Business context and reporting period
United Security Bancshares, Inc. (USBI), parent of First United Security Bank and finance subsidiary Acceptance Loan Company (ALC), filed this unaudited Form 10-Q for the quarter ended March 31, 2013. Unless otherwise stated, amounts below are in millions of dollars. The filing identifies United Security Bancshares, not First US Bancshares, Inc., as the registrant.
Financial performance and position
- Earnings: Net income was $0.886 million, or $0.15 per share, versus a $1.237 million net loss, or $(0.21) per share, in Q1 2012. Pretax income was $1.230 million versus a $2.219 million loss.
- Interest income and margin: Interest income fell 14.1% to $8.594 million; interest expense fell 46.0% to $0.789 million. Net interest income declined 8.7% to $7.805 million. Net interest margin increased to 6.07% from 6.01%.
- Other income and expenses: Non-interest income rose 27.4% to $1.623 million, including a $0.484 million mortgage-backed pool prepayment penalty. Non-interest expense fell 21.7% to $7.692 million, primarily because OREO impairment expense dropped to $0.197 million from $2.834 million.
- Credit costs: The loan-loss provision was $0.506 million, down from $2.215 million. Net charge-offs were approximately $3.0 million, or 3.4% annualized of average loans. The allowance was $16.793 million, 5.0% of loans net of unearned interest, versus $19.278 million and 5.4% at year-end.
- Cash flow and liquidity: Operating cash flow was $6.534 million; investing activities provided $10.429 million and financing activities used $2.490 million. Cash and cash equivalents ended at $68.599 million, up from $54.126 million at year-end. Deposits were $486.782 million, down 0.5% from year-end.
- Balance sheet and funding: Total assets were $564.639 million, down $2.494 million from year-end; shareholders’ equity was $69.002 million. Net loans were $321.007 million, versus $337.400 million at year-end. Short-term borrowings were $0.399 million; no long-term debt or FHLB advances were outstanding. Available borrowing capacity included $169.4 million from the FHLB and $17.8 million in correspondent-bank federal funds lines.
Material changes and operating trends
- Profitability turned positive year over year, chiefly reflecting materially lower OREO impairment and loan-loss provisions, along with higher non-interest income. ALC’s net income declined to $0.123 million from $0.187 million, primarily due to increased losses on OREO sales.
- Loan and investment yields and average balances reduced interest income. Lower deposit and borrowing costs partly offset this pressure. Management said loan demand remained weak and expected difficult economic conditions and lender competition to constrain loan growth.
- Non-performing assets were $35.359 million, or 10.10% of net loans and OREO, compared with $38.475 million and 10.40% at year-end. Nonaccrual loans declined to $21.114 million, while accruing loans 90 days or more past due increased to $1.863 million. OREO was $12.382 million.
- Real-estate-secured loans represented 71.5% of the portfolio. Substandard FUSB loans were $61.478 million at quarter-end, versus $65.403 million at year-end. Allowance coverage of non-performing assets declined to 47.5% from 50.1%.
- Accumulated other comprehensive income fell $0.531 million, principally reflecting unrealized losses on available-for-sale securities. Comprehensive income was $0.354 million.
Outlook, risks and contingencies
- No quantified earnings or growth guidance was provided. Management expected net interest margin to remain near current levels until Federal Reserve rate changes; it also cautioned that weak economic conditions and real-estate values could hinder loan growth and reduction of non-performing assets.
- Management warned that further OREO impairment and losses could occur if the economy remained weak or property values declined. Loan-loss allowances rely on estimates of economic conditions, borrower finances and collateral values; adverse changes could require additional provisions.
- The company reported a $8.8 million net deferred tax asset and established no valuation allowance despite a three-year cumulative loss position. Realization depends in part on projected future taxable income; management noted there was no assurance those projections would be achieved.
- Litigation included a continuing ALC contract and unjust-enrichment case, an appeal of a judgment in the Bank’s favor in a mortgage-related case, and a former employee complaint pending before an administrative law judge. The filing said outcomes of certain matters were too early to assess; management considered other litigation not likely to have a material adverse effect.
- The company and Bank reported compliance with regulatory capital requirements, but specific capital ratios are not provided in the supplied filing text. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether continued loan contraction and weak local demand pressure future interest income and net interest margin.
- Trends in nonaccrual, past-due, impaired, restructured and substandard loans, especially real-estate development exposures, and adequacy of the allowance after charge-offs.
- OREO sale proceeds, realized losses and further impairment, given the substantial decline in impairment charges that supported the year-over-year earnings improvement.
- Whether projected taxable income supports realization of the $8.8 million deferred tax asset.
- Developments in the pending litigation and any resulting financial exposure; also confirm regulatory capital ratios, which are not clearly stated in the supplied text.