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, 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 8/5/04
Common Stock, $0.01 par value 6,430,454 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, 2004, and December 31,
2003 4
Condensed Consolidated Statements of Income
for the Three and Six Months Ended June 30,
2004, and 2003 5
Condensed Consolidated Statements of Cash Flows
for the Six Months Ended June 30, 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 15
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 19
ITEM 4. CONTROLS AND PROCEDURES 19
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 20
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS 20
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
June 30, December 31,
2004 2003
(Unaudited)
Cash and Due from Banks $ 10,748 $ 12,596
Interest-Bearing Deposits in Banks 31 48
Securities Available for Sale 141,132 139,104
Loans, net of allowances for loan
losses of $6,998 and
$6,842 respectively 381,672 379,736
Premises and Equipment, net 20,334 11,363
Cash Surrender Value of Bank Owned
Life Insurance 8,636 6,840
Accrued Interest Receivable 4,504 4,972
Investment in Limited Partnerships 2,803 2,980
Other Assets 10,214 9,548
Total Assets $580,074 $567,187
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $388,333 $387,680
Short-Term Borrowings 3,565 2,587
Long-Term Debt 99,696 95,755
Other Liabilities 11,251 7,836
Total Liabilities $502,845 $493,858
Shareholders' Equity:
Minority Interest 482 0
Common stock, par value $0.01 per
share; 10,000,000 shares authorized;
7,317,560 issued 73 73
Surplus 9,233 9,233
Accumulated other comprehensive
Income 190 977
Retained Earnings 78,050 73,794
Less Treasury Stock: 887,106 and
885,286 shares, at cost,
respectively (10,799) (10,748)
Total Shareholders' Equity 77,229 73,329
Total Liabilities and
Shareholders' Equity $580,074 $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 Six Months Ended
June 30, June 30,
2004 2003 2004 2003
(Unaudited) (Unaudited)
INTEREST INCOME:
Interest and
Fees on Loans $10,657 $ 9,844 $21,201 $ 19,382
Interest on Securities 1,491 1,562 3,016 3,130
Total Interest Income 12,148 11,406 24,217 22,512
INTEREST EXPENSE:
Interest on Deposits 1,557 1,858 3,135 3,823
Interest on Borrowings 936 1,020 1,857 2,103
Total Interest
Expense 2,493 2,878 4,992 5,926
NET INTEREST INCOME 9,655 8,528 19,225 16,586
PROVISION FOR LOAN
LOSSES 789 1,007 1,450 1,998
NET INTEREST INCOME
AFTER PROVISION FOR
LOAN LOSSES 8,866 7,521 17,775 14,588
NONINTEREST INCOME:
Service and Other
Charges on Deposit
Accounts 852 817 1,661 1,608
Other Income 581 564 1,116 1,016
Securities Gains
(Losses), net (43) 3 (72) 72
Total Noninterest
Income 1,390 1,384 2,705 2,696
NONINTEREST EXPENSES:
Salaries and Employee
Benefits 3,242 3,192 6,396 6,263
Occupancy Expense 344 331 707 671
Furniture and
Equipment Expense 347 328 671 665
Other Expenses 1,728 1,434 3,106 2,770
Total Noninterest
Expense 5,661 5,285 10,880 10,369
INCOME BEFORE
INCOME TAXES 4,595 3,620 9,600 6,915
PROVISION FOR INCOME
TAXES 1,453 1,110 3,029 2,065
NET INCOME 3,142 2,510 6,571 4,850
BASIC NET INCOME
PER SHARE $0.49 $0.39 $1.02 $0.75
DILUTED NET INCOME
PER SHARE $0.49 $0.39 $1.02 $0.75
DIVIDENDS PER SHARE $0.18 $0.17 $0.36 $0.33
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,
2004 2003
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $6,571 $ 4,850
Adjustments:
Depreciation 442 464
Amortization of Premiums and Discounts, net 289 554
Provision for Losses on Loans 1,450 1,998
Gain(loss)on sale of securities, net 72 (72)
Gain on sale of fixed assets, net 54 0
Changes in Assets and Liabilities:
(Increase) in Other Assets (43) (2,682)
Increase (Decrease) in Other Liabilities 1,457 (81)
Total Adjustments 3,721 181
Net Cash Provided by Operating Activities 10,292 5,031
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from Maturities/Call and Paydowns
Of Securities Available for Sale 16,765 40,554
Proceeds from Sales of Securities 9,558 16,339
Purchase of Bank-Owned Life Insurance (1,500) (168)
Purchase of Property and Equipment, Net (435) (899)
Purchase of Securities Available for Sale (30,561) (58,426)
Redemption of Federal Funds Sold 0 829
Net Cash Acquired in Consolidation of
Limited Partnership 133
Net Increase in Loans (9,335) (4,560)
Net Cash Used in Investing Activities (15,375) (6,331)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in Customer Deposits,Net 665 14,508
Exercise of Stock Options 0 74
Dividends Paid (2,316) (2,123)
Purchase of Treasury Stock (50) 0
Increase(decrease)in Borrowings, net 4,919 (10,101)
Net Cash (Used in) Provided by
Financing Activities 3,218 2,358
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS (1,865) 1,058
CASH AND CASH EQUIVALENTS, beginning
of period 12,644 16,742
CASH AND CASH EQUIVALENTS, end of period 10,779 17,800
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, 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 and six-month periods
ended June 30, 2004, and 2003. 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, 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.
The following table represents the earnings per share
calculations for the three and six-month periods ended
June 30, 2004, and 2003:
Net
Income
Net Per
For the Three Months Ended Income Shares Share
June 30, 2004(dollars in
thousands):
Net Income $3,142
Basic Net Income Per Share $3,142 6,430,545 $0.49
Dilutive Securities 0 0
Diluted Earnings Per Share 3,142 6,430,545 $0.49
June 30, 2003:
Net Income $2,510
Basic Net Income Per Share $2,510 6,432,274 $0.39
Dilutive Securities 0 0
Diluted Earnings Per Share 2,510 6,432,274 $0.39
Net
Income
Net Per
For the Six Months Ended Income Shares Share
June 30, 2004(dollars in
thousands):
Net Income $6,571
Basic Net Income Per Share $6,571 6,431,083 $1.02
Dilutive Securities 0 0
Diluted Earnings Per Share 6,571 6,431,083 $1.02
June 30, 2003:
Net Income $4,850
Basic Net Income Per Share $4,850 6,431,119 $0.75
Dilutive Securities 0 0
Diluted Earnings Per Share 4,850 6,431,119 $0.75
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, 2004, and
2003:
Three Months Six Months
Ended Ended
June 30, June 30,
2004 2003 2004 2003
Net Income $3,142 $2,510 $6,571 $4,850
Other Comprehensive
Income, Net of Tax:
Change in Unrealized
Gain (Loss) on
Derivative
Instruments (Net of
Tax of $328, $45,
$221, and $53
respectively) 547 (83) 369 (99)
Change in Unrealized
Gain on Securities
Available For Sale
(Net of Tax of $1,041,
$72, $694, and
$211 respectively). (1,733) (133) (1,155) (392)
Comprehensive Income $ 1,956 $2,294 $ 5,785 $4,359
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 con-
solidate 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
June 30, 2004:
Net Interest
Income $ 6,017 $ 3,625 $ 13 $ 0 $ 9,655
Provision for
Loan Losses 217 572 0 0 789
Total Noninterest
Income 1,088 109 3,487 (3,294) 1,390
Total Noninterest
Expense 3,662 1,811 275 (87) 5,661
Income(Loss)
Before Income
Taxes 3,226 1,351 3,225 (3,207) 4,595
Provision
(Benefit) for
Income Taxes 965 486 2 0 1,453
Net Income(Loss) $ 2,261 $ 865 $ 3,223 $ (3,207) $ 3,142
For the six
months ended
June 30, 2004:
Net Interest
Income $12,121 $7,073 $ 31 $ 0 $19,225
Provision for
Loan Losses 262 1,188 0 0 1,450
Total Noninterest
Income 2,185 254 7,168 (6,902) 2,705
Total Noninterest
Expense 7,116 3,463 506 (205) 10,880
Income(Loss)
Before Income
Taxes 6,928 2,676 6,693 (6,697) 9,600
Provision
(Benefit) for
Income Taxes 2,074 950 5 0 3,029
Net Income(Loss) $ 4,854 $1,726 $6,688 $(6,697) $ 6,571
Other Significant
Items:
Total Assets $571,913 $118,146 $89,869 $(199,854) $580,074
Total Investment
Securities 140,231 0 901 0 141,132
Total Loans 384,547 114,832 0 (117,707) 381,672
Investment in
Subsidiaries 5,391 103 73,636 (79,022) 108
Total Interest
Income from
External
Customers 13,341 10,858 18 0 24,217
Total Interest
Income from
Affiliates 3,785 0 12 (3,797) 0
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
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
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 transactions 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.
June 30, December 31,
2004 2003
Standby Letters of Credit $ 1,028 $ 523
Commitments to Extend Credit $26,987 $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 June 30, 2004, is
$1,027,868 and represents the Company's total credit risk. At June 30,
2004, the Company had $834,888 of liabilities and $834,888 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" 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, 2003, consolidated financial statements.
The emphasis of this discussion is a comparison of Assets, Liabilities,
and Stockholders' Equity as of June 30, 2004, to year-end 2003, while
comparing income and expense for the three and six-month periods ended
June 30, 2004, and 2003.
All yields and ratios presented and discussed herein are not presented
on a tax-equivalent basis.
Interest income increased $741,000, or 6.5%, to $12.1 million for the
second quarter of 2004 from $11.4 million for the second quarter of 2003.
Interest income increased $1,705,000, or 7.6% to $24.2 million for the
first six months of 2004 compared to $22.5 million for the first six
months of 2003.
This increase in interest income was primarily due to an increase in
interest earned on loans offset somewhat by a decrease in interest
earned on investment securities. This increase in loan income is due
to both increases in volume and also increases in yield.
Interest expense decreased $385,000, or 13.4%, to $2.5 million for the
second quarter of 2004 from $2.9 million for the second quarter of 2003.
Interest expense decreased $934,000 million, or 15.7%, to $5.0 million for
the first six months of 2004 compared to $5.9 million for the first six
months 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 both deposits and borrowings, during
the same period.
Net interest income increased $1.1 million, or 13.2%, for the second quarter
of 2004 and $2.6 million, or 15.9% for the first six months of 2004 as a
result of an improvement of a 79 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 $789,000 or .83% annualized of
average loans in the second quarter of 2004, compared to $1.0 million or
1.13% annualized of average loans in the second quarter of 2003. The loan
loss provision decreased slightly compared to the prior year due to
decreased charge-offs. For the first six months of 2004, the provision
for loan losses decreased to $1.5 million or .76% annualized of average
loans, compared to $2.0 million or 1.12% annualized of average loans for
the first six months of 2003.
Total non-interest income (excluding security gains and losses) increased
$52,000 or 3.8% for the second quarter and $153,000 or 5.8% for the first
six months of 2004. These increases are all attributable to increases in
service charges on deposit accounts and other income.
Total non-interest expense increased $376,000, or 7.1% for the second
quarter of 2004 to $5.7 million. Total non-interest expense increased
$511,000 or 4.9% for the first six months of 2004 compared to 2003. This
increase was related to an increase in salaries and employee benefits as
a result of normal merit increases and higher benefits costs.
Income tax expense increased $334,000 or 30.9% during the second quarter
of 2004 as compared to the same period a year ago. Income tax expense
increased $964,000 or 46.7% over the first six months of 2003. The
increase during the first six months of 2004 compared to 2003 resulted
from higher levels of taxable income. United Security's effective tax
rate for the first six months of 2004 and 2003 were 31.6% and 29.9%,
respectively. The Company continues to realize tax benefits primarily
from tax-exempt securities and low income housing tax credits; however,
these tax benefits have not increased as rapidly as taxable income.
For the second quarter, net income increased $632,000, or 25.2%,
resulting in an increase of basic net income per share to $0.49. For
the first six months, net income increased $1,721,000, or 35.5%, resulting
in an increase of basic net income per share to $1.02. Annualized
return on assets was 2.30% compared to 1.79% for the same period
during 2003. Average return on stockholders' equity increased to
17.52% from 14.32%.
COMPARING THE JUNE 30, 2004, STATEMENT OF FINANCIAL CONDITION TO
DECEMBER 31, 2003
In comparing financial condition at December 31, 2003, to June 30, 2004,
total assets increased $12.9 million to $580.1 million, while liabilities
increased $9.0 million to $502.8 million. Shareholders' equity increased
$3.4 million as a result of earnings in excess of dividends during the
first six months of 2004.
Investment securities increased $2.0 million, or 1.5% during the first
six months of 2004 as a result of deployment of increased liquidity from
deposits and modest loan growth. Investments provide United Security
with a stable form of liquidity while maximizing earnings yield. Loans
net of unearned income increased $2.1 million from $386,578 at December
31, 2003, to $388,670 at June 30, 2004. This increase of less than 1%
is impacted by the elimination of $6.0 million in loans eliminated in
the consolidation of a variable interest entity. Deposits increased
$653,000 or 0.2% for the first six months of 2004.
CREDIT QUALITY
At June 30, 2004, the allowance for loan losses was $7.0 million, or
1.80% of loans net of unearned income, compared to $6.5 million, or
1.83% of loans net of unearned income at June 30, 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 90.17% at June 30, 2004, compared to 140.5% at December 31,
2003, primarily as a result of an increase in non-accrual loans during
the first six months of 2004.
Activity in the allowance for loan losses is summarized as follows
(amounts in thousands):
Six Months
Ended
June 30,
2004 2003
Balance at Beginning of Period $6,842 $6,623
Charge-Offs 1,739 2,495
Recoveries (445) (410)
Net Loans Charged-Off 1,294 2,085
Additions Charged to Operations 1,450 1,998
Balance at End of Period $6,998 $6,536
Net charge-offs for the six months ended June 30, 2004, were $1.3 million
or 0.68% of average loans, on an annualized basis, a decrease of $791,000
from the $2.1 million or 1.17% annualized of average loans reported a
year earlier. The provision for loan losses for the first six months of
2004 was $1.5 million compared to $2.0 million in the first six months of
2003.
United Security maintains the allowance for loan losses at a level
deemed adequate by management to absorb probable 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,
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):
June 30, Dec. 31, June 30,
2004 2003 2003
Loans Accounted for on a
Non-Accrual Basis $4,935 $1,879 $ 4,956
Accruing Loans Past Due
90 Days or More 2,058 382 461
Real Estate Acquired in
Settlement of Loans 768 2,608 2,859
Total $7,761 $4,869 $ 8,276
Non-Performing Assets as a
Percentage of Net Loans
and Other Real Estate 1.99% 1.26% 2.28%
Loans accounted for on a non-accrual basis increased $3.1 million since
December 31, 2003. Of this increase $.5 million is a commercial real
estate loan which has adequate collateral, with no loss of principal
anticipated. The remaining $2.4 million is made up of 2 commercial
real estate loans which are considered impaired as discussed below.
Accruing loans past due 90 days or more increased $1.7 million from
December 31, 2003. Two large commercial real estate loans account for
this increase. These loans are in the process of collection, and
management is confident they will be paid soon with no loss of principal
or interest. Real estate acquired in settlement of loans decreased $2.1
million since June 30, 2003, and $1.8 million since December 31, 2003,
through sales of foreclosed property.
At June 30, 2004, the recorded investment in loans that were considered
impaired was $2,445,914 compared to $1,320,822 at December 31, 2003,
all of which were on a non-accrual basis. There was approximately
$658,489 and $198,123 at June 30, 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, 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 June 30, 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 June 30, 2004, 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 Principal 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 upon that eval-
uation, the Chief Executive Officer and the Principal 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 significant 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 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
The Company held its Annual Meeting of Shareholders on May 13, 2004.
At the meeting, the shareholders of the Company were asked to vote
on the election of 13 directors to serve until the next annual meeting
of shareholders or until their successors are elected and qualified
and to ratify the adoption of the United Security Bancshares, Inc.
Non-Employee Directors' Deferred Compensation Plan. The results of
the shareholder voting on both matters are summarized as follows:
Proposal 1: The Election of Directors
Director For Withheld
1. Dan R. Barlow 4,300,926 92,700
2. Linda H. Breedlove 4,281,802 111,824
3. Gerald P. Corgill 4,327,316 66,310
4. Wayne C. Curtis 4,277,721 115,905
5. John C. Gordon 4,327,316 66,310
6. William G. Harrison 4,327,212 66,414
7. Hardie B. Kimbrough 4,202,890 190,736
8. Jack W. Meigs 4,327,316 66,310
9. R. Terry Phillips 4,318,990 74,636
10. Ray Sheffield 4,290,128 103,498
11. James C. Stanley 4,327,316 66,310
12. Howard M. Whitted 4,327,316 66,310
13. Bruce N. Wilson 4,148,088 245,538
Proposal 2: The Ratification of the Adoption of the United Security
Bancshares, Inc. Non-Employee Directors' Deferred Compensation Plan
For Against Abstain
4,176,801 163,492 53,333
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 the Chief Executive Officer and
the Principal Financial Officer Pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
(b) Reports on Form 8-K.
A report on Form 8-K was filed on April 27, 2004, relating to
the press release dated April 26, 2004, announcing financial
results for the quarter ended March 31, 2004.
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: August 5, 2004
BY: /s/ROBERT STEEN
ROBERT STEEN
Its Assistant Vice President, Assistant Treasurer &
Principal Financial Officer
(Duly Authorized Officer and Principal Financial
Officer)