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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 March 31, 2004
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 05/05/04
Common Stock, $0.01 par value 6,430,574 shares
UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
PAGE
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Statements of Financial
Condition at March 31, 2004, and December 31,
2003 4
Condensed Consolidated Statements of Income
for the Three Months Ended March 31, 2004, and
2003 5
Condensed Consolidated Statements of Cash Flows
for the Three Months Ended March 31, 2004, and
2003 6
Notes to Condensed Consolidated Financial
Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS 16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 20
ITEM 4. CONTROLS AND PROCEDURES 20
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 21
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 21
Signature Page 22
FORWARD-LOOKING STATEMENTS
Statements contained in this Quarterly Report on Form 10-Q that
are not historical facts are forward-looking statements (as
defined in the Private Securities Litigation Reform Act of 1995).
In addition, United Security Bancshares, Inc. ("Bancshares"),
through its senior management, from time to time makes forward-
looking public statements (as defined in the Private Securities
Litigation Reform Act of 1995) concerning its expected future
operations and performance and other developments. Such forward-
looking statements are necessarily estimates reflecting
Bancshares' best judgment based upon current information and
involve a number of risks and uncertainties, and various factors
could cause results to differ materially from those contemplated
by such forward-looking statements. Such factors could include
those identified from time to time in Bancshares' Securities and
Exchange Commission filings and other public announcements,
including the factors described in Bancshares' Annual Report on
Form 10-K for the year ended December 31, 2003. With respect to
the adequacy of the allowance for loan losses for Bancshares,
these factors include, but are not limited to, the rate of growth
in the economy and the relative strength and weakness in the
consumer and commercial credit sectors and in the real estate
markets. Forward-looking statements speak only as of the date
they are made, and Bancshares undertakes no obligation to revise
forward-looking statements to reflect circumstances or events
that occur after the dates the forward-looking statements are
made.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in Thousands)
ASSETS
March 31, December 31,
2004 2003
(Unaudited)
Cash and Due from Banks $ 9,884 $ 12,596
Interest-Bearing Deposits in Banks 2,985 48
Securities Available for Sale 141,463 139,104
Loans, net of allowances for loan
losses of $6,915 and $6,842,
respectively 375,744 379,736
Premises and Equipment, net 20,303 11,363
Cash Surrender Value of Bank Owned
Life Insurance 6,911 6,840
Accrued Interest Receivable 4,350 4,972
Investment in Limited Partnerships 2,219 2,980
Other Assets 10,871 9,548
Total Assets $574,730 $567,187
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $386,147 $387,680
Short-Term Borrowings 598 2,587
Long-Term Debt 99,726 95,755
Other Liabilities 11,876 7,836
Total Liabilities $498,347 $493,858
Shareholders' Equity:
Minority Interest 431 0
Common Stock, par value $0.01 per
share; 10,000,000 shares
authorized; 7,317,560 and 7,317,560
shares issued,
respectively 73 73
Surplus 9,233 9,233
Accumulated other comprehensive
income 1,377 977
Retained Earnings 76,065 73,794
Less Treasury Stock: 886,986 and
885,286 shares at cost,respectively (10,796) (10,748)
Total Shareholders' Equity 76,383 73,329
Total Liabilities and
Shareholders' Equity $574,730 $567,187
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
March 31,
2004 2003
(Unaudited)
INTEREST INCOME:
Interest and Fees on Loans $10,545 $ 9,537
Interest on Securities 1,525 1,568
Total Interest Income 12,070 11,105
INTEREST EXPENSE:
Interest on Deposits 1,579 1,965
Interest on Borrowings 921 1,083
Total Interest Expense 2,500 3,048
NET INTEREST INCOME 9,570 8,057
PROVISION FOR LOAN LOSSES 661 991
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 8,909 7,066
NONINTEREST INCOME:
Service and Other Charges on Deposit
Accounts 809 791
Other Income 535 452
Securities (Losses) Gains, Net (29) 68
Total Noninterest Income 1,315 1,311
NONINTEREST EXPENSES:
Salaries and Employee Benefits 3,154 3,071
Occupancy Expense 363 340
Furniture and Equipment Expense 324 337
Other Expenses 1,378 1,335
Total Noninterest Expense 5,219 5,083
INCOME BEFORE INCOME TAXES 5,005 3,294
PROVISION FOR INCOME TAXES 1,576 955
NET INCOME 3,429 2,339
Basic Net Income Per Share $0.53 $0.37
Diluted Net Income Per Share $0.53 $0.37
Dividends Per Share $0.18 $0.17
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)
March 31,
2004 2003
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 3,429 $ 2,339
Adjustments:
Depreciation 222 236
Amortization (Accretion) of Premiums and
Discounts, Net 133 300
Provision for Loan Losses 661 991
Loss(Gain) on Sale of Securities, Net 29 (68)
Changes in Assets and Liabilities:
(Increase) in Other Assets 213 (1,621)
Increase(Decrease) in Other Liabilities 497 (93)
Total Adjustments 1,755 (255)
Net Cash Provided by Operating
Activities 5,184 2,084
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from Maturities/Calls and Paydowns
Of Securities Available for Sale 6,140 19,897
Proceeds from Sales of Securities 0 16,339
Purchase of Insurance 0 (83)
Purchase of Property and Equipment, Net (131) (400)
Purchase of Securities Available for Sale (7,737) (50,593)
Net Change in Loan Portfolio (2,618) 1,329
Net Cash Acquired in Consolidation of
Limited Partnership 133 0
Net Cash Used by Investing Activities (4,213) (13,511)
CASH FLOWS FROM FINANCING ACTIVITIES:
(Decrease)Increase in Customer Deposits,Net (1,521) 11,802
Exercise of Stock Options 0 74
Dividends Paid (1,158) (1,061)
Increase (Decrease)in Borrowings 1,981 (1,774)
Purchase of Treasury Stock (48) 0
Net Cash (Used in) Provided by Financing
Activities (746) 9,041
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 225 (2,386)
CASH AND CASH EQUIVALENTS, beginning
of period 12,644 16,742
CASH AND CASH EQUIVALENTS, end of period 12,869 14,356
The accompanying notes are an integral part of these
Consolidated Statements.
UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. GENERAL
The accompanying unaudited condensed consolidated financial
statements as of March 31, 2004, and 2003, 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, 2004. 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,
2003, 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,
2003, 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-month period ended
March 31, 2004, and 2003. Common stock outstanding consists
of issued shares less treasury stock. Diluted net income
per share for the three-month periods ended March 31, 2004,
and 2003, 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 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 received one additional share for
every share held. For presentation purposes, all prior periods
presented have been restated for comparative purposes.
The following table represents the earnings per share
calculations for the three-month periods ended March 31,
2004, and 2003:
Net
Income
Net Per
For the Three Months Ended Income Shares Share
March 31, 2004(dollars in
thousands):
Net Income $3,429
Basic Earnings Per Share 3,429 6,431,620 $0.53
Dilutive Securities 0 0
Dilutive Earnings Per Share $3,429 6,431,620 $0.53
March 31, 2003:
Net Income $2,339
Basic Earnings Per Share 2,339 6,249,950 $0.37
Dilutive Securities 0 0
Dilutive Earnings Per Share $2,339 6,249,950 $0.37
3. COMPREHENSIVE INCOME
Comprehensive income is a measure of all changes in equity
of an enterprise that results 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 and derivative instruments is to be recorded as an
adjustment to a separate component of shareholders' equity, net
of income tax effect. This change in unrealized gain or loss
serves to increase or decrease comprehensive income. The
following table represents comprehensive income and its changes
for the three-month periods ended March 31, 2004, and
2003:
Three Months
Ended
March 31,
2004 2003
Net Income $3,429 $2,339
Other Comprehensive Income, Net of Tax:
Change in Unrealized (Loss) on
Derivative Instruments (Net of
Tax of $96 and $9) (178) (16)
Change in Unrealized Gain(Loss)on
Securities Available for Sale
(Net of Tax of $311 and $140) 578 (259)
Comprehensive Income $3,829 $2,064
4. RECENT ACCOUNTING PRONOUNCEMENTS
The financial accounting standards board issued a revised version
of Interpretation No. 46 "Consolidation of Variable Interest
Entities" (Interpretation 46), in December of 2003. This
revised interpretation 46 is effective no later than the end of
the first interim or annual period ending after December 15,
2003, for entities created after January 31, 2003, and for
entities created before February 1, 2003, no later than the end
of the first interim or annual period ending after March 15,
2004. As required, the Bank adopted the guidance of
Interpretation 46 for all entities.
The Bank has limited partnership investments in affordable
housing projects, for which it provides funding as a limited
partner and receives tax credits related to its investments in
the projects based on its partnership share. The Bank has
invested in limited partnerships of affordable housing projects,
both as direct investments and investments in funds that invest
solely in affordable housing projects. The bank has determined
that these structures meet the definition of a variable interest
entity. The bank has determined that it needs to consolidate one
of the funds in which it is the sole limited partner. The Bank
has also determined that this fund is required to consolidate one
of the affordable housing projects the fund invests in. The
resulting financial impact to the consolidation of the Bank is an
increase to total assets of approximately $10.0 million,
including $9.0 million in premises and equipment. Loans payable
by the partnership, payable to the Bank, totaling $6.0 million
were eliminated as a result of this consolidation.
Unconsolidated investments in these limited partnerships are
accounted for under the equity method of accounting. The Bank's
maximum exposure to future loss related to these limited
partnerships is limited to the $2.2 million recorded investment.
In March, 2004, the SEC issued Staff Accounting Bulletin 105
"Application of Accounting Principles to Loan Commitments,"
(SAB 105) to inform registrants of the Staff's view that the fair
value of the recorded loan commitments should not consider the
expected future cash flows related to the associated servicing of
the future loan. The provisions of SAB 105 must be applied to
loan commitments accounted for as derivatives that are entered
into after March 31, 2004. The Bank carries all loan commitments
at fair value, and does not include the value of its servicing or
any of internally developed intangible asset in the valuation of
its commitments. Thus, the adoption of SAB 105 did not have an
impact on the Bank's financial condition or results of
operations.
In March 2004, the Emerging Issues Task Force reached a consensus
on Issue 03-1, "Meaning of Other Than Temporary Impairment"
(Issue 03-1) for debt and equity securities accounted for under
Statement of Financial Accounting Standards No. 115 and cost
method investments. The basic model developed by the Task Force
in evaluating whether an investment within the scope of Issue 03-
1 is other-than-temporarily impaired is as follows: 1) Determine
whether the investment is impaired. An investment is impaired if
its fair value is less than its cost. 2) Evaluate whether the
impairment is other-than-temporary. 3) If the impairment is
other-than-temporary, recognize an impairment loss equal to the
difference between the investment's cost and its fair value. The
model shall be applied prospectively to all current and future
investments in interim or annual reporting periods beginning
after June 15, 2004. The Bank does not anticipate the adoption
of Issue 03-1 will have a material impact on its financial
condition or results of operations.
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
March 31, 2004:
Net Interest
Income $ 6,104 $ 3,448 $ 18 $ 0 $ 9,570
Provision for
Loan Losses 45 616 0 0 661
Total Noninterest
Income 1,097 145 3,681 (3,608) 1,315
Total Noninterest
Expense 3,454 1,652 231 (118) 5,219
Income(Loss)
Before Income
Taxes 3,702 1,325 3,468 (3,490) 5,005
Provision
(Benefit) for
Income Taxes 1,109 464 3 0 1,576
Net Income
(Loss) $ 2,593 $ 861 $ 3,465 $ (3,490)$ 3,429
Other Significant
Items:
Total Assets $568,493 $114,032 $ 88,981 $(196,776) $574,730
Total Investment
Securities 140,508 0 955 0 141,463
Total Loans 379,383 110,431 0 (114,070) 375,744
Investment in
Wholly-Owned
Subsidiaries 5,391 127 73,386 (78,161) 743
Total Interest
Income from
External
Customers 6,747 5,313 18 (9) 12,069
Total Interest
Income from
Affiliates 1,865 0 0 (1,865) 0
All Elimi- Consol-
FUSB ALC Other nations idated
For the three
months ended
March 31, 2003:
Net Interest
Income $ 5,278 $ 2,750 $ 29 $ 0 $ 8,057
Provision for
Loan Losses 350 641 0 0 991
Total Noninterest
Income 1,175 98 2,532 (2,494) 1,311
Total Noninterest
Expense 3,324 1,652 200 (93) 5,083
Income Before
Income Taxes 2,779 555 2,361 (2,401) 3,294
Provision
(Benefit) for
Income Taxes 792 161 2 0 955
Net Income
(Loss) $ 1,987 $ 394 $ 2,359 $ (2,401) $ 2,339
Other Significant
Items:
Total Assets, $544,068 $92,162 $70,461 $(160,500) $546,191
Total Investment
Securities 146,585 0 1,655 0 148,240
Total Loans 349,817 88,838 0 (89,541) 349,114
Investment in
Wholly-Owned
Subsidiary 2,654 110 64,622 (67,276) 110
Total Interest
Income from
External
Customers 6,834 4,249 22 0 11,105
Total Interest
Income from
Affiliates 1,499 0 7 (1,506) 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
forecasted 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.
7. GUARANTEES, COMMITMENTS AND CONTINGENCIES
In the normal course of business there are outstanding
commitments and contingent liabilities, such as commitments to
extend credit, letters of credit, and others. The financial
instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of amounts recognized in the
financial statements. A summary of these commitments and
contingent liabilities is presented below.
March 31, December 31,
2004 2003
Standby Letters of Credit $ 901 $ 523
Commitments to Extend Credit $25,864 $25,792
Standby letters of credit are contingent commitments issued by
the Company generally to guarantee the performance of a customer
to a third party. The Company has recourse against the customer
for any amount it is required to pay to a third party under a
standby letter of credit. Revenues are recognized over the life
of the standby letter of credit. The potential amount of future
payments the Company could be required to make under its standby
letter of credit at March 31, 2004, is $900,628 and represents
the Company's total credit risk. At March 31, 2004, the Company
had $707,648 of liabilities and $707,648 of receivables
associated with standby letter of credit agreements entered into
subsequent to December 31, 2002, as a result of the Company's
adoption of Interpretation 45 at January 1, 2003. Standby letter
of credit agreements entered into prior to January 1, 2003, have
a carrying value of zero.
Commitments to extend credit are agreements to lend to a customer
as long as there is no violation of any condition established in
the contract. Commitments generally have fixed expiration dates
or other termination clauses and may require payment of a fee.
Since many of the commitments are expected to expire without
being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each
customer's creditworthiness on a case-by-case basis. The amount
of collateral obtained, if deemed necessary by the Company upon
extension of credit, is based on management's credit evaluation
of the counter party. Collateral held varies but may include
accounts receivable, inventory, property, plant, and equipment,
and income-producing commercial properties.
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"). United Security is the parent holding company of
First United Security Bank (the "Bank"), and it 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, 2003, consolidated financial statements.
The emphasis of this discussion is a comparison of Assets,
Liabilities, and Shareholder's Equity for the three months ended
March 31, 2004, to year-end 2003, while comparing income and
expense for the three-month period ended March 31, 2004, and
2003.
All yields and ratios presented and discussed herein are not
presented on a tax-equivalent basis.
COMPARING THE THREE MONTHS ENDED MARCH 31, 2004, TO THE THREE
MONTHS ENDED MARCH 31, 2003
Net income increased $1,090,000, or 46.6%, resulting in an
increase of basic net income per share to $0.53. Annualized
return on assets was 2.41% compared to 1.75% for the same period
during 2003. Average return on stockholders' equity increased to
18.38% from 14.03%.
Interest income for the first quarter increased $965,000 or 8.7%
compared to the first quarter of 2003. The increase in interest
income was primarily due to an increase in interest earned on
loans. This increase is due to an overall increase in the
average yield and an increase in the volume of loans and
investments outstanding.
Interest expense for the first quarter decreased $548,000 or
18.0% compared to the first quarter of 2003. 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 the net effect of deposits and
borrowings, during the same period.
Net interest income increased $1,513,000, or 18.8% as a result of
an improvement of 79 basis point net yield on earning assets.
The provision for loan losses was $661,000 or 0.69% annualized of
average loans in the first three months of 2004, compared to
$991,000 or 1.12% annualized of average loans in the first three
months of 2003. Charge-offs exceeded recoveries by $588,000 for
the quarter, a decrease of approximately $111,000 over the same
period in the prior year. The decrease in charge-offs was due to
the continued improvements in the loan portfolio. Decreases in
the first quarter provision are a reflection of this improvement.
Total non-interest income (excluding security gains and losses)
increased $101,000 or 8.12% compared to the first three months of
2003. This was attributable to an increase in the service
charges on deposits and other income.
Total non-interest expense increased $136,000, or 2.68% in the
first three months of 2004. This increase was related to an
increase in salaries and employee related benefits as a result of
normal merit increases and higher benefit costs.
Income tax expense increased $621,000 or 65.0% over the first
three months of 2004. The increase during the first quarter of
2004 compared to 2003 resulted from higher levels of taxable
income. United Security's effective tax rate for the first three
months of 2004 and 2003 was 31.5% and 29.0%, respectively as the
Company continues to realize tax benefits primarily from tax-
exempt securities and low-income housing tax credits.
COMPARING THE MARCH 31, 2004, STATEMENT OF FINANCIAL
CONDITION TO DECEMBER 31, 2003
In comparing financial condition at December 31, 2003, to
March 31, 2004, total assets increased $7.5 million to $574.7
million, while liabilities increased $4.4 million to $498.3
million. Shareholders' equity increased $3.1 million as a result
of earnings in excess of dividends during the quarter.
Investment securities increased $2.4 million, or 1.7% during the
first quarter 2004 as a result of deployment of increased
liquidity from deposits. Investments provide United Security
with a stable form of liquidity while maximizing earnings yield.
Loans, net of unearned income decreased $3.9 million from
$386,578 at December 31, 2003, to $382,658 at March 31, 2004.
This 1.0% decrease is the result of the elimination of $6.0
million in loans eliminated in the consolidation of a variable
interest entity. Deposits decreased $1.5 million, or 0.4% during
the first quarter of 2004. While deposits have decreased period-
end to period-end, average deposits increased $2.2 million or
0.6% for the first quarter of 2004 over the fourth quarter of
2003.
CREDIT QUALITY
At March 31, 2004, the allowance for loan losses was $6.9
million, or 1.81% of loans net of unearned income, compared to
$6.9 million, or 1.94% of loans net of unearned income at March
31, 2003 and $6.8 million, or 1.77% of loans net of unearned
income at December 31, 2003. The coverage ratio of the allowance
for loan losses to non-performing assets decreased to 94.8% at
March 31, 2004, compared to 140.5% at December 31, 2003.
Activity in the allowance for loan losses is summarized as
follows (amounts in thousands):
Three Months
Ended
March 31,
2004 2003
Balance at Beginning of Period $6,842 $6,623
Charge-Offs 794 919
Recoveries (206) (220)
Net Loans Charged-Off 588 699
Additions Charged to Operations 661 991
Balance at End of Period $6,915 $6,915
Net charge-offs for the quarter ended March 31, 2004, were
$588,000 or 0.61% of average loans, on an annualized basis, a
decrease of 16% or $111,000 from the $699,000 or 0.78% annualized
of average loans reported a year earlier. The provision for loan
losses for the first quarter of 2004 was $661,000 compared to
$991,000 in the first quarter of 2003.
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 March 31, 2004, 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):
Mar. 31, Dec. 31, Mar. 31,
2004 2003 2003
Loans Accounted for on a
Non-Accrual Basis $ 1,972 $ 1,879 $ 5,196
Accruing Loans Past Due
90 Days or More 2,765 382 1,067
Real Estate Acquired in
Settlement of Loans 2,557 2,608 2,924
Total $ 7,294 $ 4,869 $ 9,187
Non-Performing Assets as a
Percentage of Net Loans
and Other Real Estate 1.91% 1.26% 2.56%
Loans accounted for on a non-accrual basis decreased $3.2 million
since March 31, 2003 and increased $0.9 million since December
31, 2003. Accruing loans past due 90 days or more increased $1.7
million, compared to March 31, 2003, and $2.4 million since
December 31, 2003. This increase is attributable to two large
commercial real estate lines which are in the process of
collection. Management is confident adequate collateral values
are present to protect the Bank from loss and has allowed
interest accrual to continue. If they are not resolved in a
timely manner, or if collateral values deteriorate, accrual of
interest will be discontinued. Real estate acquired in
settlement of loans decreased $367,000 since March 31, 2003 and
$51,000 since December 31, 2003.
At March 31, 2004, the recorded investment in loans that were
considered impaired was $1,405,959 compared to $1,320,822 at
December 31, 2003. There was approximately $210,894 and $198,123
at March 31, 2004 and December 31, 2003 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, the
ability to borrow, 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 $129.9 million in borrowing capacity
from the Federal Home Loan Bank and $40 million in established
Federal Funds Lines.
The Bank is required to maintain certain levels of regulatory
capital. At March 31, 2004, and December 31, 2003, 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, 2003, is hereby incorporated
herein by reference.
ITEM 4. CONTROLS AND PROCEDURES
As of March 31, 2004, the end of the period covered by this
report, the Company carried out an evaluation, under the
supervision and with the participation of its management,
including its Chief Executive Officer and Principal Financial
Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures pursuant to
Securities Exchange Act Rule 13a-15. Based upon that evaluation,
the Chief Executive Officer and Principal Financial Officer
concluded that the Company's disclosure controls and procedures
are effective in timely alerting them to material information
relating to the Company that is required to be included in the
Company's periodic filings with the Securities and Exchange
Commission.
There were no significant changes in the Company's internal
controls over financial reporting during the quarter ended March
31, 2004, that have materially affected, or are reasonably likely
to materially affect, the Company's internal control 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 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.
Exhibit 31.2: Certification of the Principal Financial
Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
Exhibit 32: Certification of Chief Executive Officer and
Principal Financial Officer Pursuant to 18 U.S.C. Section
1350, as created by Section 906 of the Sarbanes-Oxley Act
of 2002.
(b) Reports on Form 8-K.
A report on Form 8-K was filed on February 4, 2004,
relating to the press release dated February 4, 2004,
announcing financial results for the quarter and twelve
months ended December 31, 2003.
SIGNATURES
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: May 07, 2004
BY: /s/LARRY M. SELLERS
LARRY M. SELLERS
Its Vice-President, Secretary, and Treasurer
(Duly Authorized Officer and Principal Financial
Officer)