Business context and reporting period
The supplied filing is United Security Bancshares, Inc. and subsidiaries’ unaudited Form 10-Q for the quarter ended September 30, 2011—not a filing identified as First US Bancshares, Inc. The company is the parent of First United Security Bank (FUSB), which operates Acceptance Loan Company (ALC). Unless stated otherwise, amounts below are in U.S. dollars.
Financial performance and condition
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Interest income | $10.7m | $11.4m | $31.8m | $33.9m |
| Net interest income | $9.0m | $9.0m | $26.4m | $26.0m |
| Provision for loan losses | $2.3m | $1.4m | $5.2m | $6.8m |
| Non-interest income | $1.6m | $1.6m | $5.0m | $8.7m |
| Non-interest expense | $10.6m | $8.9m | $26.2m | $23.4m |
| Net income (loss) attributable to USBI | $(1.3)m | $0.4m | $0.4m | $3.3m |
| Basic and diluted earnings (loss) per share | $(0.22) | $0.06 | $0.07 | $0.55 |
- Net interest margin improved to 6.19% in Q3 2011 from 6.01% a year earlier, and to 6.18% for the first nine months from 5.74%.
- Cash from operating activities was $12.2m for the first nine months, versus $15.2m in 2010. Cash and cash equivalents ended September at $45.6m, up from $13.5m at year-end 2010. The filing reports a $32.0m net cash increase; customer deposits rose $27.8m.
- At September 30, total assets were $638.8m, deposits $531.3m, total liabilities $561.3m, and shareholders’ equity $77.5m. Net loans were $382.4m; available-for-sale securities were $140.2m.
- Long-term debt was $20.0m, down from $30.0m at year-end 2010; short-term borrowings were $1.3m. The Bank reported $171.3m of available FHLB credit and $7.8m of federal funds lines. The company and Bank reported compliance with regulatory capital requirements, but the excerpt does not provide capital ratios.
Material changes and credit quality
- Q3 shifted to a $1.3m net loss from $0.4m of net income. Nine-month earnings fell to $0.4m from $3.3m.
- Interest income declined as loan and investment yields fell; lower deposit and borrowing costs largely offset this pressure, supporting higher net interest income and margin. Management said loan demand remained weak and expected the margin to stay near current levels until Federal Reserve rates change.
- Nine-month non-interest income fell $3.7m, primarily because 2010 included a $4.2m insurance settlement (the MD&A also describes $3.8m of net proceeds). Non-interest expense rose $2.7m, including increased real estate impairment and employee costs.
- Q3 other-real-estate impairment expense was $3.0m, versus $2.0m a year earlier. Nine-month impairment expense was $3.8m. Nine-month net charge-offs were $10.9m, up from $7.0m in 2010; the largest reported category was commercial real estate.
- Non-performing assets were $46.0m, or 10.93% of net loans and other real estate, at September 30, compared with $44.4m and 10.24% at December 31, 2010. Nonaccrual loans increased to $19.9m; other real estate owned was $23.0m. The allowance for loan losses was $15.3m, or 3.8% of loans net of unearned income; coverage of non-performing assets was 33.2%.
- Management cited depressed real estate markets, falling collateral values, weak economic conditions and unemployment as continuing pressures. Real-estate-secured loans represented 73% of the portfolio.
Outlook, contingencies and unusual items
- No numerical earnings or balance-sheet guidance is provided. Management said margin was expected to remain near current levels and warned that adverse economic and real-estate conditions could impede reductions in non-performing assets and require future loan-loss provisions.
- The company restated its 2010 Form 10-K after learning that updated appraisals on properties securing impaired loans had not been reflected in the previously issued statements. The amended filing was submitted in May 2011.
- In Q2 2011, refinancing of a $5.0m loan led the company to deconsolidate La Vista Foundation I, LP. The change increased equity by $1.4m and reduced assets by $2.4m, with no income-statement impact.
- Two described lawsuits remain unresolved. In the Graves Automotive matter, claims against the parent, Bank and their directors and officers were dismissed; claims against ALC for breach of contract and unjust enrichment remain, with a fraud claim potentially to be re-pleaded. The company said outcomes were too early to assess. The Russell matters include claims and a counterclaim involving the Bank; the Bank intends to seek dismissal. Management said other litigation was not expected to have a material adverse effect.
- James F. House became President and CEO of the company and Bank on November 7, 2011. The filing identifies successful leadership transition as a risk.
- Management concluded disclosure controls were effective at quarter-end and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm the issuer identity: the supplied 10-Q is for United Security Bancshares, Inc., whereas the request names First US Bancshares, Inc.
- Review the amended 2010 Form 10-K and subsequent allowance, charge-off and appraisal disclosures, particularly for commercial real estate exposures.
- Track nonaccrual loans, other real estate owned, net charge-offs, allowance coverage and the adequacy of collateral valuations.
- Assess the sustainability of earnings given Q3 losses, higher impairment and operating costs, and the 2010 insurance-settlement comparison.
- Review the outcomes and potential financial exposure from the pending litigation, and the execution of the new CEO transition.
- Verify regulatory capital ratios and any later liquidity or funding developments; the filing states regulatory compliance but does not provide the ratios in this excerpt.