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March 29, 2000
FILED VIA EDGAR
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: United Security Bancshares, Inc.
Annual Report on Form 10-K
(File No., 01-14549)
On behalf of our client, United Security Bancshares, Inc., we are filing
the above-referenced Form 10-K via the EDGAR system.
Please do not hesitate to contact the undersigned if you have any
questions or comments.
Very truly yours,
/s/ J. Michael Savage
______________________
J. Michael Savage
JMS/mrm
Enclosures
cc: R. Terry Phillips
Larry M. Sellers
C. Matthew Lusco
James M. Pool
United Security Bancshares, Inc.
131 West Front Street
P.O. Box 249
Thomasville, Alabama 36784
334-636-5424
March 16, 2000
FILED VIA EDGAR
Securities and Exchange Commission
450 Fifth Street, NW
Washington, D.C. 20549
Gentlemen:
Management of United Security Bancshares, Inc. hereby informs the
Securities and Exchange Commission that the financial statements in its
Annual Report on Form 10-K for the year ended December 31, 1999, transmitted
herewith, do not reflect a change from the preceding year in any accounting
principles or practices or in the method of applying any such principles or
practices.
UNITED SECURITY BANCSHARES, INC.
/s/ R. Terry Phillips
_____________________
By: R. Terry Phillips
Its: President & CEO
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number 0-14549
UNITED SECURITY BANCSHARES, INC.
_____________________________________________________
(Exact name of registrant as specified in its charter)
Alabama 63-0843362
_______________________________ __________________
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
131 West Front Street
Post Office Box 249
Thomasville, Alabama 36784
________________________________________ __________
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (334) 636-5424
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
___________________ __________________________________________
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $0.01 per share (Title of class)
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 if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. ___
Shares of common stock ($0.01 par value) outstanding as of December 31,
1999: 3,568,081.
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, based on the sales price of shares sold in a private
transaction on January 25, 2000, is $26.00. There is no established public
trading market for the Registrant's voting stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's definitive proxy statement for the 2000 annual
meeting of its shareholders are incorporated by reference into Part III.
UNITED SECURITY BANCSHARES, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1999
TABLE OF CONTENTS
Sequential
Part Item Caption Page No.
I 1 Business 3
2 Properties 8
3 Legal Proceedings 9
4 Submission of Matters to a Vote of Security Holders 9
II 5 Market for Registrant's Common Equity and Related
Stockholder Matters 9
6 Selected Financial Data 11
7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
7A Quantitative and Qualitative Disclosures
About Market Risk 37
8 Financial Statements and Supplementary Data 38
9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 69
III 10 Directors and Executive Officers of the Registrant 70
11 Executive Compensation 70
12 Security Ownership of Certain Beneficial Owners
and Management 70
13 Certain Relationships and Related Transactions 70
IV 14 Exhibits, Financial Statement Schedules
and Reports on Form 8-K 71
Signatures 72
Exhibits 74
PART I
Item 1. Business.
General
United Security Bancshares, Inc. ("Bancshares") is a Delaware
corporation organized in 1999, as a successor by merger to United Security
Bancshares, Inc., an Alabama corporation. Bancshares is a bank holding
company registered under the Bank Holding Company Act of 1956, as amended,
and it operates one banking subsidiary, First United Security Bank (the
"Bank"). The Bank's name was changed from United Security Bank to First
United Security Bank on July 9, 1997. The Bank owns all of the stock of
Acceptance Loan Company, Inc. ("ALC"), a finance company organized for the
purpose of making consumer loans and purchasing consumer loans from vendors.
Bancshares owns all the stock of First Security Courier Corporation ("First
Security"), an Alabama corporation organized for the purpose of providing
certain bank courier services.
The Bank has eighteen banking offices, which are located in Thomasville,
Coffeeville, Fulton, Gilbertown, Grove Hill, Butler, Jackson, Brent,
Centreville, North Bibb, Bucksville and Harpersville, Alabama, and its market
area includes portions of Bibb, Clarke, Choctaw, Jefferson, Marengo, Shelby,
Sumter, Tuscaloosa, Washington, and Wilcox Counties in Alabama, as well as
Clarke, Lauderdale and Wayne Counties in Mississippi.
The Bank conducts a general commercial banking business and offers
banking services such as the receipt of demand, savings and time deposits,
personal and commercial loans, credit card and safe deposit box services, and
the purchase and sale of government securities.
As of December 31, 1999, the Bank had 189 full-time equivalent
employees, ALC had 126 full-time equivalent employees, and Bancshares had no
employees, other than the officers of Bancshares who are indicated in Part
III, Item 10 of this report.
The Bank is in the process of completing the organization of a
wholly-owned subsidiary in the State of Arizona. The subsidiary, FUSB
Reinsurance, Inc. ("FUSB Reinsurance"), will reinsure or "underwrite" credit
life and credit accident and health insurance policies sold to the Bank's
consumer loan customers. FUSB Reinsurance will be responsible for the first
level of risk on these policies up to a specified maximum amount, and the
primary third-party insurer will retain the remaining risk. The third-party
insurer and/or a third-party administrator will be responsible for performing
most of the administrative functions of FUSB Reinsurance on a contact basis.
Competition
The Bank encounters strong competition in making loans, acquiring
deposits and attracting customers for investment services. Competition among
financial institutions is based upon interest rates offered on deposit
accounts, interest rates charged on loans, other credit and service charges
relating to loans, the quality and scope of the services rendered, the
convenience of banking facilities and, in the case of loans to commercial
borrowers, relative lending limits. The Bank competes with other commercial
banks (including at least 10 in its service area), savings and loan
associations, credit unions, finance companies, mutual funds, insurance
companies, brokerage and investment banking companies, and other financial
intermediaries operating in Alabama and elsewhere. Many of these competitors,
some of which are affiliated with large bank holding companies, have
substantially greater resources and lending limits. In addition, many of the
Bank's non-bank competitors are not subject to the same extensive federal
regulations that govern bank holding companies and federally-insured banks.
On November 12, 1999, President Clinton signed into law the
Gramm-Leach-Bliley Act (the "GLB Act"). Effective March 11, 2000, the GLB Act
permits bank holding companies to become financial holding companies and
thereby affiliate with securities firms and insurance companies and engage in
other activities that are financial in nature. See "Supervision and
Regulation." Under the GLB Act, securities firms and insurance companies that
elect to become financial holding companies may acquire banks and other
financial institutions. The GLB Act, which represents the most sweeping
reform of financial services regulation in over sixty years, may
significantly change the competitive environment in which Bancshares and the
Bank conduct business. At this time, however, it is not possible to predict
the full effect that the GLB Act will have on Bancshares. One consequence may
be increased competition from large financial services companies that will be
permitted to provide many types of financial services, including bank
products, to their customers.
The financial services industry is also likely to become more
competitive as further technological advances enable more companies to
provide financial services. These technological advances may diminish the
importance of depository institutions and other financial intermediaries in
the transfer of funds between parties.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
(the "IBBEA") authorized bank holding companies to acquire banks and other
bank holding companies without geographic limitations beginning September 30,
1995. The arrival of interstate banking is expected to increase further the
competitiveness of the banking industry.
In addition, beginning on June 1, 1997, the IBBEA authorized interstate
mergers and consolidations of existing banks, provided that neither bank's
home state had opted out of interstate branching by May 31, 1997. The State
of Alabama opted in with respect to interstate branching. Once a bank has
established branches in a state through an interstate merger, the bank may
establish and acquire additional branches at any location in the state where
any bank involved in the interstate merger could have established or acquired
branches under applicable federal or state law.
Under the IBBEA, Alabama banks may also establish branches or offices in
any other state, any territory of the United States or any foreign country,
provided that the branch or office is established in compliance with federal
law and the law of the proposed location and is approved by the Alabama
Superintendent of Banks. Under former law, Alabama banks could not establish
a branch in any location other than its principal place of business, except
as authorized by local laws or general laws of local application. These more
liberal branching laws are likely to increase competition within the State of
Alabama among banking institutions located in Alabama and from those located
outside of Alabama, many of which are larger than Bancshares. Size gives the
larger banks certain advantages in competing for business from large
corporations. These advantages include higher lending limits and the ability
to offer services in other areas of Alabama and the southeast region.
Supervision and Regulation
Bancshares and the Bank are subject to state and federal banking laws
and regulations which impose specific requirements and restrictions on, and
provide for general regulatory oversight with respect to, virtually all
aspects of operations. These laws and regulations are generally intended to
protect depositors, not stockholders. To the extent that the following
summary describes statutory or regulatory provisions, it is qualified in its
entirety by reference to the particular statutory and regulatory provisions.
Any change in applicable laws or regulations may have a material effect on
the business and prospects of Bancshares.
Beginning with the enactment of the Financial Institutions Reform,
Recovery and Enforcement Act of 1989 and following in December 1991 with the
Federal Deposit Insurance Corporation Act ("FDICIA"), numerous additional
regulatory requirements have been placed on the banking industry in the past
ten years, and additional changes have been proposed. The operations of
Bancshares and the Bank may be affected by legislative changes and the
policies of various regulatory authorities. Bancshares is unable to predict
the nature or the extent of the effect on its business and earnings that
fiscal or monetary policies, economic control or new federal or state
legislation may have in the future.
As a bank holding company, Bancshares is subject to the regulation and
supervision of the Board of Governors of the Federal Reserve System (the
"Board of Governors"). Bancshares is required to file with the Board of
Governors an annual report and such additional information as the Board of
Governors may require. The Board of Governors may also conduct examinations
of Bancshares and each of its subsidiaries.
The Bank Holding Company Act imposes numerous restrictions on
Bancshares. In particular, the Act requires a bank holding company to obtain
the prior approval of the Board of Governors before it may acquire
substantially all of the assets of any bank or control of any voting shares
of any bank, if, after such acquisition, it would own or control, directly or
indirectly, more than 5% of the voting shares of such bank. The Board of
Governors may not approve an acquisition by Bancshares of substantially all
the assets or the voting shares of any bank located outside Alabama unless
such acquisition is specifically authorized by the laws of the state in which
the bank to be acquired is located.
The GLB Act permits bank holding companies to become financial holding
companies and thereby affiliate with securities firms and insurance companies
and engage in other activities that are financial in nature. A bank holding
company may become a financial holding company by filing a declaration if
each of its subsidiary banks is well capitalized under the FDICIA prompt
corrective action provisions, is well managed, and has at least a
satisfactory rating under the Community Reinvestment Act ("CRA"). No
regulatory approval will be required for a financial holding company to
acquire a company, other than a bank or savings association, engaged in
activities that are financial in nature or incidental to activities that are
financial in nature, as determined by the Board of Governors.
The GLB Act defines "financial in nature" to include securities
underwriting, dealing and market making; sponsoring mutual funds and
investment companies; insurance underwriting and agency; and activities that
the Board of Governors has determined to be closely related to banking. A
national bank also may engage, subject to limitations on investment, in
activities that are financial in nature (other than insurance underwriting,
insurance company portfolio investment, merchant banking, real estate
development and real estate investment) through a financial subsidiary of the
bank, if the bank is well capitalized, well managed and has at least a
satisfactory CRA rating. Subsidiary banks of a financial holding company or
national banks with financial subsidiaries must continue to be well
capitalized and well managed in order to continue to engage in activities
that are financial in nature without regulatory actions or restrictions,
which could include divestiture of the financial subsidiary or subsidiaries.
In addition, a financial holding company or a bank may not acquire a company
that is engaged in activities that are financial in nature unless each of the
subsidiary banks of the financial holding company or the bank at issue has a
CRA rating of satisfactory or better.
The GLB Act preserves the role of the Board of Governors as the umbrella
supervisor for holding companies while at the same time incorporating a
system of functional regulation designed to take advantage of the strengths
of the various federal and state regulators. In particular, the GLB Act
replaces the broad exemption from Securities and Exchange Commission
regulation that banks previously enjoyed with more limited exemptions, and it
reaffirms that states are the regulators for the insurance activities of all
persons, including federally-chartered banks.
Subsidiary banks of a bank holding company are subject to certain
restrictions on extensions of credit to the bank holding company or any of
its non-bank subsidiaries, on investments in the stock or other securities
thereof, and on the acceptance of such stocks or securities as collateral for
loans to any borrower. Among other requirements, transactions between a bank
and its affiliates must be on an arm's-length basis.
The Bank is subject to extensive supervision and regulation by the
Alabama State Banking Department and the Federal Deposit Insurance
Corporation (the "FDIC"). Among other things, these agencies have the
authority to prohibit the Bank from engaging in any activity (such as paying
dividends) that, in the opinion of the agency, would constitute an unsafe or
unsound practice. The Bank is also subject to various requirements and
restrictions under federal and state law. Areas subject to regulation include
dividend payments, reserves, investments, loans (including loans to insiders
and significant shareholders), mergers, issuance of securities, establishment
of branches and other aspects of operation, including compliance with
truth-in-lending laws, usury laws and other consumer protection laws. The
recently enacted GLB Act establishes minimum federal standards of financial
privacy pursuant to which financial institutions will be required to
institute written privacy policies that must be disclosed to customers at
certain required intervals. In addition to the impact of regulation,
commercial banks are affected significantly by the actions of the Board of
Governors as it attempts to control the money supply and credit availability
in order to influence the economy.
There are a number of obligations and restrictions imposed on bank
holding companies and their depository institution subsidiaries by federal
law and regulatory policy that are designed to reduce potential loss exposure
to the depositors of such depository institutions and to the FDIC insurance
fund in the event the depository institution becomes in danger of default or
is in default. For example, under a policy of the Board of Governors with
respect to bank holding company operations, a bank holding company is
required to serve as a source of financial strength to its subsidiary
depository institutions and commit resources to support such institutions in
circumstances where it might not do so absent such policy. In addition, the
"cross-guarantee" provisions of federal law require insured depository
institutions under common control to reimburse the FDIC for any loss suffered
or reasonably anticipated as a result of the default of a commonly controlled
insured depository institution or for any assistance provided by the FDIC to
a commonly controlled insured depository institution in danger of default.
Although the FDIC's claim is junior to the claims of non-affiliated
depositors, holders of secured liabilities, general creditors, and
subordinated creditors, it is superior to the claims of shareholders.
The federal banking agencies have broad powers under current federal law
to take prompt corrective action to resolve problems of insured depository
institutions. The extent of these powers depends upon whether the
institutions in question are "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" or"critically
undercapitalized" as such terms are defined under regulations issued by the
federal banking agencies. In general, the agencies measure capital adequacy
within a framework that makes capital requirements sensitive to the risk
profiles of individual banking companies. The guidelines define capital as
either Tier 1 (primarily common shareholders' equity) or Tier 2 (certain debt
instruments and a portion of the allowance for loan losses). Bancshares and
the Bank are subject to a minimum Tier 1 capital ratio (Tier 1 capital to
risk-weighted assets) of 4%, total capital ratio (Tier 1 plus Tier 2 to
risk-weighted assets) of 8% and Tier 1 leverage ratio (Tier 1 to average
quarterly assets) of 3%. To be considered a "well capitalized" institution,
the Tier 1 capital ratio, the total capital ratio, and the Tier 1 leverage
ratio must equal or exceed 6%, 10% and 5%, respectively.
The CRA requires that, in connection with examinations of a financial
institution such as the Bank, the FDIC must evaluate the record of the
financial institution in meeting the credit needs of its local communities,
including low and moderate income neighborhoods, consistent with the safe and
sound operation of those institutions. The CRA does not establish specific
lending requirements or programs for financial institutions nor does it limit
an institution's discretion to develop the types of products and services
that it believes are best suited to its particular community. These factors
are considered in evaluating mergers, acquisitions and applications to open a
branch or facility. The CRA also requires all institutions to make public
disclosure of their CRA ratings. The Bank received a satisfactory rating in
its most recent evaluation.
From time to time, various bills are introduced in the United States
Congress with respect to the regulation of financial institutions. Certain of
these proposals, if adopted, could significantly change the regulation of
banks and the financial services industry. Bancshares cannot predict whether
any of these proposals will be adopted or, if adopted, how these proposals
would affect Bancshares.
FDIC regulations require that management report on its responsibility
for preparing its institution's financial statements and for establishing and
maintaining an internal control structure and procedures for financial
reporting and compliance with designated laws and regulations concerning
safety and soundness.
Supervision, regulation and examination of banks by the bank regulatory
agencies are intended primarily for the protection of depositors rather than
for holders of Bancshares common stock.
Statistical Information
Statistical information concerning the business of Bancshares is set
forth in Part II of this report.
Item 2. Properties.
Bancshares owns no property and does not expect to own any. The business
of Bancshares is conducted from the offices of the Bank. With the exception
of leasing a small facility in Centreville, the Bank owns all of its offices
in fee without encumbrances. ALC leases office space throughout Alabama but
owns no property. The aggregate annual rental payments for office space for
ALC total approximately $338,340.
Item 3. Legal Proceedings.
Bancshares and the Bank, because of the nature of their businesses, are
subject at various times to numerous legal actions, threatened or pending. In
the opinion of Bancshares, based on review and consultation with legal
counsel, the outcome of any litigation presently pending against Bancshares
or the Bank will not have a material effect on Bancshares' consolidated
financial statements or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.
There were 3,634,431 shares of Bancshares common stock issued and
3,570,431 shares outstanding as of March 8, 2000. As of March 8, 2000,
there were approximately 1016 shareholders of Bancshares.
The Bank is authorized by its Articles of Incorporation to issue 25,000
shares of common stock, par value $1.00 per share, all of which are
outstanding. Bancshares is the only shareholder of the Bank.
There is no established public trading market for Bancshares common
stock. Management of Bancshares is aware that from time to time Bancshares
common stock is bought or sold in private transactions or in transactions
directly with a securities broker-dealer making a limited market in
Bancshares' common stock. Management of Bancshares is aware of approximately
50 sales of Bancshares common stock since January 1, 1999 at prices ranging
from $26.00 to $42.00 per share.
Bancshares has paid dividends on its common stock on a quarterly basis
in the past three years as follows:
Dividend paid
on Common Stock
Fiscal Year (per share)
___________ _______________
1997 $.58
1998 $.72
1999 $.82
As a holding company, Bancshares, except under extraordinary
circumstances, will not generate earnings of its own, but will rely solely on
dividends paid to it by the Bank as the source of income to meet its expenses
and pay dividends. Under normal circumstances, Bancshares' ability to pay
dividends will depend entirely on the ability of the Bank to pay dividends to
Bancshares.
The Bank is a state banking corporation, and the payment of dividends by
the Bank is governed by the Alabama Banking Code. The restrictions upon
payment or dividends imposed by the Alabama Banking Code are described in
Part II, Item 5 of Bancshares' Annual Report on Form 10-K for the year ended
December 31, 1984, (file no. 0-14549) and such description is incorporated
herein by reference.
Item 6. Selected Financial Information.
UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES
SELECTED FINANCIAL INFORMATION
Year Ended December 31,
____________________________________________________________
1999 1998 1997 1996 1995
________ _________ ________ ________ ________
(In Thousands of Dollars, Except Per Share Amounts)
RESULTS OF OPERATIONS
Interest Revenue $ 44,919 $ 43,255 $ 37,648 $ 34,551 $ 30,571
Interest Expense 15,365 15,518 15,376 15,081 13,298
________ ________ ________ ________ ________
Net Interest Revenue 29,554 27,737 22,272 19,470 17,273
Provision for Loan Losses 4,305 3,187 1,710 800 255
Non-Interest Revenue 4,747 4,558 4,361 2,725 2,555
Non-Interest Expense 18,534 17,008 15,229 11,765 10,898
________ ________ ________ _______ ________
Income Before Income Taxes 11,462 12,100 9,694 9,630 8,675
Income Taxes 3,302 3,521 2,713 2,659 2,225
________ ________ ________ _______ ________
Net Income $ 8,160 $ 8,579 $ 6,981 $ 6,971 $ 6,450
________ ________ ________ _______
________ ________ ________ _______
Net Income Per Share:
Basic $ 2.29 $ 2.42 $ 1.97 $ 1.97 $ 1.83
Diluted $ 2.28 $ 2.40 $ 1.96 $ 1.97 $ 1.83
Average Number of Shares
Outstanding (000) 3,561 3,543 3,537 3,537 3,520
PERIOD END STATEMENT OF CONDITION
Total Assets $476,599 $450,073 $425,941 $430,383 $377,120
Loans 276,172 235,060 215,897 204,886 182,000
Deposits 326,751 326,645 322,418 346,306 304,381
Shareholders' Equity 61,671 60,568 52,711 47,616 41,795
AVERAGE BALANCES
Total Assets $459,922 $439,080 $434,010 $410,541 $364,330
Average Earning Assets 424,074 408,506 402,271 382,458 337,921
Loans 256,192 231,792 212,570 198,327 172,146
Deposits 328,263 320,958 345,442 327,531 294,063
Shareholders' Equity 61,140 57,409 50,164 44,044 37,588
PERFORMANCE RATIOS
Net Income to:
Average Total Assets 1.77% 1.95% 1.61% 1.70% 1.77%
Average Shareholders' Equity 13.35% 14.94% 13.92% 15.83% 17.16%
Average Shareholders' Equity to
Average Total Assets 13.29% 13.07% 11.55% 10.73% 10.32%
Dividend Payout Ratio 36.67% 31.40% 26.79% 20.21% 18.12%
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Introduction
The following discussion and financial information are presented to aid
in an understanding of the current financial position and results of
operations of Bancshares, Inc. ("United Security"), and should be read in
conjunction with the Audited Financial Statements and Notes thereto included
herein. The emphasis of this discussion will be on the years 1999, 1998, and
1997. All yields presented and discussed herein are based on the accrual
basis and not on the tax-equivalent basis.
On June 30, 1997, First Bancshares, the parent holding company of First
Bank and Trust, merged with and into United Security. The merger was
accounted for as a pooling of interests, and, accordingly, financial
information for all prior periods has been restated to present the combined
financial condition and results of operations of both companies as if the
merger had been in effect for all periods presented.
United Security is the parent holding company of First United Security
Bank (the "Bank"). The Bank operates a finance company, Acceptance Loan
Company, that currently has thirty-three offices in Alabama, Northwest
Florida, and Southeast Mississippi.
United Security also began a courier company as a subsidiary, First
Security Courier Corporation, in 1997 mainly for the purpose of delivering
checks and documents to the Federal Reserve to aid in check clearing. This
courier company performs courier services for First United Security Bank as
well as other companies in our market area.
At December 31, 1999, United Security had consolidated assets of
approximately $476.6 million and operated eighteen banking locations in five
counties. These eighteen locations contributed approximately $7.9 million to
consolidated net income in 1999. First United Security Bank's sole business
is banking; therefore, loans and investments are its principal source of
income.
This discussion contains certain forward looking statements with respect
to the financial condition, results of operation and business of United
Security and the Bank related to, among other things:
(A) trends or uncertainties which will impact future operating results,
liquidity and capital resources, and the relationship between those
trends or uncertainties and nonperforming loans and other loans;
(B) the diversification of product production among timber related
entities and the effect of that diversification on the Bank's
concentration of loans to timber related entities;
(C) the composition of United Security's derivative securities
portfolio and its interest rate hedging strategies and volatility
caused by uncertainty over the economy, inflation and future
interest rate trends;
(D) the effect of the market's perception of future inflation and real
returns and the monetary policies of the Federal Reserve Board
on short and long term interest rates;
(E) the effect of interest rate changes on liquidity and interest rate
sensitivity management;
(F) the amount of anticipated (i) net loan charge offs; (ii) loans on a
non-accrual basis; and (iii) options income and other
off-balance-sheet income; and
(G) the expectations, beliefs, and plans of Management as set forth in
the letter to shareholders contained in this Annual Report.
These forward looking statements involve certain risks and
uncertainties. Factors that may cause actual results to differ materially
from those contemplated by such forward looking statements include, among
other possibilities:
(1) the perceived diversification in product production within the
timber industry fails to protect the Bank from its concentration of
loans to the timber industry as a result of, for example, the
emergence of technological developments or market difficulties that
affect the timber industry as a whole;
(2) periods of lower interest rates continue to accelerate the rate at
which the underlying obligations of mortgage-backed securities and
collateralized mortgage obligations are prepaid, thereby affecting
the yield on such securities held by the Bank;
(3) inflation grows at a greater-than-expected rate with a material
adverse effect on interest rate spreads and the assumptions
management of United Security has used in its interest rate hedging
strategies and interest rate sensitivity gap strategies;
(4) rising interest rates adversely affect the demand for consumer
credit; and
(5) general economic conditions, either nationally or in Alabama, are
less favorable than expected.
Financial Condition
United Security's financial condition depends primarily on the quality
and nature of the Bank's assets, liabilities, capital structure, the quality
of its personnel, and prevailing market and economic conditions.
The majority of the assets and liabilities of a financial institution
are monetary and, therefore, differ greatly from most commercial and
industrial companies that have significant investments in fixed assets and
inventories. Inflation has an important impact on the growth of total assets
in the banking industry, resulting in the need to increase equity capital at
rates greater than the applicable inflation rate in order to maintain an
appropriate equity to asset ratio. Also, the category of other expenses tends
to rise during periods of general inflation.
In conjunction with the First Bancshares merger on June 30, 1997, First
United Security Bank sold the deposits, branch facility and associated assets
of its branch office in Grove Hill effective November 1, 1997 as directed by
the United States Department of Justice as a requirement for the merger
approval. This divestiture reduced deposits by approximately $9.8 million.
The Bank owns all of the stock of Acceptance Loan Company, Inc. ("ALC"),
an Alabama Corporation. ALC is a finance company organized for the purpose of
making consumer loans. The Bank is ALC's only source of funds and ALC's
funding makes up approximately $76 million of the Bank's loans.
Management believes the most significant factor in producing quality
financial results is the Bank's ability to react properly and timely to
changes in interest rates. Management is, therefore, attempting to maintain a
more balanced position between interest-sensitive assets and liabilities in
order to protect against wide interest rate fluctuations. The following table
reflects the distribution of average assets, liabilities, and shareholders'
equity for each of the three years ended December 31, 1999, 1998, and 1997.
Distribution of Assets, Liabilities, and Shareholders' Equity, with
Interest Rates and Interest Differentials
December 31,
_______________________________________________________________________________________________________
1999 1998 1997
_______________________________ ________________________________ _______________________________
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate % Balance Interest Rate % Balance Interest Rate %
________ ________ ______ ________ ________ ______ ________ ________ ______
(In Thousands of Dollars, Except Percentages)
ASSETS
Interest-Earning Assets:
Loans (Note A) $256,192 $33,776 13.18% $231,792 $29,397 12.68% $212,570 $22,964 10.80%
Taxable Investments
(Note B) 140,387 9,498 6.77% 150,678 12,292 8.16% 161,125 12,854 7.98%
Non-Taxable Investments 25,029 1,528 6.10% 24,206 1,469 6.07% 26,704 1,736 6.50%
Federal Funds Sold 2,466 117 4.74% 1,830 97 5.30% 1,872 95 5.07%
________ _______ ______
Total Interest-Earning
Assets 424,074 44,919 10.59% 408,506 43,255 10.59% 402,271 37,649 9.36%
________ _______ _____ ________ _______ _____ ________ _______ _____
Non-Interest Earning Assets:
Other Assets 35,848 30,574 31,739
________ ________ ________
Total $459,922 $439,080 $434,010
________ ________ ________
________ ________ ________
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest-Bearing Liabilities:
Demand Deposits $ 59,885 $ 1,225 2.05% $ 59,794 $ 1,387 2.32% $ 64,607 $ 1,644 2.54%
Savings Deposits 39,896 1,026 2.57% 41,728 1,137 2.72% 43,797 1,218 2.78%
Time Deposits 188,170 9,932 5.28% 180,128 9,971 5.44% 193,738 10,413 5.37%
Other Liabilities 62,700 3,182 5.07% 54,383 3,023 5.56% 34,605 2,101 6.07%
________ _______ _____ ________ _______ _____ ________ _______ _____
Total Interest-Bearing
Liabilities 350,651 15,365 4.38% 336,033 15,518 4.62% 336,747 $15,376 4.57%
Non-Interest Bearing
Liabilities:
Demand Deposits $ 40,312 $ 39,308 $ 43,300
Other Liabilities 7,819 6,330 3,799
Shareholders' Equity 61,140 57,409 50,164
________ ________ ________
Total $459,922 $439,080 $434,010
________ ________ ________
________ ________ ________
Net Interest Income
(Note C) $29,554 $27,737 $22,273
_______ _______ _______
_______ _______ _______
Net Yield on Interest-
Earning Assets 6.97% 6.79% 5.54%
_____ _____ _____
_____ _____ _____
Note A -- For the purpose of these computations, non-accruing loans are
included in the average loan amounts outstanding.
Note B -- Taxable investments include all held-to-maturity,
available-for-sale, and trading account securities.
Note C -- Loan fees of $1,665,872, $1,099,758, and $815,566 for 1999, 1998,
and 1997, respectively, are included in interest income amounts
above.
Loans and Allowances for Loan Losses
Total loans outstanding increased by $41.7 million in 1999 with $281.8
million outstanding at year end. Real estate loans increased by $33.7 million
to $157.0 million outstanding at December 31, 1999. Real estate loans made up
55.7% of total gross loans at year end 1999. Construction activity in the
trade areas continues to be predominately commercial. The Company continues
to offer a home equity loan and a long-term fixed-rate mortgage loan program.
Real estate loans consist of construction loans to both businesses and
individuals. These loans relate to residential and commercial development,
commercial buildings and apartment complexes. Real estate loans also consist
of other loans secured by real estate such as one-to-four family dwellings
including mobile homes, loans on land only, multi-family dwellings, non-farm
non-residential real estate and home equity loans. Acceptance Loan Company
had a total of $15.6 million in real estate loans or 10.5% of total real
estate loans at year end 1999.
Commercial loans totaled $40.0 million at December 31, 1999. These loans
increased $4.5 million or 12.8% from December 31, 1998.
Consumer installment loans totaled $90.6 million at December 31, 1999.
This increase of $4.3 million or 5.0% is almost all attributed to growth in
Acceptance Loan Company. These loans include loans to individuals for
household, family and other personal expenditures including credit cards and
other related credit plans. Consumer installment loans by ALC represent $65.0
million or 71.4% of total consumer installment loans. The yields on these
loans average over 22% A.P.R. and enhance the Bank's net interest margin.
However, these loans carry a higher risk than the average bank loan and
accordingly require a higher loan loss reserve.
Acceptance Loan Company is a wholly-owned subsidiary of First United
Security Bank. ALC was organized in 1995 primarily to make consumer loans. At
December 31, 1995, three offices were in operation with $1.9 million in total
loans outstanding. At December 31, 1996, six offices were open with total
loans outstanding. At December 31, 1997, twenty offices were open with $39.4
million in total loans. There were twenty-five offices open on December 31,
1998, with $71.2 million in gross loans outstanding. Thirty-three offices
were open on December 31, 1999, with twenty-five offices located in Alabama,
three in Mississippi and five in Florida. Combined loans from these offices
total $80.6 million and make up 28.6% of total loans of First United Security
Bank.
The allowance for loan losses is maintained at a level which, in
management's judgment, is adequate to absorb credit losses inherent in the
loan portfolio. The amount of the allowance is based on management's
evaluation of the collectibility of the loan portfolio, including the nature
of the portfolio and changes in its risk profile, credit concentrations,
historical trends, specific impaired loans, and economic conditions. This
evaluation also considers the balance of impaired loans. Losses on
individually identified impaired loans are measured based on the present
value of expected future cash flows discounted at each loan's original
effective market interest rate. As a practical expedient, impairment may be
measured based on the loan's observable market price or the fair value of the
collateral if the loan is collateral dependent. When the measure of the
impaired loan is less than the recorded investment in the loan, the
impairment is recorded through the provision added to the allowance for loan
losses. One-to-four family residential mortgages and consumer installment
loans are subjected to a collective evaluation for impairment, considering
delinquency and repossession statistics, historical loss experience, and
other factors. Though management believes the allowance for loan losses to be
adequate, ultimate losses may vary from their estimates. However, estimates
are reviewed periodically, and as adjustments become necessary, they are
reported in earnings during periods they become known.
The Bank's loan policy requires immediate recognition of a loss if
significant doubt exists as to the repayment of the principal balance of a
loan. Consumer installment loans at the Bank and ALC are generally recognized
as losses if they become 90 days and 120 days or more delinquent,
respectively. The only exception to this policy occurs when the underlying
value of the collateral or the customer's financial position makes a loss
unlikely.
A credit review of the Bank's individual loans is conducted periodically
by branch and by loan officer. A risk rating is assigned to each loan and is
reviewed at least annually. In assigning risk, management takes into
consideration the capacity of the borrower to repay, collateral values,
current economic conditions and other factors.
Loan officers and other personnel handling loan transactions undergo
frequent training dedicated to improving the credit quality as well as the
yield of the loan portfolio. First United Security Bank operates under a
written loan policy which attempts to guide lending personnel in maintaining
a consistent lending function. This policy is intended to aid loan officers
and lending personnel in making sound credit decisions and to assure
compliance with state and federal regulations. In addition, the intent of the
loan policy is to provide lending officers with a guide to making loans which
will provide an adequate return while providing services to the communities
and trade areas in which we are located.
The balance in the allowance for loan losses as of December 31, 1999,
was $5.6 million. This increase of approximately $600,000 over year end 1998
reflects the continuing evaluation of the Bank's portfolio and the growth in
Acceptance Loan Company. Management considers this allowance adequate for
coverage of losses inherent in the loan portfolio. This allowance remains at
2% of total loans.
In order to better manage credit risk, ALC's lending policy requires
credit information for each applicant to determine income, payment
obligations, indebtedness, paying habits, and length and stability of
employment. The information is obtained from the applicants, the applicant's
employers, creditors of the applicants, and credit reporting agencies.
Acceptance Loan Company also carefully oversees its portfolio through
monitoring of customer payments and active follow-up. ALC believes that its
large number of customers, their broad range of occupations, and geographical
distribution minimize any risk to its business, which may be created by
unfavorable local conditions. ALC has an established process to determine the
adequacy of the allowance for loan losses which is conducted on an aggregate
level based upon recent delinquency status. Acceptance Loan Company policy
requires charge off of all loans over a specified delinquent period. The CEO
of the company must approve any exception to this policy.
The following table shows the Bank's loan distribution as of December
31, 1999, 1998, 1997, 1996 and 1995.
December 31,
____________________________________________________________
1999 1998 1997 1996 1995
________ _________ _________ ________ ________
(In Thousands of Dollars)
Commercial, Financial and Agricultural $ 39,996 $ 35,444 $ 35,036 $ 36,387 $ 33,696
Real Estate 156,979 123,264 126,824 126,666 114,985
Installment 90,599 86,282 61,822 49,119 36,301
Less: Unearned Interest, Commissions
& Fees 5,823 4,941 3,738 4,153 1,525
________ ________ ________ ________ ________
Total $281,751 $240,049 $219,944 $208,019 $183,457
________ ________ ________ ________ ________
________ ________ ________ ________ ________
The amounts of total loans (excluding installment loans) outstanding at
December 31, 1999, which, based on the remaining scheduled repayments of
principal, are due in (1) one year or less, (2) more than one year but within
five years, and (3) more than five years, are shown in the following table.
Maturing
________________________________________________
After One
Within But Within
One Year Five Years Five Years Total
________ __________ __________ ________
(In Thousands of Dollars)
Commercial, Financial, and Agricultural $ 25,787 $ 9,387 $ 4,822 $ 39,996
Real Estate - Mortgage 67,982 45,514 43,483 156,979
________ ________ ________ ________
Total $ 93,769 $ 54,901 $ 48,305 $196,975
________ ________ ________ ________
________ ________ ________
Variable rate loans totaled approximately $59.4 million and are included
in the one-year category.
First United Security Bank and Acceptance Loan Company (a wholly owned
subsidiary of First United Security Bank) began the year with a combined
balance in the allowance for loan losses of $5.0 million. Total loans charged
off in 1999 totaled $4.5 million. Recoveries on loans previously charged off
totaled $514,000, resulting in net charge-offs of $4.0 million. Net
charge-offs for 1998 totaled $2.2 million. Management allocated and charged
to operations $4.3 million in 1999 as an addition to the allowance for loan
losses. This compares to $3.2 million charged to operations for 1998. The
balance of $5.6 million at year end 1999 represented 2.0% of total loans
outstanding and is considered adequate for losses inherent in the portfolio.
Total loans outstanding on December 31, 1999 were $281.8 million. Of
this total, loans by ALC amounted to $80.6 million. This represents 28.6% of
total loans outstanding. Of the $5.6 million balance in the allowance for
loan losses account at December 31, 1999, $2.5 million or 44.6% is
represented by reserves maintained for ALC loans.
Non-Performing Assets
The following table presents information on non-performing loans and
real estate acquired in settlement of loans.
December 31,
__________________________________________________
1999 1998 1997 1996 1995
______ ______ ______ ______ ______
(In Thousands of Dollars)
Non-Performing Assets:
Loans Accounted for on a Non-Accrual Basis $1,725 $3,460 $1,488 $1,797 $ 169
Accruing Loans Past Due 90 Days or More 1,347 1,610 1,285 1,122 1,390
Real Estate Acquired in Settlement of Loans 286 215 506 18 63
______ ______ ______ ______ ______
Total $3,358 $5,285 $3,279 $2,937 $1,622
______ ______ ______ ______ ______
______ ______ ______ ______
Percent of Net Loans and Other Real Estate 1.21% 2.25% 1.52% 1.44% 0.90%
______ ______ ______ ______ ______
______ ______ ______ ______
Accruing loans past due 90 days or more at December 31, 1999, totaled
$1.3 million. These loans are well secured and taking into consideration the
collateral value and the financial strength of the borrowers, management
believed there would be no loss in these accounts and allowed the loans to
continue accruing. Those loans 90 days and more past due, whether on accrual
or non-accrual, are reviewed by the Board of Directors each month. Loans past
due 90 days produced by Acceptance Loan Company totaled $1.1 million at
December 31, 1999, or 81.7% of all loans past due 90 days and more and still
accruing.
At December 31, 1999, the Company had one loan considered to be
impaired. The amount of this loan, which is on non-accrual, is $457,468 and
the related allowance is $228,734. The average recorded investment in
impaired loans during the year ended December 31, 1999 was approximately
$472,147. For the year ended December 31, 1999, the Company did not recognize
interest income on the impaired loan during the period the loan was
considered impaired. The Company had approximately $487,000 considered to be
impaired at December 31, 1998.
In the opinion of management, non-performing loans and any other loans
which have been classified for regulatory purposes do not represent or result
from trends or uncertainties which will materially impact future operating
results, liquidity, or capital resources. Management is not aware of
information which would cause serious doubts as to the ability of borrowers
to comply with present repayment terms. Non-performing assets as a percentage
of net loans and other real estate was 1.21% at December, 1999. Loans past
due 90 days or more and still accruing are reviewed closely by management and
are allowed to continue accruing only when underlying collateral values and
management's belief that the financial strength of the borrowers is
sufficient to protect the Bank from loss. If at any time management
determines there may be a loss of interest or principal, these loans will be
changed to non-accrual and their asset value downgraded. Through frequent
training, our lending officers are directed by the Bank's written loan policy
to make loans within our trade area, to obtain adequate down payments on
purchase-money transactions, and to lend within policy guidelines on other
transactions. In addition, the Bank's loan review officer conducts an
independent review of individual loans by branch and officer.
First United Security Bank discontinues the accrual of interest on a
loan when management has reason to believe the financial condition of the
borrower has deteriorated so that the collection of interest is in doubt.
When a loan is placed on non-accrual, all unpaid accrued interest is reversed
against current income unless the collateral securing the loan is sufficient
to cover the accrued interest. Interest received on non-accrual loans is
generally either applied against the principal or cash basis, according to
management's judgement as to whether the borrower can ultimately repay the
loan. A loan may be restored to accrual status if the obligation is brought
current, performs in accordance with the contract for a reasonable period,
and if management determines that the repayment of the total debt is no
longer in doubt.
It is the policy of the Bank to charge-off immediately as loss all
amounts judged to be uncollectible. Management is aware that certain losses
may exist in the loan portfolio which have not been specifically identified.
The allowance for loan losses is established for this reason. This allowance
was $5.6 million at year-end and represented 2% of total loans outstanding.
Management believes this allowance is adequate to absorb any future loan
losses.
Allocation of Allowance for Loan Losses
The following table shows an allocation of the allowance for loan losses
for each of the five years indicated.
December 31,
________________________________________________________________________________________________________________
1999 1998 1997 1996 1995
____________________ ____________________ ____________________ ____________________ ____________________
Percent Percent Percent Percent Percent
of Loans of Loans of Loans of Loans of Loans
in Each in Each in Each in Each in Each
Category Category Category Category Category
Allowance to Total Allowance to Total Allowance to Total Allowance to Total Allowance to Total
Allocation Loans Allocation Loans Allocation Loans Allocation Loans Allocation Loans
__________ ________ __________ ________ __________ ________ __________ ________ __________ ________
(In Thousands of Dollars)
Commercial,
Financial, and
Agricultural $ 837 14% $ 748 15% $1,416 16% $1,097 17% $ 370 18%
Real Estate 558 55 499 50 405 57 313 60 493 62
Installment 4,184 31 3,742 35 2,225 27 1,724 23 1,604 20
______ ___ ______ ___ ______ ___ ______ ___ ______ ___
Totals $5,579 100% $4,989 100% $4,046 100% $3,134 100% $2,467 100%
______ ___ ______ ___ ______ ___ ______ ___ ______ ___
______ ___ ______ ___ ______ ___ ______ ___ ______ ___
Note: First Bank & Trust did not allocate Allowance for Loan Losses by
category. Percentages for United Security Bank were used 1995-1996.
The allowance for loan losses is established by risk group as follows:
Large classified loans and nonaccrual loans are evaluated individually
with specific reserves allocated based on management's review.
Smaller nonaccrual and adversely classified loans are assigned a portion
of the allowance based on loan grading. Smaller past due loans are
assigned a portion of the allowance using a formula that is based on the
severity of the delinquency.
The remainder of the portfolio is also allocated a portion of the
allowance based on past loss experience and the economic conditions for
the particular loan portfolio. Allocation weights are assigned based on
the Company's historical loan loss experience in each category, although
a higher allocation weight may be used if current conditions indicate
that loan losses may exceed historical experience.
The unallocated portion of the allowance is for inherent losses which
probably exist as of the valuation date even though they may not have been
identified by the more objective processes used for the allocated portion of
the allowance. This portion of the allowance is particularly subjective and
requires judgements based upon qualitative factors which do not lend
themselves to exact mathematical calculations. Some of the factors considered
are changes in credit concentrations, loan mix, changes in underwriting
practices, historical loss experience, and the general economic environment
in the Company's markets. While the total allowance is described as
consisting of an allocated and an unallocated portion, these terms are
primarily used to describe a process. Both portions are available to support
inherent losses in the loan portfolio.
The table above is based in part on the loan portfolio make-up, the
Bank's internal risk evaluation, historical charge-offs, past-due loans,
non-accrual loans and management's judgement. The portion of the allowance
that has not been identified by the Company as related to specific loan
categories has been allocated to the individual loan categories on a pro rata
basis for purposes of the table above.
Net charge-offs as shown in the "Summary of Loan Loss Experience" below
indicates the trend for the last five years. Net loan charge-offs as a
percentage of average loans increased from .97% in 1998 to 1.54% in 1999.
Summary of Loan Loss Experience
This table summarizes the Bank's loan loss experience for each of the
five years indicated.
December 31,
____________________________________________________________
1999 1998 1997 1996 1995
________ ________ ________ ________ ________
(In Thousands of Dollars)
Balance at Beginning of Period $ 4,989 $ 4,046 $ 3,134 $ 2,467 $ 1,904
Charge-Offs:
Commercial, Financial, and Agricultural (94) (94) (299) (246) (201)
Real Estate - Mortgage (116) (111) (20) (21) (6)
Installment (4,232) (2,373) (694) (497) (179)
Credit Cards (30) (11) (26) (9) (8)
_______ _______ _______ _______ _______
$(4,472) $(2,589) $(1,039) $ (773) $ (394)
Recoveries:
Commercial, Financial and Agricultural $ 166 $ 120 $ 110 $ 96 $ 52
Real Estate - Mortgage 21 15 18 0 5
Installment 418 305 107 117 62
Credit Cards 9 5 6 4 8
_______ _______ _______ _______ _______
$ 514 $ 345 $ 241 $ 217 $ 127
Net Charge-Offs (Deduction) $(3,958) $(2,244) $ (798) $ (556) $ (267)
Additions Charged to Operations 4,305 3,187 1,710 800 255
Allowances Acquired 243*** 0 0 423** 575*
_______ _______ _______ _______ _______
Balance at End of Period $ 5,579 $ 4,989 $ 4,046 $ 3,134 $ 2,467
_______ _______ _______ _______ _______
_______ _______ _______ _______ _______
Ratio of Net Charge-Offs During Period
to Average Loans Outstanding 1.54% 0.97% 0.38% 0.28% 0.16%
* Acquisition of Bibb County Branches by First Bank and Trust in 1995.
** Acquisition of Brent Banking Company by United Security Bank in 1996.
*** Branch acquisitions by ALC in 1999.
Non-Accruing Loans
Summarized below is information concerning the income on those loans
with deferred interest or principal payments resulting from a deterioration
in the financial condition of the borrower.
December 31,
____________________________
1999 1998 1997
______ ______ ______
(In Thousands of Dollars)
Total Loans Accounted for on a Non-Accrual Basis $1,725 $3,460 $1,488
Interest Income that Would Have Been Recorded
under Original Terms $ 247 $ 340 $ 154
Interest Income Reported and Recorded During
the Year $ 211 $ 298 $ 108
Total loans on non-accrual decreased by $1.7 million from December 31,
1998 to December 31, 1999. The majority of the loans in this category are in
process of liquidation or management has commitments from the principals
involved for reduction during the year. Underlying collateral values support
those loans which are not already in liquidation. Management continues to
emphasize asset quality and expects an increase in non-accrual loans during
the year 2000 as the $1.1 million in loans past due 90 days and more on the
books of ALC are moved to non-accrual or charged to the loan loss reserve.
The Company believes that at December 31, 1999, it has adequate reserves for
losses inherent in this portion of the portfolio.
Lending officers and other personnel involved in the lending process
receive ongoing training in compliance as well as asset quality. The Company
has no foreign loans. The Company does not make loans on commercial property
outside our market area without prior approval of the Board of Directors or
the Directors' Loan Committee. The Company is conservative in its lending
directives.
Industry Concentration Factors
The First United Security Bank trade area includes Clarke, Choctaw,
Bibb, Tuscaloosa, and Shelby Counties in Alabama. In addition, parts of
Chilton, Hale, Jefferson, Marengo, Monroe, Perry, Washington, Sumter and
Wilcox Counties in Alabama as well as parts of Clarke, Lauderdale and Wayne
Counties in Mississippi are included. There are several major paper mills in
our trade area including the Alabama River Companies, Boise Cascade, Fort
James and Weyerhauser. In addition, there are several sawmills, lumber
companies, and pole and piling producers. The table below shows the dollar
amount of loans made to timber and timber related companies as of December
31, 1999. The amount of timber related loans decreased from $41.5 million in
1998 to $31.2 million in 1999. The percentage of timber related loans to
gross loans decreased from 16.9% to 11.07%. The growth in ALC loans of $10.5
million during 1999 helped to reduce the timber industry concentration.
Timber Total Percentage of
Related Loans Gross Loans Total Loans
_____________ ______________ _____________
$31.2 million $281.8 million 11.07%
Management understands the concern about concentration of loans in
timber and timber-related industries. However, we continue to feel these
risks are reduced by the diversification of product production within these
industries. Some of the mills and industries specialize in paper and pulp,
some in lumber and plywood, some in poles and pilings, and others in wood and
veneer. We do not believe that this concentration is excessive or that it
represents a trend which might materially impact future earnings, liquidity,
or capital resources of the Bank. Management realizes that the Company is
heavily dependent on the economic health of the timber related industries.
The Company continues to benefit from the area industries engaged in the
growing, harvesting, processing and marketing of timber and timber-related
products. The majority of the land in our trade area is used to grow pine
and hardwood timber. Agricultural production loans make up less than 1% of
the Company's total loan portfolio.
Investments in Limited Partnerships
First United Security Bank invests in limited partnerships that operate
qualified affordable housing projects to receive tax benefits in the form of
tax deductions from operating losses and tax credits. The Bank accounts for
the investments under either the equity or the cost method based on the
percentage ownership and influence over operations. The Company's interest in
these partnerships was $5.5 million and $4.2 million for 1999 and 1998,
respectively. Costs associated with the partnerships carried under the equity
method amounted to approximately $119,000, $128,000, and $122,000 for 1999,
1998, and 1997, respectively. Management analyzes these investments annually
for potential impairment. The assets and liabilities of these partnerships
consist primarily of apartment complexes and related mortgages. United
Security's carrying value approximates cost or its underlying equity in the
net assets of the partnerships. The Company has remaining cash commitments to
these partnerships at December 31, 1999 in the amount of $36,000. Although
these investments are considered non-earning assets they do contribute to the
bottom line in the form of Federal income tax credits. These credits amounted
to $541,000 in 1998 and are estimated to be approximately $540,000 for 1999.
Also, operating losses related to these partnerships are available as
deductions for taxes on the Company's books.
Deposits
Average total deposits were up a modest amount, with a 2.3% increase in
1999. Management believes this deposit level was affected by the competitive
interest rate environment, and the availability of other low cost funding
sources for the Bank.
Average non-interest bearing demand deposits have decreased 6.9% over
the last three years, while the increase for 1999 was 2.6%. The ratio of
average non-interest bearing deposits to average total deposits remained
relatively steady in 1999 at 12.3% from 12.2% in 1998 and 12.5% in 1997.
Average interest-bearing transaction accounts have decreased 7.3% during
the last three years partly because the Bank reclassified a portion of
interest-bearing transaction accounts to money market savings accounts in
1997. Nevertheless, interest-bearing transaction accounts continue to be an
important source of funds for the Bank, accounting for 18.2% of average total
deposits in 1999.
Average time deposits increased by 4.5% in 1999, compared to a decrease
of 7% in 1998. Time deposits represented 57.3% of the total average deposits
in 1999 compared to 56.1% in 1998 and 56.1% in 1997.
Average savings deposits have declined 8.9% since 1997. Average savings
declined 4.4% in 1999. The ratio of average savings to average total deposits
decreased to 12.2% in 1999 compared to 13.0% in 1998 and 12.7% in 1997.
First United Security Bank's deposit base remains the primary source of
fund. These deposits represented 77.4% of the average earning assets in 1999
and 78.6% of the average earning assets in 1998. As seen in the following
table, overall rates on the deposits decreased to 3.71% in 1999, compared to
3.89% in 1998 and 3.84% in 1997. Emphasis continues to be placed on
attracting consumer deposits.
Management, as part of an overall program to emphasize the growth of
transaction accounts, is now introducing "on-line" banking and a bill paying
program as well as enhancing the telephone banking product and the employee
incentive plan. In addition, an increased effort is being placed on
promotions, direct mail campaigns and cross selling efforts. This is being
accomplished by remaining safe and sound, emphasizing our products and
providing quality service.
Other Interest-Bearing Liabilities - Other interest-bearing liabilities
include all interest-bearing liabilities except deposits, such as: federal
funds purchased and Federal Home Loan Bank advances. This category continues
to be more fully utilized as an alternative source of funds as evidenced by
the $8.3 million or 15.3% increase in average borrowing during 1999. The
increase was representative of both volume increases of long term advances
from the Federal Home Loan Bank (FHLB) and short term federal funds
purchased. The appeal of this alternative funding was further illustrated by
the fact that average rates on the other liabilities declined by 49 basis
points, while total average deposit rates declined by only 18 basis points in
1999.
Average Daily Amount of Deposits and Rates
The average daily amount of deposits and rates paid on such deposits is
summarized for the periods in the following table.
December 31,
________________________________________________________________
1999 1998 1997
__________________ __________________ ____________________
Amount Rate Amount Rate Amount Rate
________ ____ ________ _____ ________ _____
(In Thousands of Dollars, Except Percentages)
Non-Interest Bearing DDA $ 40,312 $ 39,308 $ 43,300
Interest-Bearing DDA 59,885 2.05% 59,794 2.32% 64,607 2.54%
Savings Deposits 39,896 2.57 41,728 2.72 43,797 2.78
Time Deposits 188,170 5.28 180,128 5.44 193,738 5.37
________ ____ ________ ____ ________ ____
Total $328,263 3.71% $320,958 3.89% $345,442 3.84%
________ ____ ________ ____ ________ ____
________ ____ ________ ____ ________ ____
Maturities of Time Certificates of Deposits and Other Time Deposits of
$100,000 or more outstanding at December 31, 1999, are summarized as follows:
Time Other
Certificates Time
Maturities of Deposits Deposits Total
__________ ____________ ___________ ___________
(In Thousands of Dollars)
3 Months or Less $20,155,468 $16,303,081 $26,458,549
Over 3 Through 6 Months 8,391,139 0 8,391,139
Over 6 Through 12 Months 3,781,780 0 3,781,780
Over 12 Months 13,722,161 0 13,722,161
___________ ___________ ___________
Total $46,053,294 $16,303,081 $52,356,375
___________ ___________ ___________
___________ ___________ ___________
Investment Securities and Securities Available for Sale
Investment securities available for sale included Mortgage-Backed
Securities of $127.1 million, U.S. treasury and agency securities of $2.8
million, state, county and municipal securities of $24.4 million, and other
securities of $3.5 million. The securities portfolio is carried at fair value
and it decreased $6.1 million from December 1998 to December 1999 as a result
of unrealized losses due to changes in the rate environment.
At December 1999, approximately $33.4 million in CMOs had floating
interest rates which reprice monthly and $54.5 million had fixed interest
rates.
Because of their liquidity, credit quality and yield characteristics,
the majority of the purchases of taxable securities have been purchases of
agency guaranteed mortgage-backed obligations and collateralized mortgage
obligations. The mortgage-backed obligations in which United Security invests
represent an undivided interest in a pool of residential mortgages or may be
collateralized by a pool of residential mortgages ("mortgage-backed
securities"). Mortgage-backed securities have yield and maturity
characteristics corresponding to the underlying mortgages and are subject to
any prepayments of principal due to prepayment, refinancing, or foreclosure
of the underlying mortgages. Although maturities of the underlying mortgage
loans may range up to 30 years, amortization and prepayments substantially
shorten the effective maturities of mortgage-backed securities. Transactions
in these securities have focused on the three to seven year average maturity
range. Principal and interest payments also add significant liquidity to the
balance sheet. In 1999, there was a continuing emphasis in CMOs, all of which
are collateralized by U. S. Government and Agency Mortgage Pools. The CMO
market in existence since 1983 was created to add liquidity to the
mortgage-backed security ("MBS") market by furnishing better distribution of
risk/reward profiles. Since CMOs are derived from MBS pools, they are labeled
mortgage derivatives.
Although the Federal Financial Institution Examination Council no longer
requires that all MBS derivatives be tested for suitability as an investment
in the portfolio of financial institutions, First United Security Bank
continues to run these tests at purchase and periodically thereafter. The
three tests being performed are as follows:
#1 -- Average Life Test --
The expected average life of the security must be less than or equal to
10 years.
#2 -- Average Life Sensitivity Test --
The average life of the security will not extend by more than 4 years
or shorten by more than 6 years for immediate Treasury curve shifts of
+/- 300 basis points (3%).
#3 -- Price Sensitivity Test --
The estimated price of the security will not change by more than 17%
for immediate Treasury curve shifts of +/- 300 basis points.
Securities that do not pass all three tests are designated "high risk".
United Security held $17 million in securities which, at December 31,
1999, were designated high risk. $7 million of these securities were floating
rate, $9.4 million were inverse floating rate securities and $.6 million were
fixed rate securities. These securities were purchased and/or are being held
to hedge certain areas of interest rate risk in the portfolio and balance
sheet. There were unrealized losses in this portion of the portfolio at
December 31, 1999 of $918,224.
The overall securities portfolio is formally monitored on a monthly
basis, and assessments are made continually relative to United Security's
exposure to fluctuations in interest rates. Changes in the level of earnings
and fair values of securities are generally attributable to fluctuations in
interest rates, as well as volatility caused by general uncertainty over the
economy, inflation, and future interest rate trends. MBS and CMOs present
some degree of additional risk s collateralizing these securities can be
prepaid, thereby affecting the yield and market value of the portfolio.
The composition of United Security's investment portfolio reflects
United Security's investment strategy of maximizing portfolio yields
commensurate with risk and liquidity considerations. The primary objectives
of United Security's investment strategy are to maintain an appropriate level
of liquidity and provide a tool to assist in controlling United Security's
interest rate position while at the same time producing adequate levels of
interest income.
Fair market values of securities vary significantly as interest rates
change. The gross unrealized gains and losses in the securities portfolio are
not expected to have a material impact on future income, liquidity or other
funding needs. There were unrealized losses (net of taxes) of $1.8 million in
the securities portfolio on December 31, 1999 versus net unrealized gains
(net of taxes) of $2.8 million one year ago.
United Security uses other off balance sheet derivative products for
hedging purposes. These include interest rate swaps and caps. The use and
detail regarding these products are fully discussed under "Liquidity and
Interest Rate Sensitivity Management" and in Note 19 in the "Notes to
Consolidated Financial Statements".
Investment Securities Available-for-Sale
The following table sets forth the amortized costs of investment
securities as well as their fair value and related unrealized gains or loss
at the dates indicated.
December 31,
__________________________________
1999 1998 1997
_________ ________ ________
(In Thousands of Dollars)
Investment Securities Available for Sale:
U.S. Treasury and Agencies Securities $ 2,891 $ 2,090 $ 2,096
Obligations of States, Counties, and Political Subdivisions 24,550 23,841 22,228
Mortgage-Backed Securities 129,737 132,588 144,310
Other Securities 3,501 3,076 2,245
Total Book Value 160,679 159,505 170,879
Net Unrealized Gains/Losses (2,805) 4,514 1,620
________ ________ ________
Total Market Value $157,874 $164,019 $172,499
________ ________ ________
________ ________ ________
Investment Securities Available-for-Sale Maturity Schedule
Maturing
__________________________________________________________________________________
After One After Five
Within But Within But Within After
One Year Five Years 10 Years 10 Years
________________ ________________ _________________ __________________
Amount Yield Amount Yield Amount Yield Amount Yield
______ _____ ______ _____ ______ _____ ________ _____
(In Thousands of Dollars, Except Yields)
Investment Securities Available for Sale:
U.S. Treasury and Agency
Securities $ 500 0.00% $ 0 0.00% $ 2,844 7.12% $ 1,560 0.00%
State, County and Municipal
Obligations 3,046 6.63% 5,211 7.15% 3,192 6.26% 12,923 5.59%
Mortgage-Backed
Securities 7 0% 1,275 7.18% 10,504 6.78% 115,340 7.13%
Corporate Bank Notes 0 0.00% 11 7.87% 0 0.00% 0 0.00%
______ ____ ______ ____ _______ ____ ________ ____
Total $3,053 6.61% $6,497 7.16% $16,540 6.73% $128,263 6.98%
______ ____ ______ ____ _______ ____ ________ ____
______ ____ ______ ____ _______ ____ ________ ____
154,353 6.95%
Equity Securities 3,521 7.38%
TOTAL $157,874 6.96%
*Available for Sale Securities are stated at Market Value and Market Yield
The maturities and weighted average yields of investment securities
available-for-sale at the end of 1999 are presented in the preceding table
based on stated maturity. While the average stated maturity of the Mortgage
Backed Securities (excluding CMO's) was 24.01 years, the average life
expected is 9.87 years. The average stated maturity of the CMO portion of the
portfolio was 21.24 years, and the average expected life was 7.33 years. The
average expected life of investment securities available-for-sale was 8.40
years with an average yield of 6.96 percent.
Condensed Portfolio Maturity Schedule
Dollar Portfolio
Maturity Summary Amount Percentage
________________ ____________ __________
Maturing in 3 months or less $ 1,966,564 0.63%
Maturing in 3 months to 1 year 2,086,219 1.35
Maturing in 1 to 3 years 4,741,992 3.07
Maturing in 3 to 5 years 1,753,901 1.14
Maturing in 5 to 15 years 24,537,786 15.89
Maturing in over 15 years 120,266,910 77.92
____________ ______
Total $154,353,372 100.00%
____________ ______
____________ ______
The following Marketable Equity Securities have been excluded from the above
Maturity Summary due to no stated maturity date.
Federal Home Loan Bank Stock $3,289,500
Mutual Funds $ 9,618
Other Marketable Equity Securities $ 221,453
Condensed Portfolio Repricing Schedule
Dollar Portfolio
Repricing Summary Amount Percentage
_________________ ____________ __________
Repricing in 30 days or less $131,244,405 20.24%
Repricing in 31 days to 1 year 2,086,219 1.35
Repricing in 1 to 3 years 4,589,794 2.97
Repricing in 3 to 5 years 1,753,901 1.14
Repricing in 5 to 15 years 21,868,799 14.17
Repricing in over 15 years 92,810,254 60.13
____________ ______
Total $154,353,372 100.00%
____________ ______
____________ ______
Repricing in 30 days or less does not include:
Mutual Funds $ 9,618
Repricing in 31 days to 1 year does not include:
Federal Home Loan Bank Stock $3,289,500
Other Marketable Equity Securities $ 221,453
The tables above reflect all securities at market value on December 31, 1999.
Securities Gains and Losses
Non-interest income from securities transactions, trading account
transactions, and associated option premium income increased in 1999 compared
to 1998, as can be seen in the table below. The majority of the profits
realized in 1999 were generated through the sale of securities. Gains in this
area occurred in connection with United Security's asset and liability
management activities and strategies. Option income and other off-balance
sheet income declined 34.87% from $319,918 to $208,377. Although this income
should be considered non-recurring, it is expected that $90,902 will be
recognized in 2000. This income which will be received in 2000 is the result
of early termination of interest rate contracts and deferred gains and losses
associated with these interest rate risk management tools, and is being
amortized over the original life of the hedge.
During 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. This statement replaces existing
pronouncements and practices with a single, integrated accounting framework
for derivatives and hedging activities requiring companies to formally
document, designate, and assess the effectiveness of transactions that
receive hedge accounting. During 1999, the FASB issued SFAS No. 137, which
deferred the effective date of SFAS No. 133 to fiscal years beginning after
June 15, 2000. Presently, the Company has not yet quantified the effect
adoption will have on the consolidated financial statements.
The table below shows the associated net gains or (losses) for the
periods 1999, 1998, and 1997:
1999 1998 1997
_________ _________ _________
Investment Securities $ 533,806 $ 410,987 $ 105,254
Trading Account 0 0 10,187
Options & Off Balance Sheet Transactions 208,377 310,918 396,772
_________ _________ _________
Total $ 742,183 $ 721,905 $ 512,213
_________ _________ _________
_________ _________ _________
Gains in 1999 from sales of investment securities were net of losses of
$578,768. Volume of sales as well as other information on securities is
further discussed in Note 4 to the financial statements.
Short-Term Borrowings
Purchased funds can be used to satisfy daily funding needs, and when
advantageous, for arbitrage. The following table shows information for the
last three years regarding the Bank's short- and long-term borrowings
consisting of U. S. Treasury demand notes included in its Treasury, Tax, and
Loan Account, securities sold under repurchase agreements, Federal Fund
purchases (one day purchases), and other borrowings from the Federal Home
Loan Bank.
Short-Term Borrowings Long-Term Borrowings
Maturity Less Than One Year Maturity One Year or Greater
___________________________ ____________________________
(In Thousands of Dollars)
Year Ended December 31,:
1999 $17,045 $65,729
1998 12 55,847
1997 3,913 40,966
Weighted Average Interest Rate at Year-end:
1999 5.34% 5.80%
1998 4.41% 5.04%
1997 5.23% 5.83%
Maximum Amount Outstanding at Any Month's End:
1999 $17,105 $65,788
1998 11,620 55,906
1997 11,936 40,973
Average Amount Outstanding During the Year:
1999 $ 4,919 $57,781
1998 3,929 55,454
1997 3,210 30,296
Weighted Average Interest Rate During the Year:
1999 5.19% 5.07%
1998 5.87% 5.53%
1997 5.80% 5.83%
During January of 1997, United Security converted Federal Home Loan Bank
short-term borrowings to long-term borrowings.
Balances in these accounts fluctuate dramatically on a day-to-day basis.
Rates on these balances also fluctuate daily, but as reflected in the chart
above, they generally depict the current interest rate environment.
Shareholders' Equity
United Security has always placed great emphasis on maintaining its
strong capital base. At December 31, 1999, shareholders' equity totaled $61.7
million, or 12.9% of total assets compared to 13.5% and 12.4% for the same
periods in 1998 and 1997, respectively. This level of equity indicates to
United Security's shareholders, customers and regulators that United Security
is financially sound and offers the ability to sustain an appropriate degree
of leverage to provide a desirable level of profitability and growth.
Over the last three years shareholders' equity grew from $47.6 million
at the beginning of 1997 to $61.7 million at the end of 1999. All of this
growth was the result of internally generated retained earnings, with the
exception of approximately $700,000 from stock options being exercised.
Shareholders' equity was also impacted by the market value adjustment of
$(4.6) million made for the available for sale investments as required by
Statement of Accounting Standards No. 115. The internal capital generation
rate (net income less cash dividends as a percentage of average shareholders'
equity) was 8.5% in 1999, 10.3% in 1998 and 10.2% in 1997.
United Security is required to comply with capital adequacy standards
established by the Federal Reserve and FDIC. Currently, there are two basic
measures of capital adequacy: a risk-based measure and a leverage measure.
The risk-based capital standards are designed to make regulatory capital
requirements more sensitive to differences in risk profile among banks and
bank holding companies, to account for off-balance sheet exposure, and to
minimize disincentives for holding liquid assets. Assets and off-balance
sheet items are assigned to risk categories, each with a specified risk
weighting factor. The resulting capital ratios represent capital as a
percentage of total risk weighted assets and off-balance sheet items. The
banking regulatory agencies have also adopted regulations which supplement
the risk based guidelines to include a minimum leverage ratio of 3% of Tier l
Capital to total assets less goodwill (the "leverage ratio"). Depending upon
the risk profile of the institution and other factors, the regulatory
agencies may require a leverage ratio of 1% or 2% higher than the minimum 3%
level.
The minimum standard for the ratio of total capital to risk-weighted
assets is 8%. At least 50% of that capital level must consist of common
equity, undivided profits, and non-cumulative perpetual preferred stock, less
goodwill and certain other intangibles ("Tier l Capital"). The remainder
("Tier II Capital") may consist of a limited amount of other preferred stock,
mandatory convertible securities, subordinated debt, and a limited amount of
the allowance for loan losses. The sum of Tier l Capital and Tier II Capital
is "total risk-based capital".
The following chart summarizes the applicable regulatory capital
requirements. United Security's capital ratios at December 31, 1999,
substantially exceeded all regulatory requirements.
Risk-Based Capital Requirements
Minimum United Security's
Regulatory Ratio at
Requirement December 31, 1999
___________ _________________
Tier I Capital to sets 8.00% 19.05%
Total Capital to Risk-Adjusted Assets 4.00% 17.79%
Tier I Leverage Ratio 3.00% 12.47%
Total capital also has an important effect on the amount of FDIC
insurance premiums paid. Lower capital ratios can cause the rates paid for
FDIC insurance to increase. United Security plans to maintain the capital
necessary to keep FDIC insurance rates at a minimum.
United Security attempts to balance the return to shareholders through
the payment of dividends with the need to maintain strong capital levels for
future growth opportunities. Total cash dividends declared were $3.0 million
or $.84 per share in 1999 compared to $.76 per share in 1998 and $.53 per
share in 1997. The total cash dividends represented a payout ratio of 36.7%
in 1999 with payout ratio of 31.4% and 26.8% in 1998 and 1997 respectively.
This is the eleventh consecutive year that United Security has increased cash
dividends.
Ratio Analysis
The following table presents operating and capital ratios for each of
the last three years.
Year Ended December 31,
____________________________
1999 1998 1997
______ ______ ______
Return on Average Assets 1.77% 1.95% 1.61%
Return on Average Equity 13.35% 14.94% 13.92%
Cash Dividend Payout Ratio 36.67% 31.40% 26.79%
Average Equity to Average Assets Ratio 13.29% 13.07% 11.55%
Liquidity and Interest Rate Sensitivity Management
The primary function of asset and liability management is to assure
adequate liquidity and to maintain an appropriate balance between
interest-sensitive assets and interest-sensitive liabilities. Liquidity
management involves the ability to meet day-to-day cash flow requirements of
United Security's customers, whether they are depositors wishing to withdraw
funds or borrowers requiring funds to meet their credit needs. Without proper
liquidity management, United Security would not be able to perform the
primary function of a financial intermediary and would, therefore, not be
able to meet the needs of the communities it serves. Interest rate risk
management focuses on the maturity structure of assets and liabilities and
their repricing characteristics during changes in market interest rates.
Effective interest rate sensitivity management seeks to ensure that both
assets and liabilities respond to changes in interest rates within an
acceptable time frame, thereby minimizing the effect of such interest rate
movements on the net interest margin.
The asset portion of the balance sheet provides liquidity primarily from
loan principal payments and maturities and through sales, maturities, and
payments from the investment portfolio. Other short-term investments such as
Federal Funds Sold are additional sources of liquidity. Loans maturing or
repricing in one year or less amounted to $126.8 million at December 31,
1999.
Investment securities maturing or repricing in the same time frame
totaled $36.4 million or 23.6% of the investment portfolio at year-end 1999.
In addition, principal payments on mortgage-backed securities totaled $8
million in 1999.
The liability portion of the balance sheet provides liquidity through
interest-bearing and non-interest bearing deposit accounts. Federal Funds
purchased, securities sold under agreements to repurchase, short-term and
long-term borrowings are additional sources of liquidity. Liquidity
management involves the continual monitoring of the sources and uses of funds
to maintain an acceptable cash position. Long-term liquidity management
focuses on considerations related to the total balance sheet structure.
Although the majority of the securities portfolio has stated maturities
in excess of ten years, the entire portfolio consists of securities that are
readily marketable and which are easily convertible into cash. However,
management does not necessarily rely upon the investment portfolio to
generate cash flows to fund loans, capital expenditures, dividends, debt
repayment, etc. Instead, these activities are funded by cash flows from
operating activities and increases in deposits and short-term borrowings. The
proceeds from sales and maturities of investments have been used either to
purchase additional investments or to fund loan growth.
United Security, at December 31, 1999, had long-term debt and short-term
borrowings that on average represent 13.9 percent of total liabilities and
equity.
United Security currently has up to $85 million in borrowing capacity
from the Federal Home Loan Bank and $38 million in established Federal Funds
Lines.
Interest rate sensitivity is a function of the repricing characteristics
of the portfolio of assets and liabilities. These repricing characteristics
are the time frames during which the interest-bearing assets and liabilities
are subject to changes in interest rates, either at replacement or maturity,
during the life of the instruments. Sensitivity is measured as the difference
between the volume of assets and the volume of liabilities in the current
portfolio that are subject to repricing in future time periods. These
differences are known as interest sensitivity gaps and are usually calculated
for segments of time and on a cumulative basis.
Changes in the mix of earning assets or supporting liabilities can
either increase or decrease the net interest margin without affecting
interest rate sensitivity. In addition, the interest rate spread between an
asset and its supporting liability can vary significantly, while the timing
of repricing for both the asset and the liability remains the same, thus
affecting net interest income. It should be noted, therefore, that a matched
interest-sensitive position by itself will not ensure maximum net interest
income. Management continually evaluates the condition of the economy, the
pattern of market interest rates, and other economic data to determine the
types of investments that should be made and at what maturities. Using this
analysis, management from time to time assumes calculated interest
sensitivity gap positions to maximize net interest income based upon
anticipated movements in general levels of interest rates.
Measuring Interest Rate Sensitivity: Gap analysis is a technique used to
measure interest rate sensitivity, an example of which is presented below.
Assets and liabilities are placed in gap intervals based on their repricing
dates. Assets and liabilities for which no specific repricing dates exist are
placed in gap intervals based on management's judgment concerning their most
likely repricing behaviors. Derivatives used in interest rate sensitivity
management are also included in the applicable gap intervals.
A net gap for each time period is calculated by subtracting the
liabilities repricing in that interval from the assets repricing. A positive
gap - more assets repricing than liabilities - will benefit net interest
income if rates are rising and will detract from net interest income in a
falling rate environment. Conversely, a negative gap - more liabilities
repricing than assets - will benefit net interest income in a declining
interest rate environment and will detract from net interest income in a
rising interest rate environment.
Gap analysis is the simplest representation of United Security's
interest rate sensitivity. However, it cannot reveal the impact of factors
such as ad (e.g., the prime lending rate), pricing strategies on consumer and
business deposits, changes in balance sheet mix, or the effect of various
options embedded in balance sheet instruments.
The accompanying table shows United Security's rate sensitive position
at December 31, 1999, as measured by gap analysis. Over the next 12 months
approximately $92.9 million more interest earning assets than interest
bearing liabilities can be repriced to current market rates at least once.
This analysis indicates that United Security has a negative gap within the
next 12 month range. Therefore, net interest income would benefit slightly
from a falling interest rate environment and would be adversely impacted
slightly by a rising rate environment according to the table.
Interest Rate Sensitivity Analysis
December 31, 1999
_____________________________________________________________________________________________
(In Thousands of Dollars)
Total
0-3 4-12 1 Year 1-5 Over 5 Non-Rate
Months Months or Less Years Years Sensitive Total
_________ _________ _________ ________ ________ _________ ________
Earning Assets:
Loans (Net of Unearned
Income) $ 86,083 $ 40,741 $ 126,824 $108,477 $ 46,450 $ 0 $281,751
Investment Securities 35,850 6,115 41,965 39,874 76,035 0 157,874
Interest Bearing Deposits
in Other Banks 365 0 365 0 0 365
_________ _________ _________ ________ ________ ________ ________
Total Earning Assets $ 122,298 $ 46,856 $ 169,154 $148,351 $122,485 $ 0 $439,990
Percent of Total
Earning Assets 27.8% 10.6% 38.4% 33.7% 27.8% 100.0%
Interest-Bearing Liabilities:
Interest-Bearing Deposits
and Liabilities
Demand Deposits (1) $ 48,248 $ 0 $ 48,248 $ 12,062 $ 0 $ 0 $ 60,310
Savings Deposits (1) 19,551 0 19,551 19,551 0 0 39,102
Time Deposits 80,049 64,119 144,168 44,113 0 0 188,281
Other Liabilities 43,982 5,087 49,069 32,964 149 0 82,182
Non-Interest-Bearing
Liabilities
Demand Deposits 981 0 981 0 0 38,254 39,235
Equity 0 0 0 0 0 30,880 30,880
_________ _________ _________ ________ ________ ________ ________
Total Funding Sources $ 192,811 $ 69,206 $ 262,017 $108,690 $ 149 $ 69,134 $439,990
Percent of Total
Funding Sources 43.8% 15.7% 59.6% 24.7% 0.0% 15.7% 100.0%
Interest Sensitivity Gap
(Balance Sheet) $ (70,513) $ (22,350) $ (92,863) $ 39,661 $122,336 $(69,134) $ 0
Off-Balance Sheet $ (40,000) $ 0 $ (40,000) $ 0 $ 0 $ 0 $(40,000)
Interest Sensitive Gap $(110,513) $ (22,350) $(132,863) $ 39,661 $122,336 $(69,134) $(40,000)
Cumulative Interest-Sensitive
Gap $(110,513) $(132,863) $ N/A $(93,202) $ 29,134 $(40,000) $ 0
Over 5
Total Years
0-3 4-12 1 Year 1-5 Non-Rate
Months Months or Less Years Sensitive Total
______ ______ _______ _____ _________ _____
Ratio of Earning Assets to Funding
Sources and Off-Balance Sheet 0.53% 0.68% 0.56% 1.36% 1.77% 1.10%
Cumulative Ratio 0.53% 0.56% N/A 0.77% 0.92% 0.92%
(1) Management adjustments reflect the Company's anticipated
repricing sensitivity of non-maturity deposit products. Historically,
balances on non-maturity deposit accounts have remained relatively stable
despite changes in market interest rates. Management has classified certain
of these accounts as non-rate sensitive based on management's historical
pricing practices and runoff experience. Approximately 20% of the interest-
bearing demand deposit account balances and 50% of the savings account
balances are classified as over one year.
Certain interest-sensitive assets and liabilities are included in
the table based on historical repricing experience and expected prepayments
in the case of Mortgage Backed Securities rather than contractual maturities.
Non-accruing loans are included in loans at the contractual maturity.
United Security also uses additional tools to monitor and manage
interest rate risk sensitivity. These tools include income simulation
analysis and duration analysis. Both analyses are methods of estimating
earnings at risk and capital at risk under varying interest rate conditions.
They are used to test the sensitivity of net interest income and
stockholders' equity to changing levels of interest rates and include
adjustments for the expected timing and the magnitude of assets and liability
cash flows. Also, these measures capture adjustments for the lag between
movements in market interest rates and the movement of administered rates on
prime rate loans, interest bearing transaction accounts, regular savings, and
money market savings accounts. Income simulation analysis indicates that
United Security is slightly liability sensitive.
Condensed Balance Sheet Duration Analysis
Estimated
Book Modified Duration
Value Down 1% Up 1%
_________ _______ ______
ASSETS
Cash and Due From Banks $ 12,223 4.36% 4.36%
Investment Securities Available-for-Sale 157,874 3.65 4.67
Interest Bearing Deposits in Other Banks 666 0.01 0.01
Loans 276,172 1.95 1.99
Premises and Equipment 9,541 4.36 4.36
Accrued Interest Receivable 5,663 4.36 4.36
Investment in Limited Partnerships 5,470 4.36 4.36
Other Assets 8,990 4.36 4.36
________ ____ ____
Total Assets $476,599 2.72% 3.08%
________ ____ ____
________ ____ ____
LIABILITIES AND SHAREHOLDERS' EQUITY
Demand, Non-interest Bearing $ 39,235 4.36% 4.36%
Demand, Interest Bearing 60,310 2.24 2.24
Savings 39,102 3.72 3.72
Time Deposits 188,104 1.53 1.52
________
Total Deposits $326,751
Other Liabilities $ 5,403 4.36% 4.36%
Short-Term Borrowing 17,045 0.01 0.01
Long-Term Borrowing 65,729 1.08 1.08
Shareholders' Equity 61,671 4.36 4.36
________ ____ ____
Total Liabilities and Shareholders' Equity $476,599 2.32% 2.32%
________ ____ ____
________ ____ ____
Modified Duration Differential 0.40 0.77
* Suggested Change in Market Value of
Equity (Pre-tax) ($000) $1,918 $(3,658)
* The change in the market value of equity should represent the present
value of the Company's future earnings exposure to a 1% rise or fall in
interest rates.
United Security uses a five step process to calculate the duration of
each asset and liability category. The first step is to assemble maturity and
repricing data on loans, investments, CD's and other financial instruments
with contractual maturities. The second step is to determine how bank
management would alter the interest rate for each category of assets and
liabilities assuming market interest rates rose or fell 1%. The third step is
to combine the maturity analysis and repricing assumptions in order to
formulate a modified duration estimate for each category. The fourth step is
to calculate a weighted average for total assets and liabilities, and the
fifth step is to multiply the modified duration differential as calculated
(for both up 1% and down 1% interest rate scenarios) in step four by total
assets. Based on the current position of the balance sheet, management
believes these present value calculations approximate United Security's
aggregate pre-tax earnings exposure for the next 5 years.
In this methodology, all non-rate sensitive assets, liabilities, and
shareholders' equity are assigned a modified duration based on a five year
time horizon (4.36 years). Additionally, estimates of modified duration
incorporate the likelihood that the investment portfolio would shorten
maturity if interest rates fell and lengthen maturity if interest rates rose.
The model also incorporates management's belief that deposit and loan rates
would not rise or fall equally either by category or by interest rate
scenario. Increases in loan prepayments are considered in the methodology.
There is no allowance for growth or runoff in deposit or loan balances.
The duration analysis presented above suggests long term (the market
value of equity) that the Company's earnings should decline slightly if
interest rates rise and should increase slightly if interest rates fall.
As part of the ongoing monitoring of interest-sensitive assets and
liabilities, United Security enters into various interest rate contracts
("interest rate protection contracts") to help manage United Security's
interest sensitivity. Such contracts generally have a fixed notional
principal amount and include (i) interest rate swaps where United Security
typically receives or pays a fixed rate and a counterparty pays or receives a
floating rate based on a specified index, (ii) interest rate caps and floors
purchased where United Security receives interest if the specified index
falls below the floor rate or rises above t interest rate swaps represent
end-user activities and are designed as hedges. The interest rate risk factor
in these contracts is considered in the overall interest management strategy
and the Company's interest risk management program. The income or expense
associated with interest rate swaps, caps and floors classified as hedges are
ultimately reflected as adjustments to interest income or expense. Changes in
the estimated fair value of interest rate protection contracts are not
reflected in the financial statements until realized. A discussion of
interest rate risks, credit risks and concentrations in off-balance sheet
financial instruments is included in Note 19 of the "Notes to Consolidated
Financial Statement".
Commitments
The Bank maintains financial instruments with risk exposure not
reflected in the Consolidated Financial Statements. These financial
instruments are executed in the normal course of business to meet the
financing needs of its customers and in connection with its investing and
trading activities. These financial instruments include commitments to make
loans, options written, standby letters of credit, and commitments to
purchase securities for forward delivery.
The Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to make loans and
standby letters of credit is represented by the contractual amount of those
instruments. The Bank applies the same credit policy in making these
commitments that it uses for on-balance sheet items.
Collateral obtained upon exercise of the commitment is determined based
on management's credit evaluation of the borrower and may include accounts
receivable, inventory, property, land, and other items. The Bank does not
normally require collateral for standby letters of credit. As of December 31,
1999, the Bank had outstanding standby letters of credit and commitments to
make loans of $6.2 million and $21.8 million, respectively.
For options written and commitments to purchase securities for forward
delivery, the contractual amounts reflect the extent of the Bank's
involvement in various classes of financial instruments and does not
represent exposure to credit loss. The Bank controls the credit risk of these
instruments through credit approvals, limits, and monitoring procedures.
Options are contracts that allow the buyer of the option to purchase or
sell a financial instrument at a specified price and within a specified
period of time from or to the seller or writer of the option. As a writer of
options, the Bank is paid a premium at the outset and then bears the risk of
an unfavorable change in the price of the financial instrument underlying the
option. As of December 31, 1999, the Bank had no outstanding options.
Commitments to buy and sell securities for delayed delivery require the
Bank to buy and sell a specified security at a specified price for delivery
on a specified date. Market risk arises from potential movements in
securities values and interest rates between the commitment and delivery
dates. There were no commitments to sell securities for delayed delivery and
no commitments to purchase securities as of December 31, 1999.
The Bank is prepared to fulfill the above commitments through scheduled
maturities of loans and securities along with cash flows from operations,
anticipated growth in deposits, and short-term borrowings.
Operating Results
Net Interest Income
Net interest income is an effective measurement of how well management
has matched interest-rate sensitive assets and interest-bearing liabilities.
The fluctuations in interest rates materially affect net interest income. The
accompanying table analyzes these changes.
Net interest income increased by $1.8 million or 6.6% in 1999 compared
to 24.5% and 14.4% increases in 1998 and 1997 respectively. Volume, rate, and
yield changes contributed to the growth in net interest income. Much of this
change has resulted in an increase in loan volume and a decrease in
investment securities volume since 1997 as a result of a change in earnings
asset strategy. Average interest-earning assets increased by $15.6 million or
3.8% in 1999, while average interest-bearing liabilities increased $14.6
million. Volume changes of equal amounts in interest-earning assets and
interest-bearing liabilities generally increase net interest income because
of the spread between the yield on loans and investments and the rates paid
on interest-bearing liabilities. In 1999, average interest-earning assets
outgained average interest-bearing liabilities by $1 million.
United Security's ability to produce net interest income is measured by
a ratio called the interest margin. The interest margin is net interest
income as a percent of average earning assets. The interest margin was 7.0%
in 1999 compared to 6.8% in 1998 and 5.5% in 1997.
Interest margins are affected by several factors, one of which is the
relationship of rate-sensitive earning assets to rate-sensitive
interest-bearing liabilities. This factor determines the effect that
fluctuating interest rates will have on net interest income. Rate-sensitive
earning assets and interest-bearing liabilities are those which can be
repriced to current market rates within a relatively short time. United
Security's objective in managing interest rate sensitivity is to achieve
reasonable stability in the interest margin throughout interest rate cycles
by maintaining the proper balance of rate sensitive assets and liabilities.
For further analysis and discussion of interest rate sensitivity, refer to
the preceding section entitled "Liquidity and Interest Rate Sensitivity
Management."
Another factor that affects the interest margin is the interest rate
spread. The interest rate spread measures the difference between the average
yield on interest-earning assets and the average rate paid on
interest-bearing liabilities. This measurement gives a more accurate
representation of the effect market interest rate movements have on interest
rate-sensitive assets and liabilities. The average volume of the
interest-bearing liabilities as noted in the table, "Distribution of Assets,
Liabilities, and Shareholders' Equity, with Interest Rates and Interest
Differentials," decreased 4.4% in 1999, while the average rate of interest
paid decreased from 4.62% in 1998 to 4.38% in 1997. Average interest-earning
assets increased 3.8% in 1999, while the average yield on earning assets
remained the same at 10.59% in both 1998 and 1999. Net yield on average
interest earning assets increased 123 basis points from 1997 to 1998. This
increase is primarily the result of the higher loan yields associated with
loans made by Acceptance Loan Company.
The percentage of earning assets funded by interest-bearing liabilities
also affects the Bank's interest margin. United Security's earning assets are
funded by interest-bearing liabilities, non-interest bearing demand deposits,
and shareholders' equity. The net return on earning assets funded by
non-interest-bearing demand deposits and shareholders' equity exceeds the net
return on earning assets funded by interest-bearing liabilities. United
Security maintains a relatively consistent percentage of earning assets
funded by interest-bearing liabilities. In 1999, 82.7% of the Bank's average
earning assets were funded by interest-bearing liabilities as opposed to
82.2% in 1998 and 83.7% in 1997. Net interest income is improved as earning
assets are funded by a decreasing percentage of interest-bearing liabilities.
Summary of Operating Results
Year Ended December 31,
_______________________________
1999 1998 1997
_______ _______ _______
(In Thousands of Dollars)
Total Interest Income $44,919 $43,255 $37,648
Total Interest Expense 15,365 15,518 15,376
Net Interest Income 29,554 27,737 22,272
Provision for Loan Losses 4,305 3,187 1,710
Net Interest Income After Provision for
Loan Losses 25,249 24,550 20,562
Non-Interest Income 4,747 4,558 4,361
Non-Interest Expense 18,534 17,008 15,229
_______ _______ _______
Income Before Income Taxes 11,462 12,100 9,694
Applicable Income Taxes 3,302 3,521 2,713
_______ _______ _______
Net Income $ 8,160 $ 8,579 $ 6,981
_______ _______ _______
_______ _______ _______
Changes in Interest Earned and Interest Expense Resulting from
Changes in Volume and Changes in Rates
1999 Compared to 1998 1998 Compared to 1997 1997 Compared to 1996
_______________________________ ______________________________ _____________________________
Increase (Decrease) Increase (Decrease) Increase (Decrease)
Due to Change In: Due to Change In: Due to Change In:
_______________________________ ______________________________ _____________________________
Average Average Average
Volume Rate Net Volume Rate Net Volume Rate Net
_______ ________ ________ _______ _______ _______ _______ _______ _______
(In Thousands of Dollars)
Interest Earned On:
Loans $3,183 $ 1,196 $ 4,379 $2,200 $4,233 $6,433 $1,499 $1,246 $2,745
Taxable Investments (799) (1,995) (2,794) (862) 300 (562) 919 (376) 543
Non-Taxable Investments 50 9 59 (156) (111) (267) (410) 273 (137)
Federal Funds 29 (9) 20 (2) 4 2 (48) (5) (53)
______ _______ _______ ______ ______ ______ ______ ______ ______
Total Interest-
Earning Assets $2,463 $ (799) $ 1,664 $1,180 $4,426 $5,606 $1,960 $1,138 $3,098
______ _______ _______ ______ ______ ______ ______ ______ ______
Interest Expense On:
Demand Deposits $ 2 $ (314) $ (312) $ (118) $ (139) $ (257) $ (128) $ (133) $ (261)
Savings Deposits (50) (91) (141) (57) (24) (81) 357 (26) 331
Time Deposits 401 (260) 141 (770) 328 (442) 423 (240) 183
Other Liabilities 369 (210) 159 982 (60) 922 (43) 85 42
______ _______ _______ ______ ______ ______ ______ ______ ______
Total Interest-
Bearing Liabilities $ 722 $ (875) $ (153) $ 37 $ 105 $ 142 $ 609 $ (314) $ 295
______ _______ _______ ______ ______ ______ ______ ______ ______
Increase in Net
Interest Income $1,741 $ (76) $ 1,817 $1,143 $4,321 $5,464 $1,351 $1,452 $2,803
______ _______ _______ ______ ______ ______ ______ ______ ______
______ _______ _______ ______ ______ ______ ______ ______ ______
Provision for Loan Losses
The provision for loan losses is an expense used to establish the
allowance for loan losses. Actual loan losses, net of recoveries, are charged
directly to the allowance. The expense recorded each year is a reflection of
actual losses experienced during the year and management's judgment as to the
adequacy of the allowance to absorb losses inherent to the portfolio.
Charge-offs exceeded recoveries by $3.9 million during the year, an increase
of $1.6 million over the prior year, and accordingly a provision of $4.3
million was expensed for loan losses in 1999. The allowance remained at 2% of
total loans outstanding at December 31, 1999. For additional information and
discussion of the allowance for loan losses, refer to the section entitled
"Loans and Allowances for Loan Losses".
Non-Interest Income
Non-interest income consists of revenues generated by a broad range of
financial services and activities including fee-based services and
commissions earned through insurance sales and trading activities. In
addition, gains and losses from the sale of investment portfolio securities
and option transactions are included in non-interest income.
Non-recurring items of non-interest income include all the securities
gains (losses) discussed in a previous section. Investment securities had a
net gain of $533,806 in 1999 compared to a $410,987 gain in 1998 and a
$105,254 gain in 1997. Income generated in the area of securities gains and
losses is dependent on many factors including investment portfolio
strategies, interest rate changes, and the short, intermediate, and long-term
outlook for the economy.
In 1997, the United States Department of Justice required the
divestiture of approximately $9.8 million in deposits, branch facility and
associated assets in order to approve the merger of United Security Bank and
First Bank and Trust. The sale of these deposits and assets resulted in a
non-recurring net gain of $592,000. The Bank also sold the building that once
housed the Centreville Branch Office in order to move to a new facility that
was completed in the spring of 1999. This sale along with other less
significant asset sales resulted in a gain of $310,224 in 1997. Acceptance
Loan Company opened fourteen new offices in 1997, five in 1998, added eight
more in 1999 and currently has a total of thirty-three offices. Additionally,
the Bank opened a new office in 1998 and two new offices in 1999. These
events coupled with the Bank's Bond Division formation in 1996 contributed
to a $189,016 or 4.2% increase, in 1999 compared to $197,306 and $1,636,171
increases in 1998 and 1997, respectively.
United Security continues to search for new sources of non-interest
income. These sources will come from innovative ways of performing banking
services now as well as providing new services in the future. This philosophy
can be seen in the Bond Division organized in 1996. This division of the Bank
was formed to offer bond services to community banks and contributed $426,230
to non-interest income in 1999 compared to $402,194 in 1998 and $266,476 in
1997.
Non-Interest Expense
Non-interest expense consists primarily of four major categories:
salaries and employee benefits, occupancy expense, furniture and equipment
expense, and other expense. United Security's non-interest expense has been
impacted by the start up of thirty-one offices of Acceptance Loan Company
since 1996 for a total of thirty-three offices, the merger of United Security
Bank and First Bank and Trust in 1997, and the start up of four offices of
United Security Bank since 1997.
The ratio of non-interest expenses to average assets increased to 4.0%
in 1999 compared to 3.8% and 3.5% in 1998 and 1997 respectively. This ratio
was significantly impacted by the events noted above.
Salaries and employee benefits increased $989,257 or 10.1% in 1999. Most
of this increase is attributable to staffing the eight new offices of
Acceptance Loan Company and the Bucksville office of First United Security
Bank in 1999. At December 31, 1999, United Security had 315 full-time
equivalent employees compared to 286 in 1998 and 266 in 1997.
United Security sponsors an Employee Stock Ownership Plan with 401(k)
provisions. The Company made matching contributions totaling $451,483,
$376,120 and $238,190 in 1999, 1998, and 1997, respectively.
Furniture and equipment expense increased 6.9% in 1999, 5.3% in 1998,
and 37% in 1997. Most of the 1997 increase of $375,497 is a direct result of
the computer and check processing equipment lease and depreciation expenses
associated with the merger as well as the expenses associated with the new
Acceptance Loan Company offices. The increase of $100,833 and $74,292 in 1999
and 1998, respectively, is due to the new offices opened and the equipment
upgrade in preparation for the Year 2000.
Occupancy expense includes rents, depreciation, utilities, maintenance,
insurance, taxes, and other expenses associated with maintaining eighteen
banking offices and thirty-three finance company offices. All but one
banking offices are owned by the Company and all Acceptance Loan Company
offices are leased. Net occupancy expense increased 12.3% in 1999, 21.3%
in 1998, and 26.3% in 1997. The increases reflect the new offices opened
by Acceptance Loan Company and First United Security Bank in 1999, 1998
and 1997.
Other expenses consists of stationery, printing supplies, advertising,
postage, telephone, legal and other professional fees, other non-credit
losses, and other insurance including deposit insurance, and other misses.
Other expenses increased 6.5% in 1999, decreased 8.3% in 1998 and increased
39.7% in 1997. The 1997 increase was due to costs associated with the merger
of United Security Bank and First Bank and Trust.
Year 2000 Issues
The Company has not experienced any material effects as a result of the
year 2000 issues. However, there may be situations where third party
commercial lending customer or vendors could be adversely affected by the
year 2000 issue. If problems do materialize with commercial lending customers
or vendors, the customers' abilities to repay borrowings to the Company or
vendors' abilities to provide service could be affected. Management currently
believes that the risk of detrimental impact on the Company's results of
operations and financial position because of the year 2000 issues is low.
During 1997, 1998, and 1999, the Company paid approximately $250,000
related to Year 2000 compliance. A substantial portion of these costs have
been capitalized in the installation of software and hardware and will be
amortized over the life of the related assets. There has been no material
increase in salaries expense due to Year 2000 compliance activities as many
of the system renovations have coincided with previously planned system
replacements or enhancements, the costs of which have been included in the
costs disclosed above. The deferral of certain other projects in order to
assure Year 2000 readiness has not had, and is not expected to have, a
material impact on the Company's financial condition and results of
operations.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Information required by this item is contained in Item 7 herein
under the heading "Liquidity and Interest Rate Sensitivity Management."
Item 8. Financial Statements and Supplementary Data.
REPORT OF INDEPENDNT
PUBLIC ACCOUNTANTS
To United Security Bancshares, Inc.:
We have audited the accompanying consolidated statements of condition of
United Security Bancshares, Inc. (a Delaware corporation) and subsidiaries as
of December 31, 1999 and 1998 and the related consolidated statements of
income, shareholders' equity and cash flows for each of the three years in
the period ended December 31, 1999. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of United
Security Bancshares, Inc. and subsidiaries as of December 31, 1999 and 1998
and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1999, in conformity with
generally accepted accounting principles.
Arthur Andersen LLP
Birmingham, Alabama
January 28, 2000
UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
December 31, 1999 and 1998
ASSETS
1999 1998
____________ ____________
Cash and due from banks $ 12,222,761 $ 12,102,669
Interest bearing deposits in other banks 665,663 14,728,357
____________ ____________
Total cash and cash equivalents 12,888,424 26,831,026
Investment securities available for sale 157,873,943 164,019,411
Loans, net of allowance for loan losses of
$5,579,072 and $4,989,173, respectively 276,172,120 235,059,761
Premises and equipment, net depreciation
of $9,432,896 and $8,436,763, respectively 9,541,383 8,225,007
Accrued interest receivable 5,663,118 4,520,783
Investment in limited partnerships 5,469,829 4,234,447
Other assets 8,989,879 7,182,352
____________ ____________
Total assets $476,598,696 $450,072,787
____________ ____________
____________ ____________
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand, noninterest bearing $ 39,235,317 $ 39,786,298
Demand, interest bearing 60,309,668 64,585,952
Savings 39,102,161 39,801,921
Time, $100,000 and over 46,053,294 40,548,173
Other time 142,050,237 141,922,237
____________ ____________
Total deposits 326,750,677 326,644,581
OTHER LIABILITIES 5,403,417 7,001,153
SHORT-TERM BORROWINGS 17,044,989 11,742
LONG-TERM DEBT 65,728,802 55,847,223
____________ ____________
Total liabilities 414,927,885 389,504,699
____________ ____________
COMMITMENTS AND CONTINGENCIES (Note 18)
SHAREHOLDERS' EQUITY:
Common stock, par value $.01 per share;
10,000,000 shares authorized; 3,632,081
and 3,610,945 shares issued, respectively 36,320 36,109
Surplus 8,727,877 8,218,651
Accumulated other comprehensive income
(loss), net of tax (1,752,880) 2,821,556
Retained earnings 54,911,314 49,743,592
Less treasury stock, 64,000 shares at cost (251,820) (251,820)
____________ ____________
Total shareholders' equity 61,670,811 60,568,088
____________ ____________
Total liabilities and shareholders' equity $476,598,696 $450,072,787
____________ ____________
____________ ____________
The accompanying notes are an integral part of these consolidated statements.
UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31, 1999, 1998, and 1997
1999 1998 1997
___________ ___________ ___________
INTEREST INCOME:
Interest and fees on loans $33,776,492 $29,397,310 $22,964,581
Interest on investment securities available for sale:
Taxable 9,229,339 12,087,389 12,702,142
Tax-exempt 1,527,535 1,468,851 1,735,501
Other interest and dividends 223,114 188,786 132,802
___________ ___________ ___________
10,979,988 13,745,026 14,570,445
Interest on trading account securities 45,335 15,267 18,323
Interest on federal funds sold 117,424 97,350 95,023
___________ ___________ ___________
Total interest income 44,919,239 43,254,953 37,648,372
INTEREST EXPENSE:
Interest on deposits 12,183,430 12,495,765 13,274,760
Interest on short-term borrowings 254,008 230,738 335,505
Interest on long-term debt 2,927,719 2,791,794 1,765,440
___________ ___________ ___________
15,365,157 15,518,297 15,375,705
NET INTEREST INCOME 29,554,082 27,736,656 22,272,667
PROVISION FOR LOAN LOSSES 4,305,450 3,187,103 1,710,128
___________ ___________ ___________
Net interest income after provision for loan losses 25,248,632 24,549,553 20,562,539
NONINTEREST INCOME:
Service and other charges on deposit accounts 2,044,260 2,067,722 1,878,828
Credit life insurance commissions 653,525 670,694 312,757
Investment securities gains (losses), net 533,806 410,987 105,254
Trading securities gains (losses), net 0 0 10,187
Other income 1,515,567 1,408,738 2,053,809
___________ ___________ ___________
Total noninterest income 4,747,158 4,558,141 4,360,835
___________ ___________ ___________
NONINTEREST EXPENSE:
Salaries and employee benefits 10,755,337 9,766,080 7,823,601
Furniture and equipment expense 1,562,705 1,461,872 1,387,580
Occupancy expense 1,192,610 1,061,902 875,523
Other expense 5,023,291 4,718,118 5,142,485
___________ ___________ ___________
Total noninterest expense 18,533,943 17,007,972 15,229,189
INCOME BEFORE INCOME TAXES 11,461,847 12,099,722 9,694,185
PROVISION FOR INCOME TAXES 3,302,131 3,521,072 2,712,727
___________ ___________ ___________
NET INCOME $ 8,159,716 $ 8,578,650 $ 6,981,458
___________ ___________ ___________
___________ ___________ ___________
AVERAGE NUMBER OF SHARES OUTSTANDING 3,561,051 3,543,325 3,536,642
___________ ___________ ___________
___________ ___________ ___________
NET INCOME PER SHARE:
Basic $ 2.29 $ 2.42 $ 1.97
___________ ___________ ___________
___________ ___________ ___________
Diluted $ 2.28 $ 2.40 $ 1.96
___________ ___________ ___________
___________ ___________ ___________
DIVIDENDS PER SHARE $ .84 $ .76 $ .53
___________ ___________ ___________
___________ ___________ ___________
The accompanying notes are an integral part of these consolidated statements.
UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
For the Years Ended December 31, 1999, 1998 and 1997
Accumulated
Other Total
Common Comprehensive Retained Treasury Shareholders'
Stock Surplus Income Earnings Stock at Cost Equity
________ __________ _____________ ___________ _____________ _____________
BALANCE AT DECEMBER 31, 1996 $ 36,016 $8,046,542 $ 1,045,178 $38,747,595 $(259,548) $47,615,783
Comprehensive income:
Net income 0 0 0 6,981,458 0 6,981,458
Net change in unrealized gain
(loss) on securities available
for sale, net of tax 0 0 (32,558) 0 0 (32,558)
___________
Comprehensive income 6,948,900
Dividends declared 0 0 0 (1,870,515) 0 (1,870,515)
Retirement of treasury stock (9) (5,119) 0 0 5,128 0
Exercise of stock options 11 16,369 0 0 0 16,380
________ __________ __________ ___________ ________ ___________
BALANCE AT DECEMBER 31, 1997 36,018 8,057,792 1,012,620 43,858,538 (254,420) 52,710,548
Comprehensive income:
Net income 0 0 0 8,578,650 0 8,578,650
Net change in unrealized gain
(loss) on securities available
for sale, net of tax 0 0 1,808,936 0 0 1,808,936
___________
Comprehensive income 10,387,586
Dividends declared 0 0 0 (2,693,596) 0 (2,693,596)
Sale of treasury stock 0 651 0 0 2,600 3,251
Exercise of stock options 91 160,208 0 0 0 160,299
________ __________ __________ ___________ ________ ___________
BALANCE AT DECEMBER 31, 1998 36,109 8,218,651 2,821,556 49,743,592 (251,820) 60,568,088
Comprehensive income:
Net income 0 0 0 8,159,716 0 8,159,716
Net change in unrealized gain
(loss) on securities available
for sale, net of tax 0 0 (4,574,436) 0 0 (4,574,436)
___________
Comprehensive income 3,585,280
Dividends declared 0 0 0 (2,991,994) 0 (2,991,994)
Exercise of stock options 211 509,226 0 0 0 509,437
________ __________ ___________ ___________ _________ ___________
BALANCE AT DECEMBER 31, 1999 $ 36,320 $8,727,877 $(1,752,880) $54,911,314 $(251,820) $61,670,811
________ __________ ___________ ___________ _________ ___________
________ __________ ___________ ___________ _________ ___________
The accompanying notes are an integral part of these consolidated statements.
UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1999, 1998 and 1997
1999 1998 1997
____________ ____________ ____________
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 8,159,716 $ 8,578,650 $ 6,981,458
Adjustments:
Depreciation 878,828 797,959 894,702
Provision for loan losses 4,305,450 3,187,103 1,710,128
Deferred income tax expense (benefit) 505,053 (1,191,833) (335,835)
Amortization of intangibles 549,720 636,651 604,811
(Gain) loss on sale of securities, net (533,806) (410,987) (105,254)
Gain on sale of branch 0 0 (592,012)
Gain on sale of fixed assets 0 0 (364,378)
Equity in loss of unconsolidated investee 0 0 150,000
Amortization of premium and discounts, net 937,849 630,654 1,297,363
Changes in assets and liabilities:
Increase in accrued interest receivable (1,142,335) (472,115) (381,024)
(Increase) decrease in other assets (117,638) 154,628 (515,295)
Increase (decrease) in interest payable (362,578) 218,808 48,849
Increase (decrease) in other liabilities (561,139) 706,108 900,534
____________ ____________ ____________
Net cash provided by operating activities 12,619,120 12,835,626 10,294,047
____________ ____________ ____________
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investment securities
available for sale (102,868,215) (81,139,966) (49,711,539)
Proceeds from sales of investment
securities available for sale 49,314,030 38,509,727 47,507,930
Proceeds from maturities and prepayments of
investment securities available for sale 52,470,612 54,511,409 15,948,700
Purchases of Federal Home Loan Bank stock (494,100) (746,700) (211,260)
Net cash paid in sale of branch 0 0 (6,518,424)
Loan (originations) and principal
repayments, net (46,653,191) (22,311,330) (15,555,151)
Purchase of premises and equipment, net (2,195,204) (2,185,886) (970,598)
____________ ____________ ____________
Net cash used in investing activities (50,426,068) (13,362,746) (9,510,342)
____________ ____________ ____________
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in customer deposits 106,096 4,226,208 (14,008,721)
Net increase (decrease) in short-term
borrowings 17,033,247 (3,901,079) (79,260)
Proceeds from FHLB advances and other
borrowings 20,000,000 30,000,000 37,281,088
Repayment of FHLB advances and other
borrowings (10,118,421) (15,118,421) (23,854,663)
Proceeds from issuance of common stock 509,437 160,299 16,380
Dividends paid (3,666,013) (2,550,690) (1,605,654)
Sale of treasury stock 0 3,251 0
____________ ____________ ____________
Net cash (used in) provided by
financing activities 23,864,346 12,819,568 (2,250,830)
____________ ____________ ____________
Net increase (decrease) in cash and
cash equivalents (13,942,602) 12,292,448 (1,467,125)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 26,831,026 14,538,578 16,005,703
____________ ____________ ____________
CASH AND CASH EQUIVALENTS, END OF YEAR $ 12,888,424 $ 26,831,026 $ 14,538,578
____________ ____________ ____________
____________ ____________ ____________
The accompanying notes are an integral part of these consolidated statements.
UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
1. DESCRIPTION OF BUSINESS
United Security Bancshares, Inc. (the "Company" or "USB") and its
subsidiary, First United Security Bank (the "Bank" or "FUSB") provide
commercial banking services to customers located primarily in Clarke,
Choctaw, Bibb, and surrounding counties in Alabama and Mississippi. The
Company also owns all the stock of First Security Courier Corporation,
("FSCC") an Alabama corporation. FSCC is a courier service organized to
transport items for processing to the Federal Reserve for financial
institutions located in Southwest Alabama.
The Bank owns all of the stock of Acceptance Loan Company, Inc.
("Acceptance" or "ALC"), an Alabama corporation. Acceptance is a finance
company organized for the purpose of making consumer loans and
purchasing consumer loans from vendors. Acceptance has offices located
within the communities served by the Bank as well as offices outside the
Bank's market area in north and southeast Alabama, eastern Mississippi,
and northwest Florida. The Bank also invests in limited partnerships
that operate qualified affordable housing projects to receive tax
benefits.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company, FSCC, the Bank and its wholly owned subsidiary. All significant
intercompany balances and transactions have been eliminated. The Bank's
investment in limited partnerships are carried on an unconsolidated
basis under either the equity or cost method based on the percentage of
ownership and influence over operations.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand, amounts due from banks, and federal funds sold. Federal
funds are generally purchased and sold for one-day periods.
Supplemental disclosures of cash flow information and noncash
transactions related to cash flows for the years ended December 31,
1999, 1998, and 1997 are as follows:
1999 1998 1997
___________ ___________ ___________
Cash paid during the period for:
Interest $15,296,156 $15,284,661 $15,326,856
Income taxes 3,823,494 3,648,211 2,351,304
Supplemental schedule of noncash investment
and financing activities:
Dividends declared but unpaid 12,061 686,080 542,796
Details of branch sale:
Fair value of assets sold 0 0 3,433,740
Liabilities transferred 0 0 9,952,164
Securities
Securities may be held in three portfolios: trading account securities,
held to maturity securities, and securities available for sale. Trading
account securities are carried at market value, with unrealized gains
and losses included immediately in other income. Investment securities
held to maturity are carried at cost, adjusted for amortization of
premiums and accretion of discounts. With regard to investment
securities held to maturity, management has the intent and the Bank has
the ability to hold such securities until maturity. Investment
securities available for sale are carried at market value, with any
unrealized gains or losses excluded from earnings and reflected, net of
tax, as a separate component of shareholders' equity. Investment
securities available for sale are so classified because management may
decide to sell certain securities prior to maturity for liquidity, tax
planning, or other valid business purposes. The Company held no
securities in their trading and held to maturity portfolios at December
31, 1999 and 1998.
Included in investment securities available for sale is stock in the
Federal Home Loan Bank ("FHLB") of Atlanta. FHLB stock is carried at
cost, has no contractual maturity, has no quoted fair value, and no
ready market exists; therefore, the fair value of such stock is assumed
to approximate cost. The investment in the stock is required of every
member of the FHLB system.
Interest earned on investment securities held to maturity, investment
securities available for sale, and trading account securities is
included in interest income. Amortization of premiums and discounts on
investment securities is by the interest method. Net gains and losses on
the sale of investment securities held to maturity and investment
securities available for sale, computed principally on the specific
identification method, are shown separately in noninterest income in the
consolidated statements of income.
Derivative Financial Instruments
To hedge interest rate exposure, the Company uses derivative financial
instruments consisting of interest rate swaps, caps, and floors which
are accounted for using the accrual method. Net interest income or
expense related to interest rate swaps, caps, and floors is recorded
over the life of the agreement as an adjustment to net interest income.
The premiums paid for the caps and floors are amortized straight-line
over the life of the agreement. Changes in the estimated fair values of
derivative financial instruments used as hedges are not reflected in the
financial statements until realized. Gains or losses realized on the
sales or terminations of interest rate swaps are deferred and amortized
into interest income over the maturity period of the contract.
The Company's criteria for use of derivatives as hedges include
reduction of the risk associated with the exposure being hedged and such
derivatives must be designated as a hedge at the inception of the
derivative contract. Derivatives that do not meet these criteria are
carried at fair value with changes in value recognized currently in
earnings.
Loans and Interest Income
Loans are reported at the principal amounts outstanding, adjusted for
unearned income, deferred loan origination fees and costs, purchase
premiums and discounts, writedowns, and the allowance for loan losses.
Loan origination fees, net of certain deferred origination costs, and
purchase premiums and discounts are recognized as an adjustment to yield
of the related loan.
Interest on commercial and real estate loans is accrued and credited to
income based on the principal amount outstanding. Interest on
installment loans is recognized using the interest method and according
to the rule of 78's, which approximates the interest method.
The accrual of interest on loans is discontinued when, in the opinion of
management, there is an indication that the borrower may be unable to
meet payments as they become due. Upon such discontinuance, all unpaid
accrued interest is reversed against current income unless the
collateral for the loan is sufficient to cover the accrued interest.
Interest received on nonaccrual loans generally is either applied
against principal or reported as interest income, according to
management's judgment as to the collectibility of principal. Generally,
loans are restored to accrual status when the obligation is brought
current and has performed in accordance with the contractual terms for a
reasonable period of time and the ultimate collectibility of the total
contractual principal and interest is no longer in doubt.
Allowance for Loan Losses
The allowance for loan losses is increased by a provision for loan
losses, which is charged to expense, and reduced by charge-offs, net of
recoveries. The allowance for loan losses is maintained at a level
which, in management's judgment, is adequate to absorb credit losses
inherent in the loan portfolio. The amount of the allowance is based on
management's evaluation of the collectibility of the loan portfolio,
changes in its risk profile, credit concentrations, historical trends,
and economic conditions. This evaluation also considers the balance of
impaired loans. Losses on individually identified impaired loans are
measured based on the present value of expected future cash flows
discounted at each loan's original effective market interest rate. As a
practical expedient, impairment may be measured based on the loan's
observable market price or the fair value of the collateral if the loan
is collateral dependent. When the measure of the impaired loan is less
than the recorded investment in the loan, the impairment is recorded
through the provision added to the allowance for loan losses.
One-to-four family residential mortgages and consumer installment loans
are subjected to a collective evaluation for impairment, considering
delinquency and repossession statistics, historical loss experience, and
other factors. Though management believes the allowance for loan losses
to be adequate, ultimate losses may vary from their estimates. However,
estimates are reviewed periodically, and as adjustments become
necessary, they are reported in earnings during periods they become
known.
Long-Lived Assets
Premises and equipment are stated at cost less accumulated depreciation.
The provision for depreciation is computed using the straight-line and
accelerated methods over the estimated useful lives of the assets.
Goodwill intangibles are included in other assets and are amortized
using the straight-line method. Goodwill is being amortized over 20
years. Impairment of long-lived ass by management based upon an event or
changes in circumstances surrounding the underlying assets.
Other Real Estate
Real estate properties acquired through, or in lieu of, loan
foreclosures are to be sold and are initially recorded at fair value at
the date of foreclosure, establishing a new cost basis. Costs to
maintain or hold the property are expensed and amounts incurred to
improve the property, to the extent that fair value is not exceeded, are
capitalized. Valuations are periodically performed by management, and a
valuation allowance is established by a charge to income if the carrying
value of a property exceeds its fair value less the estimated costs to
sell. Other real estate aggregated $295,468 and $215,250 at December 31,
1999 and 1998, respectively, and is included in other assets.
Income Taxes
The Company accounts for income taxes through the use of the asset and
liability method. Under the asset and liability method, deferred taxes
are recognized for the tax-consequences of temporary differences by
applying enacted statutory tax rates applicable to future years to
differences between the financial statement carrying amounts and the
bases of existing assets and liabilities. The effect on deferred taxes
of a change in tax rates would be recognized in income in the period
that includes the enactment date.
Treasury Stock
Treasury stock repurchases and sales are accounted for using the cost
method.
Earnings Per Share
Basic earnings per share ("EPS") is computed by dividing net income by
the weighted average number of shares outstanding during the period.
Diluted EPS, presented now in accordance with a new accounting standard,
is computed in the same manner as fully diluted EPS presented in earlier
periods, except that, among other changes, the average share price for
the period is used in all cases when applying the treasury stock method
to potentially dilutive securities.
The following table represents the earnings per share calculations for
the years ended December 31, 1999, 1998, and 1997:
Per Share
For the Years Ended Income Shares Amount
___________________ __________ _________ ________
December 31, 1999:
Net income $8,159,716
__________
Basic earnings per share 8,159,716 3,561,051 $2.29
=====
Dilutive securities 0 20,340
__________ _________ _____
Diluted earnings per share $8,159,716 3,581,391 $2.28
__________ _________ _____
__________ _________ _____
December 31, 1998:
Net income $8,578,650
__________
Basic earnings per share 8,578,650 3,543,325 $2.42
=====
Dilutive securities 0 27,056
__________ _________ _____
Diluted earnings per share $8,578,650 3,570,381 $2.40
__________ _________ _____
__________ _________ _____
December 31, 1997:
Net income $6,981,458
__________
Basic earnings per share 6,981,458 3,536,642 $1.97
=====
Dilutive securities 0 17,205
__________ _________ _____
Diluted earnings per share $6,981,458 3,553,847 $1.96
__________ _________ _____
__________ _________ _____
Use of Estimates
The accounting principles and reporting policies of the Company, and the
methods of applying these principles, conform with generally accepted
accounting principles ("GAAP") and with general practices within the
financial services industry. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the date of the
statement of condition and revenues and expenses for the period. Actual
results could differ significantly from those estimates.
Material estimates that are particularly susceptible to significant
changes in the near-term relate to the determination of the allowance
for loan losses and the valuation of real estate acquired in connection
with foreclosures or in satisfaction of loans. In connection with the
determination of the allowances for loan losses and real estate owned,
management obtains independent appraisals for significant properties,
evaluates the overall portfolio characteristics and delinquencies and
monitors economic conditions.
A substantial portion of the Company's loans are secured by real estate
in its primary market area. Accordingly, the ultimate collectibility of
a substantial portion of the Company's loan portfolio and the recovery
of a portion of the carrying amount of foreclosed real estate are
susceptible to changes in economic conditions in the Company's primary
market.
Reclassifications
Certain 1998 and 1997 balances have been reclassified to conform to the
1999 presentation. These reclassifications have no effect on previously
reported net income.
Recent Accounting Pronouncements
During 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting
for Derivative Instruments and Hedging Activities. This statement
replaces existing pronouncements and practices with a single, integrated
accounting framework for derivatives and hedging activities requiring
companies to formally document, designate, and assess the effectiveness
of transactions that receive hedge accounting. During 1999, the FASB
issued SFAS No. 137, which deferred the effective date of SFAS No. 133
to fiscal years beginning after June 15, 2000. Presently, the Company has
not yet quantified the effect adoption will have on the consolidated
financial statements.
During 1999, the Company adopted Statement of Position 98-1, Accounting
for the Costs of Computer Software Developed or Obtained for Internal
Use. This statement requires capitalization of external direct costs of
materials and services; payroll and payroll-related costs for employees
directly associated; and interests costs during development of computer
for internal use (planning and preliminary costs should be expensed).
Also, capitalized costs of computer software developed or obtained for
internal use should be amortized on a straight-line basis unless another
systematic and rational basis is more representative of the software's
use. It is management's assertion that adoption of this Statement of
Position did not have a material effect on the consolidated financial
statements.
During 1999, the Company implemented FASB No. 134,
Accounting for Mortgage-Backed Securities Retained After the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking
Enterprise. This Statement, an amendment to SFAS No. 65, requires that
after the securitization of mortgage loans held for sale, an entity
engaged in mortgage banking activities classify the resulting
mortgage-backed securities or other retained interests based on its
ability to sell or hold those investments. This Statement is effective
the first fiscal quarter beginning after December 15, 1998. Based on the
Company's current operating activities, management contends that the
implementation of this Statement did not have a material impact on the
presentation of the Company's financial condition or results of
operations.
3. BUSINESS COMBINATION
On August 19, 1996, the Company signed a definitive agreement to merge
with First Bancshares, Inc. ("FBI") of Grove Hill, Alabama effective
June 30, 1997. The agreement called for the exchange of 1,398,788 shares
of the Company's common stock (5.8321 shares of the Company's common
stock for each share of FBI's common stock) for 100% of FBI's common
stock in a transaction accounted for as a pooling-of-interests.
Accordingly, the Company's financial statements were restated to include
the results of FBI for all periods presented. Merger costs of
approximately $650,000 were expensed in the accompanying 1997
consolidated statement of income.
Combined and separate results of the Company and FBI during the period
preceding the merger were as follows:
USB FBI Combined
___________ ___________ ___________
Six months ended June 30, 1997 (unaudited):
Net interest income $ 5,352,810 $ 5,265,778 $10,618,588
___________ ___________ ___________
___________ ___________ ___________
Net income $ 2,272,489 $ 1,201,565 $ 3,474,054
___________ ___________ ___________
___________ ___________ ___________
In conjunction with the merger, the U.S. Justice Department required the
divestiture of a branch in Grove Hill, Alabama. On October 31, 1997, USB
sold the branch and related assets with carrying values of $2.9 million
and $10.0 million, respectively, for a net cash payment from USB of $6.5
million. The resulting gain of $592,000 is included in other income.
4. INVESTMENT SECURITIES
Details of investment securities available for sale at December 31, 1999
and 1998 are as follows:
December 31, 1999
_____________________________________________________________
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
____________ __________ ____________ ____________
Obligations of states, counties, and
political subdivisions $ 24,550,127 $ 0 $ (178,371) $ 24,371,756
U.S. treasury securities and obligations
of U.S. government agencies 2,890,727 0 (46,340) 2,844,387
Mortgage-backed securities 129,736,586 23,363 (2,633,855) 127,126,094
Equity securities 200,123 30,948 0 231,071
Corporate notes 11,488 0 (353) 11,135
FHLB stock 3,289,500 0 0 3,289,500
____________ __________ ___________ ____________
Total $160,678,551 $ 54,311 $(2,858,919) $157,873,943
____________ __________ ___________ ____________
____________ __________ ___________ ____________
December 31, 1998
_____________________________________________________________
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
____________ ___________ ____________ ____________
Obligations of states, counties, and
political subdivisions $ 23,841,566 $ 1,686,442 $ 0 $ 25,528,008
Mortgage-backed securities 132,587,552 3,559,540 (761,265) 135,385,827
Equity securities 200,123 45,598 (14,019) 231,702
Corporate notes 80,279 0 (1,805) 78,474
FHLB stock 2,795,400 0 0 2,795,400
____________ ___________ ____________ ____________
Total $159,504,920 $ 5,291,580 $ (777,089) $164,019,411
____________ ___________ ____________ ____________
____________ ___________ ____________ ____________
The scheduled maturities of investment securities available for sale at
December 31, 1999 are presented in the following table:
Amortized Market
Cost Value
____________ ____________
Maturing within one year $ 3,000,740 $ 3,052,783
Maturing after one but before five years 6,214,082 6,495,893
Maturing after five but before fifteen years 22,141,934 24,537,786
Maturing after fifteen years 125,832,172 120,266,910
Equity securities and FHLB stock 3,489,623 3,520,571
____________ ____________
Total $160,678,551 $157,873,943
____________ ____________
____________ ____________
For purposes of the maturity table, mortgage-backed securities, which
are not due at a single maturity date, have been allocated over maturity
groupings based on the weighted-average contractual maturities of
underlying collateral. The mortgage-backed securities generally mature
earlier than their weighted-average contractual maturities because of
principal prepayments.
Investment securities with a carrying value of $75,431,232 and
$70,149,059 at December 31, 1999 and 1998, respectively, were pledged to
secure public deposits and for other purposes.
Gross gains realized on sales of securities available for sale were
$1,112,574 in 1999, $1,240,170 in 1998, and $512,843 in 1997. Gross
realized losses on those sales were $578,768 in 1999, $829,183 in 1998,
and $407,589 in 1997. Gross realized gains on trading account securities
were $0 in 1999, $0 in 1998, and $19,111 in 1997. Gross realized losses
on those sales were $0 in 1999, $0 in 1998, and $8,924 in 1997.
5. LOANS
At December 31, 1999 and 1998, the composition of the loan portfolio was
as follows:
1999 1998
____________ ____________
Commercial, financial, and agricultural $ 39,996,482 $ 35,443,976
Real estate mortgage 156,978,808 123,263,732
Installment 90,599,352 86,282,286
Less:
Allowance for loan losses 5,579,072 4,989,173
Unearned interest, commissions, and fees 5,823,450 4,941,060
____________ ____________
Total $276,172,120 $235,059,761
____________ ____________
____________ ____________
The Bank grants commercial, real estate, and installment loans to
customers primarily in Clarke, Choctaw, Bibb, and surrounding counties
in southwest Alabama, northwest Florida, and southeast Mississippi.
Although the Bank has a diversified loan portfolio, the ability of a
substantial number of the Bank's loan customers to honor their
obligations is dependent upon the timber and timber-related industries.
At December 31, 1999, approximately $31,245,000 of the Bank's loan
portfolio consisted of loans to customers in the timber and
timber-related industries.
In the ordinary course of business, the Bank makes loans to certain
officers and directors of the Company and Bank, including companies with
which they are associated. These loans are made on substantially the
same terms as those prevailing for comparable transactions with others.
Such loans do not represent more than normal risk of collectibility nor
do they present other unfavorable features. The amounts of such related
party loans and commitments at December 31, 1999 and 1998 were
$2,073,267 and $1,692,312, respectively. During the year ended December
31, 1999, new loans to these parties totaled $918,719 and repayments
were $537,764.
A summary of the transactions in the allowance for loan losses follows:
1999 1998 1997
___________ ___________ ___________
Balance at beginning of year $4,989,173 $4,045,844 $3,133,768
Acquired in branch acquisitions 242,887 0 0
Provision 4,305,450 3,187,103 1,710,128
Loans charged off (4,472,699) (2,589,300) (1,038,585)
Recoveries of loans previously charged off 514,261 345,526 240,533
__________ __________ __________
Balance at end of year $5,579,072 $4,989,173 $4,045,844
__________ __________ __________
__________ __________ __________
At December 31, 1999, the Company had one loan considered to be
impaired. The amount of this loan, which is on nonaccrual, is $457,468
and the related allowance is $228,734 The average recorded investment in
impaired loans during the year ended December 31, 1999 was approximately
$472,147. For the year ended December 31, 1999, the Company did not
recognize interest income on the impaired loan during the period the
loan was considered impaired. The Company had approximately $486,826
considered to be impaired at December 31, 1998.
Loans on which the accrual of interest has been discontinued amounted to
$1,725,008 and $3,459,814 at December 31, 1999 and 1998, respectively.
If interest on those loans had been accrued, such income would have
approximated $247,391, $339,710, and $153,870 for 1999, 1998, and 1997,
respectively. Interest income actually recorded on those loans amounted
to $211,264, $298,335, and $108,060 for 1999, 1998, and 1997,
respectively.
6. PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
1999 1998
___________ ___________
Land $ 1,037,436 $ 1,037,436
Premises (40 years) 8,539,348 7,656,911
Furniture, fixtures, and equipment (3-7 years) 9,397,495 7,967,423
___________ ___________
18,974,279 16,661,770
Less accumulated depreciation 9,432,896 8,436,763
___________ ___________
Total $ 9,541,383 $ 8,225,007
___________ ___________
___________ ___________
Depreciation expense of $878,828, $797,959, and $894,702 was recorded in
1999, 1998, and 1997, respectively, on premises and equipment.
7. INVESTMENT IN LIMITED PARTNERSHIPS
The Bank invests in limited partnerships that operate qualified
affordable housing projects to receive tax benefits in the form of tax
deductions from operating losses and tax credits. The Bank accounts for
the investments under either the equity or cost method based on the
percentage ownership and influence over operations. The Bank's interest
in these partnerships was $5,469,829 and $4,234,447 at December 31, 1999
and 1998, respectively. Losses related to these partnerships amounted to
approximately $119,000, $128,000, and $122,000 for 1999, 1998, and 1997
respectively. Management analyzes these investments annually for
potential impairment.
The assets and liabilities of these partnerships consist primarily of
apartment complexes and related mortgages. The Bank's carrying value
approximates cost or its underlying equity in the net assets of the
partnerships. Market quotations are not available for any of the
aforementioned partnerships.
The Bank has remaining cash commitments to these partnerships at
December 31, 1999 in the amount of approximately $36,000.
8. DEPOSITS
At December 31, 1999, the scheduled maturities of the Bank's time
deposits greater than $100,000 are as follows:
2000 $32,328,387
2001 9,073,991
2002 1,773,247
2003 2,011,135
2004 and thereafter 866,534
___________
$46,053,294
___________
___________
Additionally, included in the Bank's other time deposits at December 31,
1999 is $6,303,081 in state and municipal time deposits greater than
$100,000 and maturing within one year.
9. SHORT-TERM BORROWINGS
Short-term borrowings consist of federal funds purchased and securities
sold under agreements to repurchase which generally mature within one to
four days from the transaction date, treasury tax and loan deposits
which are withdrawable on demand, and FHLB advances with original
maturities in less than one year.
Information concerning short-term borrowings is as follows:
1999
__________________________________________
Treasury
Federal Tax and
Funds Repurchase Loan
Purchased Agreements Deposits
____________ ___________ ___________
Average balance during the year $ 4,070,482 $ 82,914 $ 765,458
___________ __________ __________
___________ __________ __________
Average interest rate during the year 5.07% 5.46% 5.66%
___________ __________ __________
___________ __________ __________
Maximum month-end balance during the year $14,600,000 $ 0 $2,504,952
___________ __________ __________
___________ __________ __________
1998
___________________________
Treasury
Federal Tax and
Funds Loan
Purchased Deposits
___________ ___________
Average balance during the year $3,081,863 $ 846,955
__________ __________
__________ __________
Average interest rate during the year 5.83% 5.90%
__________ __________
__________ __________
Maximum month-end balance during the year $9,100,000 $2,520,307
__________ __________
__________ __________
At December 31, 1999, the Bank has $23.4 million in available federal
fund lines from correspondent banks.
10. LONG-TERM DEBT
The Company uses Federal Home Loan Bank advances as an alternative to
funding sources with similar maturities such as certificates of deposit
or other deposit programs. These advances generally offer more
attractive rates when compared to other mid-term financing options. They
are also flexible, allowing the Company to quickly obtain the necessary
maturities and rates that best suit its overall asset/liability
strategy. Investment securities and 1-4 family mortgage loans secure
these borrowings.
The following summarizes information concerning Federal Home Loan Bank
advances and other borrowings:
1999 1998
____________ ___________
Average balance $57,781,427 $55,453,921
Maximum month-end balance during year $65,788,012 $55,906,433
Average rate paid 5.07% 5.53%
Weighted average remaining maturity 6.14 years 7.25 years
Scheduled maturities of Federal Home Loan Bank advances in 2000 are
approximately $5 million. Maturities during 2001 are approximately $10
million. There are no scheduled maturities in 2002. In 200 million in
scheduled maturities. In years subsequent to 2003, maturities total
approximately $40 million.
At December 31, 1999, the Bank has $18.2 million in available credit
from the Federal Home Loan Bank.
11. INCOME TAXES
The consolidated provisions (benefits) for income taxes for the years
ended December 31 were as follows:
1999 1998 1997
__________ ____________ ___________
Federal
Current $2,441,731 $ 4,146,035 $2,714,017
Deferred 449,361 (1,059,525) (298,811)
__________ ___________ __________
2,891,092 3,086,510 2,415,206
State
Current 355,347 566,870 334,545
Deferred 55,692 (132,308) (37,024)
__________ ___________ __________
411,039 434,562 297,521
__________ __________ __________
Total $3,302,131 $3,521,072 $2,712,727
__________ __________ __________
__________ __________ __________
The consolidated tax provision differed from the amount computed by
applying the federal statutory income tax rate to pretax earnings for
the following reasons:
1999 1998 1997
__________ __________ __________
Income tax expense at federal statutory rate $3,897,028 $4,113,755 $3,294,833
Increase (decrease) resulting from:
Tax-exempt interest (508,501) (561,148) (600,744)
State income tax expense net of federal income
tax benefit 271,286 286,810 196,364
Tax credits (low income housing) (540,000) (490,000) (480,000)
Other 182,318 171,655 302,274
__________ __________ __________
Total $3,302,131 $3,521,072 $2,712,727
__________ __________ __________
__________ __________ __________
Effective tax rate 29% 29% 28%
__________ __________ __________
__________ __________ __________
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1999 and 1998, are presented below:
1999 1998
___________ ___________
Deferred tax assets:
Allowance for loan losses $1,498,068 $2,095,795
Accrued vacation 22,200 22,200
Capital loss carryover 27,041 80,443
Deferred commissions and fees 594,909 514,925
Unrealized loss on securities available for sale 1,051,728 0
Other 167,272 574,715
__________ __________
Total gross deferred tax asset 3,361,218 3,288,078
Valuation allowance 27,041 (75,903)
__________ __________
Net deferred tax assets 3,334,177 3,212,175
__________ __________
Deferred tax liabilities:
Premises and equipment 518,225 501,986
Limited partnerships 210,522 224,035
Unrealized gain on securities available for sale 0 1,692,935
Other deferred tax liabilities 327,526 754,945
__________ __________
Total gross deferred tax liabilities 1,056,273 3,173,901
__________ __________
Net deferred tax asset (liability) $2,227,904 $ 38,274
__________ __________
__________ __________
12. EMPLOYEE BENEFIT PLANS
The Company sponsors an Employee Stock Ownership Plan with 401(k)
provisions. This plan covers substantially all employees and allows
employees to contribute up to 15% of their compensation on a before-tax
basis. The Company may make discretionary contributions to match
employee contributions dollar for dollar up to 6% of an employee's
compensation. Employees have the option to allocate some or all of their
contributions towards the purchase of Company stock. The Company made
matching contributions totaling $451,483 and $284,432 in 1999 and 1998,
respectively.
13. LONG-TERM INCENTIVE COMPENSATION PLAN
During 1997, the Company's shareholders' approved the adoption of the
United Security Bancshares, Inc. Long Term Incentive Compensation Plan
("LTICP"). This plan provides for a number of forms of stock based
compensation for key employees of USB and its subsidiaries. Under the
plan, eligible employees may be awarded incentive and nonqualified stock
options, stock appreciation rights, and restricted stock. The LTICP
provides for the issuance of up to 60,000 shares of USB common stock
with a par value of $.01 per share. In addition, each option expires no
later than five years after the grant date. The exercise price of each
option is determined by the compensation committee, but in the case of
incentive stock options, the price shall not be less than the fair
market value on the grant date.
The Company continues to record compensation cost under Accounting
Principles Board Opinion ("APB") No. 25. Had compensation cost been
determined, consistent with the fair value based method of recording for
stock-based compensation allowed for under SFAS No. 123, the Company's
net income would have been decreased to the following pro forma amounts:
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
December 31, December 31, December 31,
1999 1998 1997
____________ ____________ ____________
Net income-as reported $8,159,716 $8,578,650 $6,981,458
Net income-pro forma 7,953,163 8,372,098 6,805,635
Basic net income per share-as reported 2.29 2.42 1.97
Basic net income per share-pro forma 2.23 2.36 1.92
Diluted net income per share-as reported 2.28 2.40 1.96
Diluted net income per share-pro forma 2.22 2.34 1.91
A summary of the status of the Company's stock option plan at December
31, 1999, 1998, and 1997 and the changes during the year then ended is
as follows:
1999 1998 1997
__________________ __________________ __________________
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
______ ________ ______ ________ ______ ________
Outstanding at beginning of year 47,690 $17.72 56,250 $17.50 0 $ 0.00
Granted 2,050 36.25 600 35.00 57,350 17.50
Exercised 21,136 17.50 9,160 17.50 1,100 17.50
______ ______ ______ ______ ______ ______
Outstanding at end of year 28,604 $19.21 47,690 $17.72 56,250 $17.50
______ ______ ______ ______ ______ ______
______ ______ ______ ______ ______ ______
Exercisable at end of year 28,604 $19.21 47,690 $17.72 56,250 $17.50
______ ______ ______ ______ ______ ______
______ ______ ______ ______ ______ ______
Fair value of options granted $4.71 $4.33 $4.22
______ ______ ______
______ ______ ______
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted
average assumptions: a risk free interest rate based on zero coupon
governmental issues at grant date with the maturity equal to the
expected term of the options (5.00%, 4.54%, and 6.27% for 1999, 1998,
and 1997), no expected forfeiture rate as options are immediately vested
at date of grant, an expected stock volatility of 29%, 26%, and 26% and
an expected annual dividend yield of $.84, $.76, and $.53 per share for
1999, 1998, 1997, respectively.
14. SHAREHOLDERS' EQUITY
Dividends are paid by the Company from its assets, which are primarily
dividends from the Bank. However, certain restrictions exist regarding
the ability of the Bank to transfer funds to the Company in the form of
cash dividends, loans, or advances. As of December 31, 1999,
approximately $9.7 million of the Bank's retained earnings was available
for dividend distribution without prior regulatory approval.
The Company is subject to various regulatory capital requirements that
prescribe quantitative measures of the Company's assets, liabilities,
and certain off-balance sheet items. The Company's regulators have also
imposed qualitative guidelines for capital amounts and classifications
such as risk weightings, capital components, and other details. The
quantitative measures to ensure capital adequacy require that the
Company maintain amounts and ratios, as set forth in the schedule below,
of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined) and Tier I capital to average total
assets (as defined). Failure to meet minimum capital requirements can
initiate certain actions by regulators that, if undertaken, could have a
direct material effect on the Company's financial statements. Management
believes, as of December 31, 1999, that the Company meets all capital
adequacy requirements imposed by its regulators.
As of December 31, 1999 and 1998, the most recent notification from the
Federal Deposit Insurance Corporation categorized the Bank as well
capitalized under the regulatory framework for prompt corrective action.
To be categorized as well capitalized, the Bank must maintain minimum
total risk-based, Tier I risk-based, and Tier I leverage ratios as set
forth in the table. There have been no conditions or events since that
notification that Management believes have changed the institution's
category.
Actual capital amounts as well as required and well capitalized Tier I,
total, and Tier I leverage ratios as of December 31 for the Company and
the Bank are as follows:
1999
_______________________________________________________________
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
__________________ _________________ _________________
Amount Ratio Amount Ratio Amount Ratio
(Dollars in thousands)
Total Capital (to Risk Weighted Assets):
United Security Bancshares, Inc. $62,672 19.05% $26,312 8.00% N/A N/A
First United Security Bank 58,519 16.52 28,332 8.00 35,415 10.00%
Tier I Capital (to Risk Weighted Assets):
United Security Bancshares, Inc. 58,528 17.79 13,156 4.00 N/A N/A
First United Security Bank 54,083 15.27 14,166 4.00 21,249 6.00
Tier I Leverage (to Average Assets):
United Security Bancshares, Inc. 58,528 12.47 14,080 3.00 N/A N/A
First United Security Bank 54,083 11.77 13,785 3.00 22,976 5.00
1998
_______________________________________________________________
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
_______ _______ _______ _____ _______ _____
(Dollars in thousands)
Total Capital (to Risk Weighted Assets):
United Security Bancshares, Inc. $56,370 17.37% $25,967 8.00% N/A N/A
First United Security Bank 52,531 16.28 25,809 8.00 $32,261 10.00%
Tier I Capital (to Risk Weighted Assets):
United Security Bancshares, Inc. 52,590 16.20 12,983 4.00% N/A N/A
First United Security Bank 48,499 15.03 12,905 4.00 19,357 6.00
Tier I Leverage (to Average Assets):
United Security Bancshares, Inc. 52,590 12.07 13,067 3.00% N/A N/A
First United Security Bank 48,499 11.24 12,941 3.00 21,568 5.00
Comprehensive Income
Comprehensive Income. Comprehensive income is the change in equity
during a period from transactions and other events and circumstances
from nonowner sources. It includes all changes in equity during a
period except those resulting from investments by owners and
distributions to owners.
In addition to net income, the Company has identified changes related to
other nonowner transactions in the consolidated statement of changes in
stockholders' equity and comprehensive income. For the Company, changes
in other nonowner transactions consist entirely of changes in unrealized
gains and losses on securities available for sale.
In the calculation of comprehensive income, certain reclassification
adjustments are made to avoid double counting items that are displayed
as part of net income and other comprehensive income in that period or
earlier periods. The following table reflects the reclassification
amounts and the related tax effects for the three years ended December
31:
1999
_______________________________________________
Before After
Tax Tax Tax
Amount Effect Amount
____________ ____________ ____________
Unrealized gains (losses) arising during
the period $(6,785,292) $(2,547,154) $(4,238,138)
Less reclassification adjustments for (gains)
losses included in net income (533,806) (197,508) (336,298)
___________ ___________ ___________
Net unrealized gain/(loss) on
securities $(7,319,098) $(2,744,662) $(4,574,436)
___________ ___________ ___________
___________ ___________ ___________
1998
_______________________________________________
Before After
Tax Tax Tax
Amount Effect Amount
____________ ____________ ____________
Unrealized gains (losses) arising during
the period $ 3,282,314 $ 1,214,456 $ 2,067,858
Less reclassification adjustments for (gains)
losses included in net income (410,987) (152,065) (258,922)
___________ ___________ ___________
Net change in unrealized gain/(loss) on
securities $ 2,871,327 $ 1,062,391 $ 1,808,936
___________ ___________ ___________
___________ ___________ ___________
1997
_______________________________________________
Before After
Tax Tax Tax
Amount Effect Amount
____________ _____________ ____________
Unrealized gains (losses) arising during
the period $ 53,575 $ 19,823 $ 33,752
Less reclassification adjustments for (gains)
losses included in net income (105,254) (38,944) (66,310)
___________ ___________ ___________
Net change in unrealized gain/(loss) on
securities $ (51,679) $ (19,121) $ (32,558)
___________ ___________ ___________
___________ ___________ ___________
15. SEGMENT REPORTING
Under SFAS No. 131, "Disclosure about Segments of an Enterprise and
Related Information," certain information is disclosed for the two
reportable operating segments of the Company. 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--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.
1999
______________________________________________________________
FUSB ALC All Other Eliminations Consolidated
________ ________ _________ ____________ ____________
(In thousands)
Total interest income $ 34,390 $16,251 $ 173 $ (5,895) $ 44,919
Total interest expense 15,365 5,895 0 (5,895) 15,365
________ ________ ________ _________ ________
Net interest income 19,025 10,356 174 0 29,554
Provision for loan losses 153 4,152 0 0 4,305
________ ________ ________ _________ ________
Net interest income after provision 18,872 6,204 174 0 25,249
Total noninterest income 3,669 1,046 8,353 (8,321) 4,747
Total noninterest expense 11,651 6,591 299 (7) 18,534
________ _______ ________ _________ ________
Income (loss) before income taxes
(tax benefit) 10,890 659 8,227 (8,314) 11,462
Provision for income taxes (income
tax benefit) 3,027 279 (4) 0 3,302
________ _______ _______ _________
Net income (loss) $ 7,863 $ 380 $ 8,231 $ (8,314) $ 8,160
________ _______ _______ _________ ________
________ _______ _______ _________ ________
Other significant items:
Total assets $470,889 $79,399 $85,092 $(158,781) $476,599
Total investment securities 153,946 0 3,928 0 157,874
Total loans, net 279,642 72,695 0 (76,165) 276,172
Investment in subsidiaries 1,241 0 56,215 (57,456) 0
Total interest income from
external customers 28,494 16,251 174 0 44,919
Total interest income from affiliates 5,895 0 0 (5,895) 0
1998
______________________________________________________________
FUSB ALC All Other Eliminations Consolidated
________ ________ _________ ____________ ____________
(In thousands)
Total interest income $ 35,523 $12,141 $ 133 $ (4,542) $ 43,255
Total interest expense 15,518 4,542 0 (4,542) 15,518
________ ________ ________ _________ ________
Net interest income 20,005 7,599 133 0 27,737
Provision for loan losses 762 2,425 0 0 3,187
________ ________ ________ _________ ________
Net interest income after provision 19,243 5,174 133 0 24,550
Total noninterest income 3,580 936 9,096 (9,054) 4,558
Total noninterest expense 12,015 4,696 313 (16) 17,008
________ ________ ________ _________ ________
Income (loss) before income taxes
(tax benefit) 10,808 1,414 8,916 (9,038) 12,100
Provision for income taxes (tax benefit) 2,967 557 (3) 0 3,521
________ _______ _______ _________ ________
Net income (loss) $ 7,841 $ 857 $ 8,919 $ (9,038) $ 8,579
________ _______ _______ _________ ________
________ _______ _______ _________ ________
Other significant items:
Total assets $444,408 $67,902 $61,816 $(124,053) $476,599
Total investment securities 160,916 0 3,103 0 164,019
Total loans, net 236,274 64,486 0 (65,700) 235,060
Investment in wholly-owned
subsidiaries 384 0 55,338 (55,722) 0
Total interest income from
external customers 30,981 12,141 133 0 43,255
Total interest income from affiliates 2,560 0 0 (2,560) 0
1997
______________________________________________________________
FUSB ALC All Other Eliminations Consolidated
________ _______ _________ ____________ ____________
(In thousands)
Total interest income $ 35,213 $ 4,166 $ 5 $ (1,736) $ 37,648
Total interest expense 15,253 1,731 127 (1,736) 15,375
Net interest income 19,960 2,435 (122) 0 22,273
Provision for loan losses 657 1,053 0 0 1,710
________ ________ ________ _________
Net interest income after provision 19,303 1,382 (122) 0 20,563
Total noninterest income 4,113 309 7,569 (7,631) 4,360
Total noninterest expense 12,441 2,264 600 (76) 15,229
________ ________ ________ _________
Income (loss) before income taxes
(tax benefit) 10,975 (573) 6,847 (7,555) 9,694
Provision for income taxes (tax benefit) 3,081 (228) (140) 0 2,713
________ _______ _______ _________
Net income (loss) $ 7,894 $ (345) $ 6,987 $ (7,555) $ 6,981
________ _______ _______ _________
________ _______ _______ _________
Other significant items:
Total assets $428,851 $36,624 $53,384 $ (92,918) $425,941
Total investment securities 172,436 0 63 0 172,499
Total loans, net 217,363 34,134 0 (35,600) 215,897
Investment in subsidiaries 842 0 51,026 (51,868) 0
Total interest income from
external customers 33,482 4,166 0 0 37,648
Total interest income from affiliates 1,736 0 0 (1,736) 0
16. OTHER OPERATING EXPENSES
Other operating expenses for the years 1999, 1998, and 1997 consist of
the following:
1999 1998 1997
__________ __________ __________
Telephone expense $ 548,122 $ 543,509 $ 478,060
Amortization of intangibles 549,720 636,651 604,811
Postage, stationery, and supplies 762,201 246,051 680,248
Merger expense 0 0 650,330
Other 3,163,248 3,291,907 2,729,036
__________ __________ __________
Total $5,023,291 $4,718,118 $5,142,485
__________ __________ __________
__________ __________ __________
17. OPERATING LEASES
The Company leases office space, data processing, and other equipment
under operating leases.
The following is a schedule, by years, of future minimum rental payments
required under operating leases having initial or remaining
noncancellable terms in excess of one year as of December 31, 1999:
Year ending December 31,
2000 $390,844
2001 227,550
2002 93,592
2003 32,500
2004 and thereafter 31,633
Total rental expense under all operating leases was $389,519, $532,056,
and $347,377 in 1999, 1998, and 1997, respectively.
18. COMMITMENTS AND CONTINGENCIES
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.
19. DERIVATIVE FINANCIAL INSTRUMENTS
The Bank is a party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its
customers and in connection with its interest rate risk management,
investing, and trading activities. These financial instruments include
commitments to make loans, options written, standby letters of credit,
commitments to purchase or sell securities for forward delivery,
interest rate caps and floors purchased, caps sold, and interest rate
swaps.
The Bank's exposure to credit loss in the event of nonperformance by the
other party for commitments to make loans and standby letters of credit
is represented by the contractual amount of those instruments. The Bank
uses the same credit policies in making these commitments as it does for
on-balance sheet instruments. For interest rate caps, floors, and swap
transactions, options written, and commitments to purchase or sell
securities for forward delivery, the contract or notional amounts do not
represent exposure to credit loss. The Bank controls the credit risk of
these instruments through credit approvals, limits, and monitoring
procedures. The Bank has credit risk on caps and floors for the carrying
value plus the amount to replace such contracts in the event of
counterparty default. The Bank is fully cross-collateralized with
counterparties on all interest rate swap agreements. At December 31,
1999, the Bank estimates its credit risk on purchased caps and floors in
the event of total counterparty default to be $301,000. All of the
Bank's financial instruments are held for risk management and not for
trading purposes.
In the normal course of business there are outstanding commitments and
contingent liabilities, such as commitments to extend credit, letters of
credit, and others, which are not included in the consolidated financial
statements. 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.
December 31,
__________________
1999 1998
_______ ______
(In thousands)
Standby letters of credit $ 6,175 $ 6,477
Commitments to extend credit 21,819 23,546
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.
At December 31, 1999 and 1998, commitments to purchase and sell
securities for delayed delivery are summarized as follows:
December 31,
____________________
1999 1998
________ _______
(In thousands)
Commitments to purchase securities for delayed delivery $ 0 $ 0
Commitments to sell securities for delayed delivery 0 12,000
Commitments to purchase securities for delayed delivery require the Bank
to purchase a specified security at a specified price for delivery on a
specified date. Similarly, commitments to sell securities for delayed
delivery require the Bank to sell a specified security at a specified
price for delivery on a specified date. Market risk arises from
potential movements in security values and interest rates between the
commitment and delivery dates.
The Bank's principal objective 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.
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 notional 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 securities with a one-month
LIBOR rate index to a five-year constant maturity treasury index.
Interest rate caps and floors are option-like contracts that require the
seller to pay the purchaser at specified future dates the amount, if
any, by which a specified market interest rate exceeds the fixed cap
rate or falls below the fixed floor rate, applied to a notional
principal amount. The Bank uses floors to protect CMO floaters and
variable rate loans against a decline in rates. The Bank uses caps
purchased to partially hedge against rising interest rates on their
floating rate short-term borrowings and to uncap a portion of their
floating rate CMO portfolio. They also use caps purchased matched with
sold caps to raise, by 100 basis points, the cap on certain CMO
floaters. These matches are also referred to as "corridors." The cost of
the caps and floors are amortized straight-line over the life of these
instruments. The income derived from these instruments is recorded on
the accrual basis. The income and amortization from these instruments is
recorded in net interest income and resulted in a reduction in net
interest income of $223,217, $164,006, and $208,316 in 1999, 1998, and
1997, respectively.
Interest-rate futures contracts are entered into by the Bank as hedges
against exposure to interest-rate risk and are not for speculative
purposes. Changes in the market value of interest-rate futures contracts
are deferred while the contracts are open and subsequently amortized
into interest income or expense over the maturity period of the hedged
assets or liabilities after the contract closes.
The following table details various information regarding swaps, caps,
floors and forward contracts used for purposes other than trading as of
December 31, 1999:
Weighted
Weighted Average
Weighted Average Repricing
Notional Carrying Estimated Average Rate Years to Frequency
Amount Value Fair Value Received Paid Expiration (Days)
________ ______ __________ ________ ______ __________ _________
(Dollars in thousands)
Swaps:
Pay floating, receive 5 year 1 month
floating $ 20,000 $ 0 $(103) CMT LIBOR 2.04 30
Caps:
Purchased 62,000 211 302 0.0175% N/A 1.15 30-90
Sold 10,000 0 0 N/A 0.00% .13 30
________ ______ _____
$ 92,000 $ 211 $ 199
________ ______ _____
________ ______ _____
Swaps, caps, and floors acquired for other than trading purposes are
used to help reduce the risk of interest rate movements for specific
categories of assets and liabilities. At December 31, 1999, such swaps,
caps, and floors were associated with the following asset or liability
categories:
Notional Principal
Associated With
__________________________
Notional Fixed Floating Rate
Amount Rate Loans Securities
________ __________ ___________
(In thousands)
Swaps:
Pay floating, receive floating $ 20,000 $ 0 $ 20,000
Caps:
Purchased 62,000 44,130 17,870
Sold 10,000 0 10,000
________ _______ ________
$ 92,000 $44,130 $ 47,870
________ _______ ________
________ _______ ________
Income or expense on derivative financial instruments used to manage
interest rate exposure is recorded on an accrual basis as an adjustment
to the yield of the related interest-earning assets or interest-bearing
liabilities over the periods covered by the contracts. If a derivative
financial instrument that is used to manage interest rate risk is
terminated early, any resulting gain or loss is deferred and amortized
over the remaining periods originally covered by the derivative
financial instrument.
Deferred gains on early termination of interest rate swaps used to
manage interest rate risk are $253,069, $132,834, and $229,221 as of
December 31, 1999, 1998, and 1997, respectively, with related
amortization into income of $150,043, $147,887, and $234,459 for the
years ended December 31, 1997, respectively. Fiscal 1999 amounts are
scheduled to be amortized into income in the following periods: $90,902
gain in 2000, $81,083 gain in 2001, and $81,083 gain in 2002.
All of the Bank's derivative financial instruments are over-the-counter
instruments and are not exchange traded. Market values are obtained from
the counterparties to each instrument. The Bank only uses other
commercial banks as a counterparty to their derivative activity. The
Bank performs stress tests and other models to assess risk exposure.
20. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments,"
requires disclosure of fair value information about financial
instruments, whether or not recognized on the face of the statement of
condition, for which it is practicable to estimate that value. The
assumptions used in the estimation of the fair value of the Company's
financial instruments are detailed below. Where quoted prices are not
available, fair values are based on estimates using discounted cash
flows and other valuation techniques. The use of discounted cash flows
can be significantly affected by the assumptions used, including the
discount rate and estimates of future cash flows. The following
disclosures should not be considered a surrogate of the liquidation
value of the Company, but rather represent a good-faith estimate of the
increase or decrease in value of financial instruments held by the
Company since purchase, origination, or issuance. The Company has not
undertaken any steps to value any intangibles.
The Company in estimating the fair value of its financial instruments
used the following methods and assumptions:
Cash and due from banks: Fair value equals the carrying value of
such assets.
Investment securities available for sale: Fair values for
investment securities are based on quoted market prices.
Accrued interest receivable and payable: Fair value equals the
carrying value of these instruments.
Loans: For variable rate loans, those repricing within six months,
fair values are based on carrying values. Fixed rate commercial
loans, other installment loans, and certain real estate mortgage
loans were valued using discounted cash flows. The discount rate
used to determine the present value of these loans was based on
interest rates currently being charged by the Bank on comparable
loans as to credit risk and term.
Off-balance-sheet instruments: Fair values of the Company's
off-balance-sheet instruments (futures, forwards, swaps, caps,
floors, and options written) are based on values obtained from
counterparties, or other quotations received from third parties.
The Company's loan commitments are negotiated at current market
rates and are relatively short-term in nature. As a matter of
policy, the Company generally makes commitments for fixed rate
loans for relatively short periods of time. Because of this policy
and the absence of any known credit exposure, the estimated value
of the Company's loan commitments is nominal.
Demand and savings deposits: The fair values of demand deposits are
equal to the carrying value of such deposits. Demand deposits
include noninterest bearing demand deposits, savings accounts, NOW
accounts, and money market demand accounts.
Time deposits: The fair value of relatively short-term time
deposits is equal to their carrying values. Discounted cash flows
have been used to value long-term time deposits. The discount rate
used is based on interest rates currently being offered by the Bank
on comparable deposits as to amount and term.
Short-term borrowings: These borrowings may consist of federal funds
purchased, securities sold under agreements to repurchase, floating
rate borrowings from the Federal Home Loan Bank and the U.S.
Treasury Tax and Loan account. Due to the short-term nature of
these borrowings, fair values approximate carrying values.
Long-term debt: The fair value of this debt is estimated using
discounted cash flows based on the Company's current incremental
borrowing rate for similar types of borrowing arrangements.
At December 31, 1999 At December 31, 1998
_______________________ ______________________
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
_________ __________ ________ __________
(In thousands)
Assets:
Cash and cash equivalents $ 12,888 $ 12,888 $ 26,831 $ 26,831
Investment securities available for sale 157,874 157,874 164,019 164,019
Accrued interest receivable 5,663 5,663 4,521 4,521
Loans, net 281,751 280,045 235,060 237,246
Off-balance-sheet instruments 211 198 501 (237)
Liabilities:
Deposits 326,751 327,353 326,645 327,774
Short-term borrowing 17,045 17,045 12 12
Long-term debt 65,729 65,968 55,847 56,000
21. UNITED SECURITY BANCSHARES, INC. (PARENT COMPANY ONLY)
FINANCIAL INFORMATION
Statements of Condition
December 31,
___________________________
1999 1998
___________ ___________
ASSETS:
Cash on deposit $ 502,355 $ 1,826,501
Investment in subsidiaries 56,133,015 55,337,773
Investments available for sale 3,928,026 3,103,340
Other assets 1,139,832 1,185,211
___________ ___________
$61,703,228 $61,452,825
___________ ___________
___________ ___________
LIABILITIES:
Other liabilities $ 32,417 $ 884,737
SHAREHOLDERS' EQUITY 61,670,811 60,568,088
___________ ___________
$61,703,228 $61,452,825
___________ ___________
___________ ___________
Statements of Income
Year Ended December 31,
________________________________________
1999 1998 1997
__________ __________ __________
INCOME
Dividend income, First United Security Bank $2,991,994 $6,183,651 $5,526,531
Interest income 179,103 137,654 496
Investment securities gains (losses), net 0 24,797 0
__________ __________ __________
Total income 3,171,097 6,346,102 5,527,027
EXPENSES 256,910 278,990 573,588
__________ __________ __________
INCOME BEFORE EQUITY IN UNDISTRIBUTED
INCOME OF SUBSIDIARIES 2,914,187 6,067,112 4,953,439
EQUITY IN UNDISTRIBUTED INCOME
OF SUBSIDIARIES 5,245,529 2,511,538 2,028,019
__________ __________ __________
Net income $8,159,716 $8,578,650 $6,981,458
__________ __________ __________
__________ __________ __________
Statements of Cash Flows
Year Ended December 31,
___________________________________________
1999 1998 1997
___________ ___________ ___________
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 8,159,716 $ 8,578,650 $ 6,981,458
Adjustments to reconcile net income to net cash
provided by operating activities:
Undistributed income of subsidiaries (5,245,529) (2,511,538) (2,028,019)
(Increase) decrease in other assets 45,379 41,538 548,541
Increase (decrease) in other liabilities (356,583) 85,864 36,876
___________ ___________ ___________
Net cash provided by operating activities 2,602,983 6,194,513 5,485,577
___________ ___________ ___________
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investment securities available for sale (770,553) (3,003,161) 0
____________ ___________ ___________
Net cash used in investing activities (770,553) (3,003,161) 0
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on other borrowings 0 0 (3,004,000)
Proceeds from sale of treasury stock 0 3,251 0
Proceeds from issuance of common stock 509,437 160,299 16,380
Cash dividends paid (3,666,013) (2,550,690) (1,650,654)
___________ ___________ ___________
Net cash used in financing activities (3,156,576) (2,387,140) (4,593,024)
INCREASE IN CASH (1,324,146) 804,212 892,553
CASH AT BEGINNING OF YEAR 1,826,501 1,022,289 129,736
___________ ___________ ___________
CASH AT END OF YEAR $ 502,355 $ 1,826,501 $ 1,022,289
___________ ___________ ___________
___________ ___________ ___________
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information called for in this item is incorporated herein by
reference to Bancshares' definitive proxy statement, under the caption
"Election of Directors," to be filed pursuant to Regulation 14A with the
Securities and Exchange Commission within 120 days after the end of the
fiscal year ended December 31, 1999.
Item 11. Executive Compensation.
The information called for by this item is incorporated herein by
reference to Bancshares' definitive proxy statement, under the caption
"Executive Compensation and Benefits," to be filed pursuant to Regulation 14A
with the Securities and Exchange Commission within 120 days after the end of
the fiscal year ended December 31, 1999.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information called for by this item is incorporated herein by
reference to Bancshares' definitive proxy statement, under the caption
"Voting Securities and Principal Stockholders," to be filed pursuant to
Regulation 14A with the Securities and Exchange Commission within 120 days
after the end of the fiscal year ended December 31, 1999.
Item 13. Certain Relationships and Related Transactions.
The information called for by this item is incorporated herein by
reference to Bancshares' definitive proxy statement, under the caption
"Certain Relationships and Related Transactions," to be filed pursuant to
Regulation 14A with the Securities and Exchange Commission within 120 days
after the end of the fiscal year ended December 31, 1999.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a)1. Financial Statements
Report of Independent Public Accountants.
Consolidated Statements of Condition, December 31, 1999
and 1998.
Consolidated Statements of Shareholders' Equity,
December 31, 1999, 1998, and 1997.
Consolidated Statements of Income, December 31, 1999,
1998, and 1997.
Consolidated Statements of Cash Flows, December 31, 1999,
1998, and 1997.
Notes to Consolidated Financial Statements.
(a)2. Financial Statements Schedules
Included in Part II of this report:
The financial statement schedules required to be included
pursuant to this Item are not included herein because they
are not applicable or the required information is shown in
the financial statements or notes thereto, which are
included at Part II, Item 8, of this report.
(a)3. Exhibits
(3)(a) Certificate of Incorporation of Bancshares
incorporated herein by reference to the Exhibits to
Form 10-Q for the Quarter ended September 30, 1999.
(3)(b) Bylaws of Bancshares, incorporated herein by
reference to the Exhibits to Form 10-Q for the
quarter ended September 30, 1999.
(10)(a) The United Security Bancshares, Inc. Employee Stock
Ownership Plan, as amended dated January 1, 1992,
incorporated herein by reference to the Exhibits to
Form 10-K for the year ended December 31, 1992, file
with the Commission in Washington, D.C., File No.
0-14549.
(10)(b) Amendments to the United Security Bancshares, Inc.
Employee Stock Ownership Plan, incorporated herein
by reference to the Exhibits to Form 10-K for the
year ended December 31, 1997.
(10)(c) Employment Agreement dated January 1, 1999, between
Bancshares and R. Terry Phillips incorporated herein
by reference to the Exhibits to Form 10-K for the
year ended December 31, 1998.
(10)(d) Form of Indemnification Agreement between Bancshares
and its directors, incorporated herein by reference
to the Exhibits to Form 10-K for the year ended
December 31, 1994, filed with the Commission in
Washington, D.C., File No. 0-14549.
(10)(e) United Security Bancshares, Inc. Long Term Incentive
Compensation Plan, incorporated herein by reference
to the Exhibits to Form S-4 dated April 16, 1997
(No. 333-21241).
(13) Bancshares' definitive proxy statement for 2000
annual meeting of shareholders, to be days after
the end of the fiscal year ended December 31, 1999,
furnished for the information of the Commission.
(21) List of Subsidiaries of Bancshares.
(27) Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of the
year ended December 31, 1999.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /s/ R. Terry Phillips March 23, 2000
_____________________
R. Terry Phillips
Its President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
_____________________ ______________________________ ______________
/s/ R. Terry Phillips President, Chief Executive March 23, 2000
________________________ Officer, and Director
R. Terry Phillips (Principal Executive Officer)
/s/ Larry M. Sellers Treasurer (Principal Financial March 23, 2000
________________________ Officer, Principal Accounting
Larry M. Sellers Officer)
/s/ Dan Barlow Director March 23, 2000
________________________
Dan Barlow
/s/ Linda Breedlove Director March 23, 2000
________________________
Linda Breedlove
/s/ Gerald P. Corgill Director March 23, 2000
________________________
Gerald P. Corgill
Director March 23, 2000
________________________
Roy G. Cowan
/s/ Waynce C. Curtis Director March 23, 2000
________________________
Wayne C. Curtis
/s/ John C. Gordon Director March 23, 2000
________________________
John C. Gordon
/s/ William G. Harrison Director March 23, 2000
________________________
William G. Harrison
/s/ Fred L. Huggins Director March 23, 2000
________________________
Fred L. Huggins
/s/ Hardie B. Kimbrough Director March 23, 2000
________________________
Hardie B. Kimbrough
/s/ Jack W. Meigs Director March 23, 2000
________________________
Jack W. Meigs
/s/ James L. Miller Director March 23, 2000
________________________
James L. Miller
/s/ Ray Sheffield Director March 23, 2000
________________________
Ray Sheffield
/s/ James C. Stanley Director March 23, 2000
________________________
James C. Stanley
/s/ Clarence Watters Director March 23, 2000
________________________
Clarence Watters
/s/ Howard M. Whitted Director March 23, 2000
________________________
Howard M. Whitted
/s/ Bruce N. Wilson Director March 23, 2000
________________________
Bruce N. Wilson
EXHIBIT 21
List of Subsidiaries
Name Where Organized
____ _______________
First United Security Bank Alabama
Acceptance Loan Company, Inc. Alabama
First Security Courier Corporation Alabama
FUSB Reinsurance, Inc. Arizona