Business context and reporting period
United Security Bancshares, Inc. (NASDAQ: USBI) filed this Form 10-K for the fiscal year ended December 31, 2011. The company operates First United Security Bank, a commercial bank in Alabama, and Acceptance Loan Company, a consumer finance business in Alabama and Southeast Mississippi. The request metadata names “FIRST US BANCSHARES, INC.,” but the filing identifies the registrant as United Security Bancshares, Inc.; verify the intended issuer.
Financial results and condition
| Metric | 2011 | 2010, restated |
|---|---|---|
| Interest income | $42.3 million | $44.8 million |
| Net interest income | $35.3 million | $34.8 million |
| Net interest margin | 6.17% | 5.83% |
| Provision for loan losses | $18.8 million | $19.1 million |
| Non-interest income | $8.7 million | $10.2 million |
| Non-interest expense | $40.3 million | $32.1 million |
| Net loss attributable to USBI | $(9.1) million; $(1.51) per share | $(3.2) million; $(0.53) per share |
| Cash from operating activities | $16.4 million | $16.4 million |
- Year-end assets were $621.8 million, deposits $527.1 million, gross loans $403.4 million and shareholders’ equity $66.2 million. Assets were essentially flat; deposits rose 4.7% and gross loans declined 1.2% from 2010.
- Cash and cash equivalents increased to $52.8 million from $13.5 million. Cash provided by investing and financing activities was $10.1 million and $12.7 million, respectively; cash increased $39.3 million overall.
- Year-end long-term debt was $20.0 million, down from $30.0 million; short-term borrowings were $0.4 million. The Bank reported $166.5 million of available FHLB borrowing capacity and $7.8 million of federal funds lines. The loan-to-deposit ratio was 72.3%.
- Total risk-based capital was 14.69% at Bancshares and 14.72% at the Bank; the Bank was classified as well-capitalized. Equity was 10.6% of assets, down from 12.0% in 2010.
Material changes versus the prior comparable period
- The loss attributable to USBI widened to $9.1 million from $3.2 million. The main pressures were $6.4 million of OREO impairment, a $4.1 million goodwill impairment, and continued elevated credit costs.
- Net charge-offs rose to $17.5 million from $8.2 million, including $12.9 million of commercial real estate charge-offs at the Bank. Impaired loans increased to $61.9 million from $51.0 million, although nonperforming assets declined to $35.6 million from $44.4 million.
- Net interest income improved 1.6% as the cost of interest-bearing liabilities fell; margin increased 34 basis points. Non-interest income fell 14.1%, partly because 2010 included a nonrecurring $4.2 million insurance settlement. Securities gains increased to $2.6 million from $0.3 million.
- 2010 financial statements were restated for an $8.5 million increase in loan-loss provision relating to updated collateral valuations. The correction reduced 2010 net income by $5.3 million and total assets and equity by $5.3 million.
- At year-end 2011, the allowance for loan losses was $22.3 million, or 5.52% of loans net of unearned income. OREO was $16.8 million, down from $25.6 million.
Outlook, risks, contingencies and unusual items
- The filing provides no quantified earnings or revenue guidance. Management expected continued pressure if economic weakness and declining real estate values persisted; it said it had largely stopped originating real estate development loans and was focused on managing that portfolio.
- Management projected future taxable income to support realization of a $10.4 million net deferred tax asset and recorded no valuation allowance, despite a three-year cumulative loss position. Realization depends on forecasts and is not assured.
- The company paid no shareholder dividend after the first quarter of 2011, citing losses and capital preservation. It gave no assurance that dividends would resume.
- Credit quality, real estate collateral values, local economic conditions, interest rates, deposit competition, regulation, and the ability to dispose of foreclosed property are key risks. ALC’s consumer lending also carries elevated credit risk.
- Two described lawsuits remained unresolved: a claim against ALC and claims involving the Bank and a borrower’s spouse. Management said outcomes could not yet be assessed. Commitments to extend credit totaled $45.7 million and standby letters of credit $1.2 million.
- Management concluded internal control over financial reporting was effective at December 31, 2011. This followed a 2010 material weakness related to timely evaluation of updated appraisals; the independent auditor did not provide an attestation on internal controls.
Most important facts for investors to verify
- Confirm issuer identity: the filing is for United Security Bancshares, Inc. (USBI), not a registrant named First US Bancshares, Inc.
- Review subsequent loan performance, real estate appraisals, charge-offs, OREO sales, and allowance adequacy, especially in commercial real estate and development exposures.
- Assess whether projected taxable income supports the $10.4 million deferred tax asset and whether future losses could require a valuation allowance.
- Verify the Bank’s capital and liquidity position, deposit retention and costs, funding concentration in large and brokered CDs, and the timing and terms of FHLB debt maturities.
- Track the pending lawsuits, dividend outlook, and evidence that remediation of the prior appraisal-control weakness remains effective.