Filing summary
Registrant and period: This 10-Q is for United Security Bancshares, Inc. and its subsidiaries, for the quarter ended March 31, 2014. The request identifies First US Bancshares, Inc.; that name does not match the registrant shown in the filing. United Security Bancshares is the parent of First United Security Bank and Acceptance Loan Company.
Financial results
| Metric | Q1 2014 / March 31, 2014 | Comparable period / prior year-end |
|---|---|---|
| Interest income | $7.846 million | $8.594 million in Q1 2013 |
| Net interest income | $7.201 million | $7.805 million in Q1 2013 |
| Net income; diluted EPS | $0.774 million; $0.13 | $0.886 million; $0.15 in Q1 2013 |
| Net cash from operating activities | $3.088 million | $6.534 million in Q1 2013 |
| Total assets | $575.7 million | $569.8 million at December 31, 2013 |
| Deposits | $490.2 million | $484.3 million at December 31, 2013 |
| Loans, net of unearned interest and fees | $285.3 million | $310.3 million at December 31, 2013 |
| Cash and cash equivalents | $60.0 million | $47.7 million at December 31, 2013 |
| Allowance for loan losses | $8.6 million; 3.00% of loans net of unearned income | $9.4 million; 3.03% at December 31, 2013 |
| Nonperforming assets | $19.3 million; 6.54% of net loans and OREO | $21.5 million; 6.74% at December 31, 2013 |
| Borrowings and long-term debt | $0.8 million short-term; $5.0 million long-term | $1.2 million short-term; $5.0 million long-term at December 31, 2013 |
| Shareholders’ equity | $71.4 million; book value $11.84 per share | $70.1 million; $11.63 per share at December 31, 2013 |
Changes and operating performance
- Net income fell about 13% year over year; return on average assets was 0.55% versus 0.63%, and return on average equity was 4.44% versus 5.22%.
- Net interest income declined 7.7% year over year. Management attributed lower interest income primarily to reduced average loan balances and a shift of funds into lower-yielding securities. The reported net yield declined to 5.49% from 5.98%; yield on earning assets was 5.98% versus 6.59%.
- Non-interest income decreased 29.3% to $1.147 million, mainly reflecting lower realized securities gains. Q1 2013 included an approximately $0.5 million nonrecurring fee related to early payoff of a mortgage-backed pool. Deposit service charges also declined.
- Non-interest expense fell 10.5% to $6.884 million, largely because other-real-estate and foreclosure expense dropped to $0.1 million from $0.9 million. The efficiency ratio nevertheless rose to 82.5% from 81.6%.
- Provision for loan losses was $0.414 million versus $0.506 million. Net charge-offs were $1.2 million, down from $3.0 million. Nonaccrual loans declined to $7.4 million from $10.6 million at year-end; total nonperforming assets also declined. OREO increased to $10.4 million from $9.3 million, including $2.3 million transferred from loans during the quarter.
- Loans contracted 8.1% from year-end, while deposits rose 1.2%; the loan-to-deposit ratio decreased to 56.5% from 62.1%. Core deposits were $400.9 million, or 81.8% of total deposits.
- Operating cash flow was $3.1 million. Cash increased $12.3 million during the quarter, supported by operating and investing cash flows and deposit growth.
Outlook, risks and contingencies
- No specific earnings or financial guidance was provided. Management said quality loan growth remains a focus and a challenge, and warned that net interest income may face pressure from competition for quality loans, lower securities reinvestment yields, and limited room to reduce funding costs.
- Management considered the allowance for loan losses adequate but emphasized that it relies on estimates and could prove insufficient if economic conditions, local real estate markets, or borrower credit quality deteriorate. The loan portfolio is concentrated in real estate lending, primarily in one U.S. region.
- Management cited continued uncertainty in local real estate markets; further declines could cause additional OREO write-downs and increased foreclosures and carrying costs. Securities had unrealized losses, attributed by management to interest rates; no other-than-temporary impairment was recorded.
- Regulatory total risk-based capital was 20.66%, above the 10% well-capitalized threshold. The Bank reported $167.7 million of available FHLB capacity and $18.8 million of correspondent-bank federal funds lines; the company said it complied with capital requirements.
- Two described lawsuits remain unresolved: a long-running dispute involving ALC’s alleged automobile-repossession sales arrangement, and a 2013 wrongful-foreclosure claim against the Bank. The filing says the outcomes are not yet clear for the ALC matter and that the Bank intends to defend the other claim. Commitments included $24.7 million to extend credit and $0.9 million in standby letters of credit.
- The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Investor verification points
- Confirm the intended company: the filing is for United Security Bancshares, Inc., not First US Bancshares, Inc.
- Review the sharp loan contraction and the drivers of weaker net interest income, including yields, loan balances, and asset mix.
- Assess credit trends and allowance adequacy alongside charge-offs, impaired and restructured loans, past-due loans, and OREO dispositions.
- Check whether lower non-interest income and reduced foreclosure costs are repeatable, particularly given the prior-year nonrecurring securities-related fee.
- Follow progress and potential exposure in the disclosed litigation, and verify current liquidity, capital, and borrowing availability.