Decline: Net income decreased 11.5% to $4.8 million, driven by a 2.6% decline in net interest income and a 5.5% increase in non-interest expense.
- Interest Rate Environment: Net interest margin compressed from 5.86% to 5.58% as loan yields declined faster than deposit costs in a low-rate environment.
- Asset Quality Deterioration: Non-performing assets increased 12.2% to $42.3 million, primarily due to a $3.9 million increase in non-accrual loans and a $3.3 million increase in real estate acquired in settlement of loans. Impaired loans rose significantly to $35.4 million.
- Expense Growth: Non-interest expense rose to $26.7 million, largely due to increased FDIC insurance assessments ($1.1 million vs. $0.1 million in 2008) and higher salaries/benefits, partially offset by lower legal fees.
- Deposit Growth: Total deposits grew 5.8% to $513.1 million, with brokered certificates of deposit increasing to $42.4 million.
Guidance, Outlook, Risks, and Unusual Items
Unusual Items and Recoveries
- Insurance Settlement: In February 2010 (subsequent to year-end), the company settled a fidelity insurance claim regarding 2007 loan irregularities at ALC, receiving $4.15 million from The Cincinnati Insurance Company.
- Litigation Recovery: In 2009, the company received $2.7 million in proceeds from a settlement with former accountants regarding the 2007 ALC irregularities, recorded as non-interest income.
- DOJ Consent Order: In November 2009, the Bank entered a Consent Order with the U.S. Department of Justice to resolve allegations of Fair Housing Act violations. The Bank agreed to pay $500,000 in subsidies for new loans and implement marketing initiatives in African-American communities.
Risks and Outlook
- Economic Conditions: Management cites continued weakness in the housing market, unemployment, and the general recession as primary risks to loan collectibility and demand.
- ALC Performance: ALC continues to experience higher loan loss rates (3.6% of total loans) compared to the Bank due to the nature of its consumer lending portfolio.
- Regulatory Capital: The company remains "well-capitalized" with a total risk-based capital ratio of 17.01%, significantly exceeding the 10% threshold.
- Dividends: Dividends were reduced to $0.60 per share in 2009 (from $1.08 in 2008) to preserve capital, though the company intends to continue the program.
Investor Verification Checklist
- Asset Quality Trends: Verify the trajectory of non-performing assets and the adequacy of the allowance for loan losses given the 9.75% NPA ratio.
- ALC Loan Losses: Monitor the specific loan loss experience at the ALC subsidiary, which historically carries higher risk than the Bank.
- FDIC Assessment Impact: Confirm the ongoing impact of elevated FDIC insurance assessments on future operating expenses.
- DOJ Compliance: Track the execution and cost of the DOJ Consent Order requirements, including the $500,000 subsidy commitment.
- Interest Rate Sensitivity: Review the company's negative interest rate gap position and its exposure to rising rates versus the current low-rate environment.