UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2003
Commission File Number: 0-14549
United Security Bancshares, Inc.
(Exact name of registrant as specified in its
charter)
Delaware 63-0843362
(State or other jurisdiction of (IRS Employer Iden-
incorporation or organization) tification No.)
131 West Front Street
Post Office Box 249
Thomasville, AL 36784
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code:
(334) 636-5424
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the Exchange Act).
Yes X No
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest
practicable date.
Class Outstanding at 6/30/03
Common Stock, $0.01 par value 6,432,274 shares
UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
PAGE
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Statements of Financial
Condition at June 30, 2003, and December 31,
2002 3
Condensed Consolidated Statements of Income
for the Three and Six Months Ended June 30,
2003, and 2002 4
Condensed Consolidated Statements of Cash Flows
for the Six Months Ended June 30, 2003, and
2002 5
Notes to Condensed Consolidated Financial
Statements 6
The Condensed Consolidated Financial Statements
Furnished Have Not Been Audited by Independent
Public Accountants, but Have Been Reviewed by
Our Independent Auditor, and Reflect, in the
Opinion of Management, all Adjustments Necessary
for a Fair Presentation of Financial Condition
and the Results of Operations for the Periods
Presented
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS 13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 17
ITEM 4. CONTROLS AND PROCEDURES 17
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS 18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 18
SIGNATURE PAGE 19
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in Thousands)
ASSETS
June 30, December 31,
2003 2002
(Unaudited)
Cash and Due from Banks $ 12,599 $ 11,576
Interest-Bearing Deposits in Banks 5,201 5,166
Securities Available for Sale 134,123 134,530
Loans, net of allowances for loan
losses of $6,536 and $6,623
respectively 353,997 351,434
Premises and Equipment, net 11,257 10,834
Accrued Interest Receivable 4,474 4,353
Investment in Limited Partnerships 3,658 3,874
Other Assets 16,507 13,551
Total Assets $541,816 $535,318
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $367,608 $353,100
Short-Term Borrowings 2,349 2,391
Long-Term Debt 95,814 105,874
Other Liabilities 6,703 6,921
Total Liabilities $472,474 $468,286
Shareholders' Equity:
Common stock, par value $0.01 per
share; 10,000,000 shares authorized;
7,317,560 and 7,313,460
issued, respectively 73 73
Surplus 9,233 9,159
Accumulated other comprehensive
income 1,369 1,860
Retained Earnings 69,416 66,689
Less Treasury Stock: 885,286
and 885,286 shares, at cost,
respectively (10,749) (10,749)
Total Shareholders' Equity 69,342 67,032
Total Liabilities and
Shareholders' Equity $541,816 $535,318
The accompanying notes are an integral part of these
consolidated statements.
UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands, Except per Share Data)
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
(Unaudited) (Unaudited)
INTEREST INCOME:
Interest and
Fees on Loans $ 9,844 $ 9,317 $ 19,382 $ 18,462
Interest on
Securities 1,562 1,914 3,130 4,010
Total Interest
Income 11,406 11,231 22,512 22,472
INTEREST EXPENSE:
Interest on
Deposits 1,858 2,402 3,823 4,984
Interest on
Borrowings 1,020 1,034 2,103 2,087
Total Interest
Expense 2,878 3,436 5,926 7,071
NET INTEREST INCOME 8,528 7,795 16,586 15,401
PROVISION FOR LOAN
LOSSES 1,007 1,172 1,998 2,008
Net Interest Income
After Provision For
Loan Losses 7,521 6,623 14,588 13,393
NONINTEREST INCOME:
Service and Other
Charges on Deposit
Accounts 817 684 1,608 1,326
Other Income 564 539 1,016 863
Securities gains
(losses), net 3 39 72 130
Total Noninterest
Income 1,384 1,262 2,696 2,319
NONINTEREST EXPENSES:
Salaries and Employee
Benefits 3,192 2,819 6,263 5,835
Occupancy Expense 331 332 671 666
Furniture and
Equipment Expense 328 336 665 676
Other Expenses 1,434 1,407 2,770 2,575
Total Noninterest
Expense 5,285 4,894 10,369 9,752
INCOME BEFORE
INCOME TAXES 3,620 2,991 6,915 5,960
PROVISION FOR INCOME
TAXES 1,110 834 2,065 1,674
NET INCOME 2,510 2,157 4,850 4,286
BASIC NET INCOME
PER SHARE $0.39 $0.33 $0.75 $0.65
DILUTED NET INCOME
PER SHARE $0.39 $0.33 $0.75 $0.65
DIVIDENDS PER SHARE $0.17 $0.15 $0.33 $0.30
The accompanying notes are an integral part of these
Consolidated Statements.
UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
June 30,
2003 2002
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 4,850 $ 4,286
Adjustments:
Depreciation 464 526
Amortization of Premiums and Discounts, net 554 85
Provision for Losses on Loans 1,998 2,008
Gain on sale of securities, net (72) (130)
Changes in Assets and Liabilities:
Increase in Other Assets (2,682) (320)
Decrease in Other Liabilities (81) (1,238)
Total Adjustments 181 931
Net Cash Provided by Operating
Activities 5,031 5,217
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from Maturities/Call and Paydowns
Of Securities Available for Sale 40,554 35,355
Proceeds from Sales of Securities 16,339 0
Purchase of Insurance (168) 0
Purchase of Property and Equipment, Net (899) (1,081)
Purchase of Securities Available for Sale (58,426) (40,384)
Redemption of Federal Funds Sold 829 1,000
Net Increase in Loans (4,560) (5,376)
Net Cash Used in Investing Activities (6,331) (10,486)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in Customer Deposits,
Net 14,508 (1,561)
Exercise of Stock Options 74 164
Dividends Paid (2,123) (1,957)
Purchase of Treasury Stock 0 (4,383)
Increase in Borrowings, net (10,101) 3,921
Net Cash Provided by (Used in) Financing
Activities 2,358 (3,816)
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 1,058 (9,085)
CASH AND CASH EQUIVALENTS, beginning
of period 16,742 23,973
CASH AND CASH EQUIVALENTS, end of period 17,800 14,888
The accompanying notes are an integral part of these
Consolidated statements.
UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
The accompanying unaudited condensed consolidated financial
statements as of June 30, 2003, and 2002, include the
accounts of United Security Bancshares, Inc. and its
subsidiaries (the "Company"). All significant inter-
company transactions and accounts have been eliminated.
The interim financial statements are unaudited but, in
the opinion of management, reflect all adjustments
necessary for a fair presentation of financial position
and results of operations for such periods presented. Such
adjustments are of a normal, recurring nature. The results
of operations for any interim period are not necessarily
indicative of results expected for the fiscal year ending
December 31, 2003. While certain information and footnote
disclosures normally included in financial statements
prepared in accordance with accounting principles generally
accepted in the United States have been condensed or omitted
pursuant to the rules and regulations of the Securities and
Exchange Commission, management believes that the
disclosures herein are adequate to make the information
presented not misleading. These financial statements
should be read in conjunction with the consolidated
financial statements and notes thereto contained in the
Annual Report on Form 10-K for the year ended December 31,
2002, of United Security Bancshares, Inc. and Subsidiaries.
The accounting policies followed by United Security
Bancshares, Inc. ("USB") are set forth in the summary
of significant accounting policies in USB's December 31,
2002, consolidated financial statements.
2. NET INCOME PER SHARE
Basic net income per share was computed by dividing net
income by the weighted average number of shares of common
stock outstanding during the three and six-month periods
ended June 30, 2003, and 2002. Common stock outstanding
consists of issued shares less treasury stock. Diluted net
income per share for the three and six-month periods ended
June 30, 2003, and 2002, were computed by dividing net
income by the weighted average number of shares of common
stock and the dilutive effects of the shares awarded under
the Company's Stock Option Plan, based on the treasury stock
method using an average fair market value of the stock during
the respective periods.
On June 19, 2003, The Board of Directors declared a two-for-one
stock split payable on July 22, 2003, to shareholders of record
at the close of business on June 30, 2003. As a result of the
stock split, shareholders of record will receive one additional
share for every share currently held. All periods have been
presented and restated reflecting the stock split for
comparative purposes.
The following table represents the earnings per share
calculations for the three and six-month periods ended
June 30, 2003, and 2002:
Net
Income
Net Per
For the Three Months Ended Income Shares Share
June 30, 2003(dollars in
thousands):
Net Income $2,510
Basic Net Income Per Share $2,510 6,432,274 $0.39
Dilutive Securities 0 0
Dilutive Earnings Per Share 2,510 6,432,274 $0.39
June 30, 2002:
Net Income $2,157
Basic Net Income Per Share $2,157 6,536,151 $0.33
Dilutive Securities 0 0
Dilutive Earnings Per Share 2,157 6,536,151 $0.33
Net
Income
Net Per
For the Six Months Ended Income Shares Share
June 30, 2003(dollars in
thousands):
Net Income $4,850
Basic Net Income Per Share $4,850 6,431,119 $0.75
Dilutive Securities 0 0
Dilutive Earnings Per Share 4,850 6,431,119 $0.75
June 30, 2002:
Net Income $4,286
Basic Net Income Per Share $4,286 6,581,931 $0.65
Dilutive Securities 0 0
Dilutive Earnings Per Share 4,286 6,581,931 $0.65
3. COMPREHENSIVE INCOME
Comprehensive income is a measure of all changes in equity
of an enterprise that result from transactions and other
economic events of the period. Pursuant to Statement of
Financial Accounting Standards ("SFAS") No. 115, any
unrealized gain or loss activity of available for sale
securities is to be recorded as an adjustment to a separate
component of shareholders' equity, net of income tax effect.
This change in unrealized gain serves to increase or
decrease comprehensive income. The following table
represents comprehensive income and its changes for
the three and six-month periods ended June 30, 2003, and
2002:
Three Months Six Months
Ended Ended
June 30, June 30,
2003 2002 2003 2002
Net Income $2,510 $2,157 $4,850 $4,286
Other Comprehensive
Income, Net of Tax:
Change in Unrealized
Gain (loss) on
Derivative
Instruments (Net of
Tax of $45, $34,
$53, and $103
respectively) (83) 63 (99) 192
Change in Unrealized
Gain on securities
Available For Sale
(Net of Tax of $72,
$574, $211, and
$440 respectively). (133) 1,066 (392) 818
Comprehensive Income $2,294 $3,286 $4,359 $5,296
4. RECENT ACCOUNTING PRONOUNCEMENTS
In April 2002, the Company adopted FASB Statement of Financials
Accounting Standards No. 145, "Recission of FASB Statements No.
4,44, and 64, Amendment of FASB Statement No. 13 and Technical
Corrections" (Statement 145). Statement 145 rescinds Statement
4, which requires all gains and losses from extinguishment of
debt to be aggregated and, if material, classified as an
extraordinary item, net of related income tax effect. Provisions
of Statement 145 related to the recission of Statement 4 were
effective for financial statements issued after January 1, 2003.
The adoption of the provisions of Statement 145 did not have a
material impact on the results of operations, financial position
or liquidity of the Company.
In July 2002, the FASB issued Statement of Financial Accounting
Standards No. 146, "Accounting for Cost Associated with Exit or
Disposal Activities" (Statement 146). Statement 146 requires
companies to recognize costs associated with the exit or disposal
of activities as they are incurred rather than at the date a plan
of disposal or commitment to exit is initiated. Types of costs
covered by Statement 146 include lease termination costs and
certain employee severance costs that are associated with a
restructuring, discontinued operation, facility closing, or other
exit or disposal activity. Statement 146 will apply to all exit
or disposal activities initiated after December 31, 2002. The
adoption of the provisions of Statement 146 did not have a
material impact on the Company's financial condition or results
of operations.
In November 2002, the FASB issued Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of
Others" (Interpretation 45). Interpretation 45 requires certain
guarantees to be recorded at fair value. In general,
Interpretation 45 applies to contracts or indemnification
agreements that contingently require the guarantor to make
payments to the guaranteed party based on changes in an
underlying that is related to an asset, liability, or an equity
security of the guaranteed party. The initial recognition and
measurement provisions of Interpretation 45 are applicable on a
prospective basis to guarantees issued or modified after December
31, 2002. Interpretation 45 also requires new disclosures, even
when the likelihood of making any payments under the guarantee is
remote. These disclosure requirements are effective for
financial statements of interim or annual periods ending after
December 15, 2002. The adoption of Interpretation No. 45 did not
have a material impact on the Company's financial results. As of
June 30, 2003 the Company had standby letters of credit
outstanding totaling approximately $852,000 compared to $843,000
at December 31, 2002, and commitments to extend credit of
approximately $16 million compared to $22 million at December 31,
2002.
In January 2003, the FASB issued Interpretation No. 46,
"Consolidation of Variable Interest Entities, an Interpretation
of ARB No. 51" (Interpretation 46). Interpretation 46 addresses
consolidation by business enterprises of variable interest
entities which have one or both of the following characteristics:
(1) The equity investment at risk is not sufficient to permit the
entity to finance its activities without additional support from
other parties, which is provided through other interests that
will absorb some or all of the expected losses of the entity.
(2) The equity investors lack one or more of the following
essential characteristics of a controlling financial interest:
(a) the direct or indirect ability to make decisions about the
entity's activities through voting rights or similar rights, (b)
the obligation to absorb the expected losses of the entity if
they occur, which makes it possible for the entity to finance its
activities, or (c) the right to receive the expected residual
returns of the entity if they occur, which is the compensation
for the risk of absorbing expected losses. Interpretation 46
does not require consolidation by transferors to qualifying
special purpose entities. Interpretation 46 applies immediately
to variable interest entities created after January 31, 2003, and
to variable interest entities in which an enterprise obtains an
interest after that date. It applies in the first fiscal year or
interim period beginning after June 15, 2003, to variable
interest entities in which an enterprise holds a variable
interest that it acquired before February 1, 2003. The Company
is currently assessing the impact of Interpretation No. 46 and
has identified limited partnership investments in affordable
housing projects that are considered variable interest. The
company has provided funding as a limited partner and receives
tax credit for any losses incurred by the projects based on
partnership share. At June 30, 2003, the Company has
approximately $3.7 million associated with these investments.
The Company adjusts the carrying value of these investments for
any losses or impairment incurred by the partnerships through
earnings. Although these investments are considered variable
interest entities under Interpretation 46, the Company has not
yet determined how many of these entities, if any, will need to
be consolidated.
5. SEGMENT REPORTING
Under SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information, certain information
is disclosed for the two reportable operating segments
of the Company, First United Security Bank ("FUSB"),
and Acceptance Loan Company, Inc. ("ALC"). The
reportable segments were determined using the internal
management reporting system. They are composed of the
Company's significant subsidiaries. The accounting
policies for each segment are the same as those used
by the Company as described in Note 2 of the Company's
annual consolidated financial statements, Summary of
Significant Accounting Policies. The segment results
include certain overhead allocations and intercompany
transactions that were recorded at current market
prices. All intercompany transactions have been
eliminated to determine the consolidated balances. The
results for the two reportable segments of the Company
are included in the following table:
All Elimi- Consol-
FUSB ALC Other nations idated
For the three
months ended
June 30, 2003:
Net Interest
Income $ 5,514 $ 2,986 $ 28 $ 0 $ 8,528
Provision for
Loan Losses 420 587 0 0 1,007
Total Noninterest
Income 1,170 120 2,829 (2,735) 1,384
Total Noninterest
Expense 3,405 1,703 279 (102) 5,285
Income(Loss)
Before Income
Taxes 2,859 816 2,578 (2,633) 3,620
Provision
(Benefit) for
Income Taxes 853 253 4 0 1,110
Net Income(Loss) $2,006 $ 563 $2,574 $ (2,633) $ 2,510
For the six
months ended
June 30, 2003:
Net Interest
Income $ 10,792 $ 5,736 $ 58 $ 0 $ 16,586
Provision for
Loan Losses 769 1,229 0 0 1,998
Total Noninterest
Income 2,345 219 5,361 (5,229) 2,696
Total Noninterest
Expense 6,729 3,355 480 (195) 10,369
Income(Loss)
Before Income
Taxes 5,639 1,371 4,939 (5,034) 6,915
Provision
(Benefit) for
Income Taxes 1,646 414 5 0 2,065
Net Income(Loss) $3,993 $ 957 $4,934 $ (5,034) $ 4,850
Other Significant
Items:
Total Assets $537,938 $99,867 $71,736 $(167,725) $541,816
Total Investment
Securities 132,747 0 1,376 0 134,123
Total Loans 354,844 94,232 0 (95,079) 353,997
Investment in
Wholly-Owned
Subsidiaries 2,718 110 65,886 (68,604) 110
Total Interest
Income from
External
Customers 13,638 8,835 39 0 22,512
Total Interest
Income from
Affiliates 3,099 0 19 (3,118) 0
All Elimi- Consol-
FUSB ALC Other nations idated
For the Three
Months Ended
June 30, 2002:
Net Interest
Income $ 5,232 $ 2,512 $ 51 $ 0 $ 7,795
Provision for
Loan Losses 515 657 0 0 1,172
Total Noninterest
Income 993 218 2,452 (2,401) 1,262
Total Noninterest
Expense 3,054 1,706 227 (93) 4,894
Income (loss)
Before Income
Taxes (tax
benefit) 2,656 367 2,276 (2,308) 2,991
Provision for
Income Taxes
(tax benefit) 726 103 5 0 834
Net Income
(loss) $ 1,930 $ 264 $ 2,271 $ (2,308) $ 2,157
For the Six
Months Ended
June 30, 2002:
Net Interest
Income $ 10,392 $ 4,907 $ 102 $ 0 $ 15,401
Provision for
Loan Losses 854 1,154 0 0 2,008
Total Noninterest
Income 2,060 185 4,765 (4,691) 2,319
Total Noninterest
Expense 6,191 3,321 426 (186) 9,752
Income (loss)
Before Income
Taxes (tax
benefit) 5,407 617 4,441 (4,505) 5,960
Provision for
Income Taxes
(tax benefit) 1,492 173 9 0 1,674
Net Income
(loss) $ 3,915 444 4,432 (4,505) 4,286
Other Significant
Items:
Total Assets $521,481 $79,703 $66,503 $(144,034)$523,653
Total Investment
Securities 142,491 0 2,734 0 145,225
Total Loans 343,480 75,366 0 (82,484) 336,362
Total Interest
Income from
External
Customers 14,574 7,821 77 0 22,472
Total Interest
Income from
Affiliates 2,914 0 25 (2,939) 0
Investment in
Wholly-Owned
Subsidiaries (1,874) 0 60,642 (58,768) 0
6. DERIVATIVE FINANCIAL INSTRUMENTS
The Bank's principal objectives in holding derivative
financial instruments is asset/liability management.
The operations of the Bank are subject to a risk of
interest rate fluctuations to the extent that there
is a difference between the amount of the Bank's
interest-earning assets and the amount of interest-
bearing liabilities that mature or reprice in specified
periods. The principal objective of the Bank's asset-
liability management activities is to provide maximum
levels of net interest income while maintaining
acceptable levels of interest rate and liquidity risk
and facilitating the funding needs of the Bank. To
achieve that objective, the Bank uses a combination of
derivative financial instruments, including interest
rate swaps and caps.
All derivatives are recognized on the balance sheet at
their fair value. On the date the derivative contract
is entered into, the Company designates the derivative
as (1) a hedge of the fair value of a recognized asset
or liability or of an unrecognized firm commitment
("fair value" hedge), (2) a hedge of a forecasted
transaction or of the variability of cash flows to be
received or paid related to a recognized asset or
liability ("cash flow" hedge), or (3) "hold for trading"
("trading" instruments). Changes in the fair value of
a derivative that is highly effective as, and that is
designated and qualifies as, a fair value hedge, along
with the loss or gain on the hedged asset or liability
that is attributable to the hedge risk (including losses
or gains on firm commitments), are recorded in current-
period earnings. Changes in the fair value of a derivative
that is highly effective as, and that is designated and
qualified as, a cash flow hedge are recorded in other
comprehensive income, until earnings are affected by the
variability of cash flows (e.g., when periodic settlements
on a variable-rate asset or liability are recorded in
earnings). Changes in the fair value of derivative
trading instruments are reported in current-period
earnings.
The Company formally documents all relationships between
hedging instruments and hedged items, as well as its
risk-management objective and strategy for undertaking
various hedge transactions. This process includes
linking all derivatives that are designated as fair-value
or cash-flow hedges to specific assets and liabilities on
the balance sheet or to specific firm commitments or
forcasted transactions. The Company also formally
assesses, both at the hedge's inception and on an
ongoing basis, whether the derivatives that are used in
hedging transactions are highly effective in offsetting
changes in fair values or cash flows of hedged items.
When it is determined that a derivative is not highly
effective as a hedge or that it has ceased to be a highly
effective hedge, the Company discontinues hedge accounting.
An interest rate swap is an agreement in which two parties
agree to exchange, at specified intervals, interest
payment streams calculated on an agreed-upon principal
amount with at least one stream based on a specified
floating-rate index. Interest rate swaps are used by the
Bank to effectively convert floating-rate debt with a
three-month LIBOR rate index to a fixed rate constant maturity
treasury index.
As required under SFAS No. 133, hedge ineffectiveness of these
cash flow hedges will be reclassified into earnings based on the
extent to which changes in the value of designated hedge
instruments do not effectively offset changes in the value of
hedged items. The extent of hedge effectiveness is influenced
by a number of factors, including interest rate volatility,
hedge performance, and correlation. There were no gains
or losses, which were reclassified from OCI to other
income or expense as a result of the discontinuance of
cash flow hedges related to certain forecasted trans-
actions that are probable of not occurring. The maturity of the
interest rate swaps varies from one to two years.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis are presented to aid in an
understanding of the current financial position and results of
operations of United Security Bancshares, Inc. ("United
Security" or the "Company"). United Security is the parent
holding company of First United Security Bank (the "Bank").
The Bank operates a finance company, Acceptance Loan Company
("ALC"). United Security has no operations of any consequence
other than the ownership of its subsidiaries.
The accounting principles followed by the Company and the methods
of applying these principles conform with generally accepted
accounting principles in the United States and with general
practices within the banking industry. Critical accounting
policies relate to securities, loans, allowance for loan losses,
derivatives and hedging. A description of these policies, which
significantly affect the determination of financial position,
results of operations and cash flows, are set forth in the
summary of significant accounting policies in United Security's
December 31, 2002, consolidated financial statements.
The emphasis of this discussion is a comparison of Assets,
Liabilities, and Stockholders' Equity as of June 30, 2003, to
year-end 2002, while comparing income and expense for the three
and six-month periods ended June 30, 2003, and 2002.
All yields and ratios presented and discussed herein are not
presented on a tax-equivalent basis.
Interest income increased $175,000, or 1.6% to $11.4 million for
the second quarter of 2003 from $11.2 million for the second
quarter of 2002. Interest income increased $40,000, or .2% to
$22.5 million for the first six months of 2003 compared to $22.5
million for the first six months of 2002. This increase in
interest income is due mainly to increases in the volume of loans
outstanding offset by both a decrease in the volume of
investment securities and also a decrease in yield on these
securities.
Interest expense decreased $558,000, or 16.2% to $2.9 million for
the second quarter of 2003 from $3.4 million for the second
quarter of 2002. Interest expense decreased $1.1 million, or
16.2% to $5.9 million for the first six months of 2003 compared
to $7.1 million for the first six months of 2002. The decrease in
interest expense was due to an overall decrease in the average
rate paid for both deposits and borrowings, which offset
increases in the volume of both deposits and borrowings, during
the same period.
Net interest income increased $733,000, or 9.4% for the second
quarter of 2003 and $1.2 million, or 7.7% for the first six
months of 2003 as a result of an improvement of a 35 basis point
net yield on earning assets, resulting from a decrease in the
cost of interest-bearing deposits and a decrease in the cost
of borrowed funds, offset by an increase in the volume of
borrowed funds.
The provision for loan losses was $1.0 million or 1.13%
annualized of average loans in the second quarter of 2003,
compared to $1.2 million or 1.37% annualized of average loans in
the second quarter of 2002. The loan loss provision decreased
slightly compared to the prior year due to the decreased charge-
offs at the finance company subsidiary. For the first six months
of 2003, the provision for loan losses decreased slightly to $2.0
million or 1.12% annualized of average loans, compared to $2.0
million or 1.50% annualized of average for the first six months
of 2002.
Total non-interest income increased $122,000, or 9.7% to $1.4
million for the second quarter of 2003 from $1.3 million for the
second quarter of 2002. Total non-interest income increased to
$2.7 million for the first six months of 2003. This was
attributable to an increase in the service charges on deposits.
Total non-interest expense increased $391,000, or 8.0% for the
second quarter of 2003 to $5.3 million from $4.9 million. Total
non-interest expense increased $617,000 for the first six months
of 2003 compared to 2002. The increase is a result of higher
salaries and benefits costs associated with the opening of a new
branch office in the third quarter of 2002, higher benefit costs,
and normal merit increases.
Income tax expense increased $276,000 or 33% during the second
quarter of 2003 as compared to the same period a year ago. Income
tax expense increased $391,000 or 23% over the first six months
of 2002. The increase during the first six months of 2003
compared to 2002 resulted from higher levels of taxable income.
United Security's effective tax rate for the first six months of
2003 and 2002 were 29.9% and 28.1%, respectively as the Company
continues to realize tax benefits primarily from tax-exempt
securities and low income housing tax credits.
For the second quarter, net income increased $353,000, or 16%,
resulting in an increase of basic net income per share to $0.39.
For the first six months, net income increased $564,000, or 13%,
resulting in an increase of basic net income per share to $.75.
Annualized return on assets was 1.79% compared to 1.63% for the
same period during 2002. Average return on stockholders' equity
increased to 14.32% from 13.36%.
COMPARING THE JUNE 30, 2003, STATEMENT OF FINANCIAL
CONDITION TO DECEMBER 31, 2002
In comparing financial condition at December 31, 2002, to
June 30, 2003, total assets increased $6.5 million to $541.8
million, while liabilities increased $4.2 million to $472.5
million. Shareholders' equity increased $2.3 million as a
result of earnings in excess of dividends during the first
six months of 2003.
Investment securities slightly decreased $407,000 during the
first six months of 2003. Investments provide United Security
with a stable form of liquidity while maximizing earnings yield.
Loans, net of unearned income increased $2.6 million, or 1%
during the first six months of 2003 as result of continued
construction and real estate development in the trade areas
served by United Security. Deposits increased 14.5 million or 4%
during the first six months of 2003 as result of an increase in
both interest and non-interest bearing products.
CREDIT QUALITY
At June 30, 2003, the allowance for loan losses was $6.5 million,
or 1.83% of loans net of unearned income, compared to $6.0
million, or 1.76% of loans net of unearned income at June 30,
2002 and $6.6 million, or 1.85% of loans net of unearned income
at December 31, 2002. The coverage ratio of the allowance for
loan losses to non-performing assets increased to 82.62% at June
30, 2003, compared to 73.94% at December 31, 2002, primarily as a
result of a decrease in non-accrual loans during the first six
months of 2003.
Activity in the allowance for loan losses is summarized as
follows (amounts in thousands):
Six Months
Ended
June 30,
2003 2002
Balance at Beginning of Period $6,623 $6,590
Charge-Offs 2,495 3,030
Recoveries (410) (468)
Net Loans Charged-Off 2,085 2,562
Additions Charged to Operations 1,998 2,008
Balance at End of Period $6,536 $6,036
Net charge-offs for the six months ended June 30, 2003, were $2.1
million or 1.17% of average loans, on an annualized basis, a
decrease of $477,000 from the $2.6 million or 1.51% annualized of
average loans reported a year earlier. The provision for loan
losses for the first six months of 2003 was $2.0 million compared
to $2.0 million in the first six months of 2002.
United Security maintains the allowance for loan losses at a
level deemed adequate by management to absorb possible losses
from loans in the portfolio. In determining the adequacy of the
allowance for loan losses, management considers numerous factors,
including but not limited to: (a) management's estimate of future
economic conditions, (b) management's estimate of the financial
condition and liquidity of certain loan customers, and (c)
management's estimate of collateral values of property securing
certain loans. Because all of these factors and others involve
the use of management's estimation and judgment, the allowance
for loan losses is inherently subject to adjustment at future
dates. At June 30, 2003, it is management's opinion that the
allowance for loan losses is adequate. However, unfavorable
changes in the factors used by management to determine the
adequacy of the allowance, including increased loan delinquencies
and subsequent charge-offs, or the availability of new
information, could require additional provisions, in excess of
normal provisions, to the allowance for loan losses in future
periods.
Non-performing assets were as follows (amounts in thousands):
June 30, Dec. 31, June 30,
2003 2002 2002
Loans Accounted for on a
Non-Accrual Basis $ 4,956 $ 6,228 $ 4,072
Accruing Loans Past Due
90 Days or More 461 1,433 1,614
Real Estate Acquired in
Settlement of Loans 2,859 1,296 1,600
Total $ 8,276 $ 8,957 $ 7,286
Non-Performing Assets as a
Percentage of Net Loans
and Other Real Estate 2.28% 2.49% 2.12%
Loans accounted for on a non-accrual basis decreased $1.3 million
since December 31, 2002. Accruing loans past due 90 days or
more decreased $972,000 from December 31, 2002. A significant
portion of this decrease resulted from the foreclosure of one
large commercial real estate loan and one large commercial loan
charged to the allowance for loan losses. A favorable settlement
was reached on another non-performing loan which was 100%
reserved which reduced the provision for loan losses in the
second quarter. Also, credit quality and performance of the
loan portfolio at the finance company subsidiary continues
to improve due to stricter underwriting standards. Real
estate acquired in settlement of loans increased $1.3 million
since June 30, 2002 and $1.6 million since December 31, 2002
as a result of the loan foreclosure mentioned above.
At June 30, 2003, the recorded investment in loans that were
considered impaired was $1,282,333 compared to $3,815,189 at
December 31, 2002, all of which were on a non-accrual basis.
There was approximately $192,350 and $573,161 at June 30, 2003
and December 31, 2002 respectively, in the allowance for loan
losses specifically allocated to these impaired loans.
LIQUIDITY AND CAPITAL RESOURCES
The Bank's primary sources of funds are customer deposits,
repayments of loan principal, and interest from loans and
investments. While scheduled principal repayments on loans and
mortgage-backed securities are a relatively predictable source of
funds, deposit flows and loan prepayments are greatly influenced
by general interest rates, economic conditions, and competition
making them less predictable. The Bank manages the pricing of its
deposits to maintain a desired deposit balance. In addition, the
Bank invests in short-term interest-earning assets, which provide
liquidity to meet lending requirements.
The Bank currently has up to $120.2 million in borrowing capacity
from the Federal Home Loan Bank and $30 million in established
Federal Funds Lines.
The Bank is required to maintain certain levels of regulatory
capital. At June 30, 2003, and December 31, 2002, United
Security and the Bank were in compliance with all regulatory
capital requirements.
Management is not aware of any condition that currently exists
that would have an adverse effect on the liquidity, capital
resources, or operation of United Security Bancshares, Inc.
However, the Company is a defendant in certain claims and legal
actions arising in the ordinary course of business. In the
opinion of management, after consultation with legal counsel, the
ultimate disposition of these matters is not expected to have a
material adverse effect on the financial position of the Company.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
The information set forth under the caption "Item 7.
Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Interest Rate Sensitivity
Management" included in the Corporation's Annual Report on Form
10-K for the year ended December 31, 2002, is hereby incorporated
herein by reference.
ITEM 4. CONTROLS AND PROCEDURES
As of June 30, 2003, the end of the quarter covered by this
report, the Company carried out an evaluation, under the
supervision and with the participation of management, including
the chief executive officer and the chief financial officer, of
the effectiveness of the design and operation of the Company's
disclosure controls and procedures (as defined in Exchange
Act Rules 13a-15(e) and 15d-15(e)). Based on that evaluation,
the chief executive officer and the chief financial officer
concluded that the Company's disclosure controls and procedures
were effective in timely alerting them to material information
relating to the Company required to be included in the
Company's periodic SEC filings.
There have been no changes in the Company's internal controls
over financial reporting during the most recent fiscal quarter
that have materially affected, or are reasonably likely to
materially affect, the Company's internal controls over financial
reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is a defendant in other certain claims and legal
actions arising in the normal course of business. In the opinion
of management, the ultimate disposition of these matters is not
expected to have a material adverse effect on the financial
position or results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 13, 2003 the Annual Meeting of Shareholders of the Company
was held at which shares of common stock represented at the
Annual Meeting were voted in favor of the directors listed below
as follows:
Director For Against
1. Dan R. Barlow 2,361,226 26,244
2. Linda H. Breedlove 2,351,231 36,239
3. Gerald P. Corgill 2,387,470 0
4. Wayne C. Curtis 2,360,323 27,147
5. John C. Gordon 2,387,470 0
6. William G. Harrison 2,383,255 4,215
7. Hardie B. Kimbrough 2,375,970 11,500
8. Jack W. Meigs 2,386,567 903
9. R. Terry Phillips 2,371,807 15,663
10. Ray Sheffield 2,361,226 26,244
11. James C. Stanley 2,387,470 26,244
12. Howard M. Whitted 2,387,470 0
13. Bruce N. Wilson 2,371,326 16,144
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 31.1: Certification of the Chief Executive
Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002, filed herewith.
Exhibit 31.2: Certification of the Chief Financial
Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002, filed herewith.
Exhibit 32: Certification of Chief Executive Officer
and Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as Created by Section 906 of the Sarbanes-
Oxley Act of 2002, filed herewith.
(b) Report on Form 8-K, dated April 18, 2003, was filed on
April 23, 2003, relating to the press release announcing
financial results for the quarter ended March 31, 2003.
Report on Form 8-K, dated June 20, 2003, was filed on
June 23, 2003, relating to the press release announcing
a 2-for-1 stock split payable to shareholders at close
of business June 30, 2003.
SIGNATURE PAGE
Pursuant to the requirements of the Securities Exchange
Act of 1934, the registrant has duly caused this report
to be signed on its behalf by the undersigned thereunto
duly authorized.
UNITED SECURITY BANCSHARES, INC.
DATE: August 13, 2003
BY: /s/ROBERT STEEN
ROBERT STEEN
Its Assistant Vice-President, Assistant Treasurer,
and Principal Accounting Officer
(Duly Authorized Officer and Principal Accounting
Officer)