FUSB

Business Context and Reporting Period

Company: United Security Bancshares, Inc. (Note: Input text identifies the registrant as United Security Bancshares, Inc., despite the request metadata listing "First US Bancshares, Inc.")
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2009
Business Overview: The Company is a parent holding company for First United Security Bank and its finance subsidiary, Acceptance Loan Company, Inc. Operations are focused on commercial and consumer banking within its trade areas.

Key Financial Metrics

Material Changes vs. Prior Period

• Profitability: Net income for the three months ended June 30, 2009, increased 94% to $2.872 million from $1.481 million in the same period of 2008. For the six-month period, net income rose 22% to $4.141 million from $3.384 million.
• Non-Interest Income: Total non-interest income surged 136% in the quarter and 72% year-to-date. This was primarily driven by a $2.7 million net settlement proceeds from a lawsuit against accounting firms (McKean Lawsuit), representing a non-recurring gain of $0.30 per share.
• Interest Income/Expense: Interest income decreased 8.4% in the quarter due to lower loan yields and volumes. Interest expense decreased 20% in the quarter due to lower rates on certificates of deposit and borrowings.
• Asset Quality: Non-performing assets increased to $38.8 million (9.03% of net loans) from $37.7 million (8.85%) at year-end 2008. This increase was driven by a $1.1 million rise in non-accrual loans and a $3.3 million increase in real estate acquired in settlement of loans.
• Balance Sheet: Total assets increased $17.4 million to $685.4 million, while deposits grew $15.7 million (3.2%) during the first six months of 2009.

Guidance, Outlook, and Risks

• Outlook: Management notes that loan growth remains flat due to a slowdown in construction and real estate development. While net interest margin improved in Q2 2009 compared to Q1, it declined compared to the same periods in 2008 as asset yields fell faster than funding rates.
• Legal Contingencies:
  • McKean Lawsuit: Settled in June 2009 for $4.5 million (net proceeds $2.7 million).
  • Graves Lawsuit: Stayed due to plaintiff bankruptcy; outcome uncertain.
  • Shareholder Lawsuit: Claims regarding fraud and breaches related to loans; certain claims dismissed, others pending re-pleading.
  • DOJ Investigation: Allegations of Fair Housing Act and Equal Credit Opportunity Act violations; active discussions ongoing to resolve.
• Risk Factors: The Company faces risks related to the adequacy of the allowance for loan losses, economic conditions, and the depressed real estate market affecting the disposal of other real estate owned (OREO).
• Capital: The Company and Bank remain in compliance with all regulatory capital requirements.

Investor Verification Checklist

• Non-Recurring Income: Verify the impact of the $2.7 million legal settlement on net income and EPS; exclude this to assess core operating performance.
• Asset Quality Trends: Monitor the 9.03% non-performing asset ratio and the $38.8 million in non-performing assets, particularly the $21.4 million in real estate acquired in settlement of loans.
• Loan Portfolio Health: Review the $18.6 million in impaired loans and the specific allocation of $1.1 million in the allowance for these loans.
• Legal Exposure: Assess the potential financial impact of the pending DOJ investigation and the stayed Graves lawsuit.
• Liquidity Position: Confirm the $12.7 million cash balance against the $115.3 million borrowing capacity at the Federal Home Loan Bank.