Business context and reporting period
United Security Bancshares, Inc. (USBI), parent of First US Bank, filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2016. Its businesses include commercial banking through First US Bank and consumer lending through Acceptance Loan Company (ALC). Dollar amounts below are in millions unless otherwise stated. The filing names United Security Bancshares, Inc.; this differs from the company name in the request metadata.
Financial performance and position
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net interest income | $6.92 | $7.17 | $13.58 | $13.88 |
| Provision for loan losses | $0.54 | $0.05 | $0.70 | $(0.12) reduction |
| Non-interest income | $1.48 | $1.07 | $2.47 | $2.36 |
| Non-interest expense | $7.26 | $7.11 | $14.32 | $14.08 |
| Net income | $0.46 | $0.77 | $0.78 | $1.61 |
| Diluted earnings per share | $0.07 | $0.12 | $0.12 | $0.25 |
For the six-month period, net interest yield on earning assets was 5.15%, versus 5.29% a year earlier; the second-quarter figures were 5.19% and 5.47%, respectively. The six-month effective tax rate was 23.9%, compared with 29.2%.
At June 30, 2016, total assets were $601.8 million, loans net of allowance were $298.9 million, deposits were $495.6 million, and shareholders’ equity was $78.5 million (13.1% of assets). Cash and cash equivalents were $42.7 million. Short-term borrowings were $5.4 million and long-term debt was $15.0 million, both principally FHLB advances. The allowance for loan losses was $3.6 million.
Six-month operating cash flow was $3.1 million; investing activities used $28.6 million and financing activities provided $24.1 million. Cash and cash equivalents declined $1.3 million from year-end 2015. Net loans grew $43.5 million, or 17.0%, from December 31, 2015; deposits grew $16.4 million. Investment securities declined to $213.2 million from $231.2 million.
Material changes versus comparable periods
- Net income fell 40% in Q2 and 52% for the first six months, primarily because loan-loss provisions increased as credit-quality improvement moderated and the loan portfolio grew.
- Six-month net interest income declined $0.3 million. Lower yields on Bank loans and investments outweighed higher interest income at ALC; interest expense declined $0.1 million.
- Non-interest income rose $0.1 million for the half-year, including increased credit insurance and ancillary-service income. Securities-sale gains were approximately $0.4 million in each comparable six-month period.
- Non-interest expense increased $0.2 million for the half-year, mainly from information-technology costs, partly offset by lower real-estate and foreclosure expense.
- Nonperforming assets declined to $8.0 million (1.33% of assets) from $9.1 million (1.59%) at year-end 2015. Nonaccrual loans were $2.6 million and other real estate owned was $5.4 million.
Outlook, commentary, risks and unusual items
Management described continued loan-growth efforts, focused on commercial lending in the Birmingham and Tuscaloosa markets and point-of-sale consumer lending at ALC. It expects quality loan growth to support net interest income, but noted pressure from competition, low reinvestment yields and limited scope to reduce funding costs. No quantified earnings or financial guidance was provided.
The Bank opened a Mountain Brook loan production office in Q2. It planned construction of a 40,000-square-foot Birmingham-area office complex beginning in Q3 2016, with operations expected in the second half of 2017; about 25% of the space was expected to be used by the Bank and the remainder leased. Six-month premises-and-equipment additions were $3.6 million, largely related to land for expansion. The Bank permanently closed its Brent office on July 29, 2016 and anticipated additional branch closures in the third and fourth quarters.
Credit risks include concentration in real-estate lending in a single geographic region, sensitivity to local property values and consumer-loan charge-offs at ALC. ALC recorded $1.2 million of net charge-offs for the first half. Management considered the allowance adequate but cautioned that estimates are imprecise and future economic or local conditions could affect credit quality. The filing reports $45.4 million of commitments to extend credit and $0.2 million of standby letters of credit. Ordinary-course litigation was not expected by management to have a material adverse effect.
The Bank entered a seven-year, $10 million cash-flow hedge in April, paying a fixed 1.46% rate against three-month LIBOR on an FHLB advance. Management expected $68,000 of accumulated hedge losses to be reclassified as additional interest expense over the next 12 months. 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
- Confirm the filing entity and relationship to First US Bank: the 10-Q registrant is United Security Bancshares, Inc.
- Track whether loan growth is sustained without weakening underwriting, and monitor ALC consumer-loan delinquencies, charge-offs and reserve needs.
- Assess the effect of lower loan and investment yields, the new FHLB borrowing and interest-rate exposure on net interest income and funding costs.
- Review execution, costs, leasing assumptions and timing for the Birmingham-area office project, alongside planned branch closures.
- Monitor liquidity and funding capacity, including reliance on deposits and secured FHLB facilities, and the realization of investment-securities values.