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MAYNARD, COOPER & GALE, P.C.
ATTORNEYS AT LAW
1901 SIXTH AVENUE NORTH
2400 AMSOUTH/HARBERT PLAZA
BIRMINGHAM, ALABAMA 35203-2602
(205) 254-100
FACSIMILE (205) 254-1999
MONTGOMERY OFFICE:
ONE COMMERCE STREET
SUITE 302
MONTGOMERY, ALABAMA 36104
(334) 262-2001
Writer's Direct Dial No.: (205) 254-1055
March 29, 1996
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. 0-14549)
On behalf of our client, United Security Bancshares, Inc.,
we are filing the above-referenced Form 10-K via the EDGAR
system.
The filing fee of $250 associated with this filing has been
deposited previously.
Please do not hesitate to contact the undersigned if you have
any questions or comments.
Very truly yours,
J. Michael Savage
JMS/ead
Enclosures
cc: Jack M. Wainwright, III
Larry M. Sellers
Kevin M. Rittelmeyer
James M. Pool
United Security Bank
P.O. Box 249
Thomasville, Alabama 36784
334-636-5424
March 19, 1995
Securities and Exchange Commission
Division of Corporation Finance
Washington, D.C. 20549
RE: United Security Bancshares, Inc.
Form 10-K for the Fiscal Year Ended
December 31, 995
File Number 0-14549
Dear Sir:
Your comments on United Security Bancshares, Inc.'s Annual Report
on Form 10-K for the fiscal year ended December 31, 1994 have been
carefully considered and incorporated in the 1995 10-K. I refer you
to the "Management's Discussion and Analysis" section of the 10-K
as well as the "Notes to Consolidated Financial Statements" for the
disclosure recommended in your letter dated September 29, 1995. A
brief review of our actions is outlined below.
In the "Management's Discussion and Analysis" of the 1995 10-K
specific factors that influence management's decision to lower the
percentage of total loans to be allocated toward possible loan loss
are discussed in "Loans and Allowances for Possible Loan Losses".
Additionally, the underlying reasons for the decline in
non-performing assets is discussed in "Non-Performing Assets/Loan
Losses".
Under the management discussion section "Investment Securities and
Securities Available for Sale", a sub-section was added detailing
the Company's activities in the derivative market. This section
discusses the "high-risk" investments and how these investments are
managed.
The frequency and methodology used to evaluate impairment of
intangible assets have been disclosed in Note A of the "Notes to
Consolidated Financial Statements" under the sub-section
"Amortization of Intangibles".
The disclosure in Note C of the "Notes to Consolidated Financial
Statements" has been expanded to further explain the reasons for
the transfer of securities, and the disclosure has been made in the
"Statement of Cash Flows".
Please note that Notes R and S of the "Notes to Consolidated
Financial Statements" have been significantly expanded to adopt the
additional disclosures requested concerning the Company's
derivative instruments.
I trust the attached 10-K filing, particularly the management
discussion and the "Notes to Consolidated Financial Statements",
sufficiently addresses the disclosures recommended in your letter
of September 29, 1995. Management assures you that future filings
will address all of the areas noted.
If you have additional comments or need additional information,
please contact me at (334) 636-5424.
Sincerely,
/s/ Larry M. Sellers
Larry M. Sellers
Senior Executive Vice President
FORM 10-K
(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
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 .
Shares of common stock ($0.01 par value) outstanding as of
December 31, 1995: 2,137,960.
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 26, 1996, is
$21,256,066. (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
1996 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, 1995
TABLE OF CONTENTS
Part Item Caption
I 1 Business...................................
2 Properties.................................
3 Pending Legal Proceedings..................
4 Submission of Matters to a Vote of
Security Holders...........................
II 5 Market for Registrant's Common Equity
and Related Stockholder Matters.............
6 Selected Financial Data.....................
7 Management's Discussion and Analysis of
Financial Condition and Results of
Operations..................................
8 Financial Statements and
Supplementary Data..........................
9 Disagreements on Accounting and
Financial Disclosure........................
III 10 Directors and Executive Officers
of the Registrant...........................
11 Executive Compensation......................
12 Security Ownership of Certain
Beneficial Owners and Management............
13 Certain Relationships and
Related Transactions........................
IV 14 Exhibits, Financial Statement Schedules
and Reports on Form 8-K.....................
Signatures...................................................
Exhibits.....................................................
PART I
Item 1. Business.
General
United Security Bancshares, Inc. ("Bancshares") is an Alabama
corporation organized in 1984. Bancshares is a bank holding company
registered under the Bank Holding Company Act of 1956, as amended,
and it operates one banking subsidiary, United Security Bank (the
"Bank").
The Bank has eight banking offices which are located in
Thomasville, Coffeeville, Fulton, Gilbertown, Grove Hill, Butler,
and Jackson, Alabama, and its market area includes portions of
Clarke, Choctaw, Marengo, Sumter, 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.
The Bank encounters vigorous competition from 10 banks and one
savings and loan association located in its service area for, among
other things, new deposits, loans, savings deposits, certificates
of deposit, interest-bearing transaction (NOW) accounts, and other
banking and financial services.
As of December 31, 1995, the Bank had 90 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.
Legislation
A regional reciprocal interstate banking bill permits Alabama
banks to acquire banks located in 13 designated jurisdictions if
such jurisdictions have adopted similar statutes. The 13 designated
jurisdictions are Arkansas, Florida, Georgia, Kentucky, Louisiana,
Maryland, Mississippi, North Carolina, South Carolina, Tennessee,
Virginia, West Virginia, and the District of Columbia, and all such
jurisdictions have adopted varying forms of reciprocal statutes.
The effect of this legislation is likely to increase competition
within the State of Alabama among banking institutions located in
Alabama and from banking institutions, many of which are larger
than Bancshares, located in the area affected by the legislation.
Supervision, Regulation and Governmental Policy
Bank Holding Company Regulation. As a registered bank holding
company, Bancshares is subject to supervision and regulation by the
Board of Governors of the Federal Reserve System ("Board of
Governors") under the Bank Holding Company Act of 1956, as amended.
As a bank holding company, Bancshares is required to furnish the
Board of Governors an annual report of its operations at the end of
each fiscal year and to furnish such additional information as the
Board of Governors may require pursuant to the Bank Holding Company
Act. The Board of Governors may also make examinations of
Bancshares.
The Bank Holding Company Act requires every bank holding
company to obtain the prior approval of the Board of Governors (i)
before it may acquire direct or indirect ownership or control of
any voting shares of any bank if, after such acquisition, such bank
holding company will directly or indirectly own or control more
than five percent of the voting shares of such bank; (ii) before it
or any of its subsidiaries, other than a bank, may acquire all or
substantially all of the assets of a bank; or (iii) before it may
merge or consolidate with any other bank holding company. In
reviewing a proposed acquisition, the Board of Governors considers
financial, managerial and competitive aspects, and must take into
consideration the future prospects of the companies and banks
concerned and the convenience and needs of the community to be
served. As part of its review, the Board of Governors concentrates
on the pro forma capital position of the bank holding company and
reviews the indebtedness to be incurred by a bank holding company
in connection with the proposed acquisition to ensure that the bank
holding company can service such indebtedness in a manner that does
not adversely affect the capital requirements of the holding
company or its subsidiaries. The Bank Holding Company Act further
requires that consummation of approved acquisitions or mergers be
delayed for a period of not less than 30 days following the date of
such approval. During the 30 day period, complaining parties with
respect to competitive issues may obtain a review of the Board of
Governors' order granting its approval by filing a petition in the
appropriate United States Court of Appeals petitioning that the
order be set aside. The Board of Governors may not approve the
acquisition by Bancshares of any voting shares of, or substantially
all the assets of, any bank located outside Alabama unless such
acquisition is specifically authorized by the statutes of the state
in which the bank to be acquired is located.
The Bank Holding Company Act prohibits (with specific
exceptions) Bancshares from engaging in nonbanking activities or
from acquiring or retaining direct or indirect control of any
company engaged in nonbanking activities. The Board of Governors by
regulation or order may make exceptions for activities determined
to be so closely related to banking or managing or controlling
banks as to be a proper incident thereto. In determining whether a
particular activity is permissible, the Board of Governors
considers whether the performance of such an activity can
reasonably be expected to produce benefits to the public, such as
greater convenience, increased competition or gains in efficiency
that outweigh possible adverse effects, such as undue concentration
of resources, decreased or unfair competition, conflicts of
interest or unsound banking practices. For example, making,
acquiring or servicing loans, leasing personal property, providing
certain investment or financial advice, performing certain data
processing services, acting as agent or broker in selling credit
life insurance and certain other types of insurance in connection
with credit transactions by the bank holding company and certain
limited insurance underwriting activities have all been determined
by regulations of the Board of Governors to be permissible
activities. The Bank Holding Company Act does not place territorial
limitations on permissible bank-related activities of bank holding
companies. However, despite prior approval, the Board of Governors
has the power to order a holding company or its subsidiaries to
terminate any activity, or terminate its ownership or control of
any subsidiary, when it has reasonable cause to believe that
continuation of such activity or such ownership or control
constitutes a serious risk to the financial safety, soundness or
stability of any bank subsidiary of that holding company.
Federal Reserve policy requires a bank holding company to act
as a source of financial strength to each of its bank subsidiaries
and to take measures, including possible loans to its subsidiaries
in the form of capital notes or other instruments, to preserve and
protect bank subsidiaries in situations where additional
investments in a troubled bank may not otherwise be warranted.
However, any loans from the holding company to a subsidiary
depository institution likely would be unsecured and subordinated
to such institution's depositors and certain other creditors.
Bank Regulation. The Bank's deposits are insured by the
Federal Deposit Insurance Corporation ("FDIC") to the extent
provided by law. The major responsibility of the FDIC with respect
to insured banks is to protect depositors as provided by law in the
event a bank is closed without adequate provision having been made
to pay claims of depositors. It also acts to prevent the
development or continuation of unsafe or unsound banking practices.
The FDIC is authorized to examine the Bank in order to determine
its condition for insurance purposes. The FDIC must approve any
merger or consolidation involving the Bank where the resulting bank
is a state-chartered, non-Federal Reserve member bank. The Bank is
not a member of the Federal Reserve System. The FDIC is also
authorized to approve conversions, mergers, consolidations, and
assumption of deposit liability transactions between insured and
noninsured banks or institutions, and to prevent capital or surplus
diminution in such transactions where the resulting, continuing or
assumed bank is an insured bank that is not a member of the Federal
Reserve System.
Since the Bank is chartered under the laws of the State of
Alabama, it is also subject to supervision and examination by the
Alabama State Banking Department ("Department") and is subject to
regulation by the Department of all areas of its operations.
Alabama law and the regulations of the Department restrict the
payment of dividends by state chartered banks. Under applicable law
and regulations, cash dividends may not be paid without the
approval of the Department if the total of all dividends declared
by a bank in any calendar year exceeds the total of its net
earnings of that year combined with the net retained earnings of
the preceding two years, less any required transfers to surplus.
Cash dividends in excess of 90% of the earnings of a bank may not
be declared or paid at any time unless the surplus of such bank
shall be equal to at least 20% of the bank's capital.
In accordance with regulatory restrictions, the Bank had at
December 31, 1995, $7,441,820 of undistributed earnings included in
consolidated retained earnings available for distribution to
Bancshares as dividends without prior regulatory approval.
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.
Other Applicable Regulatory Provisions. Banks are also subject
to the provisions of the Community Reinvestment Act of 1977, which
require the appropriate federal bank regulatory agency, in
connection with its regular examination of a bank, to assess the
bank's record in meeting the credit needs of the community serviced
by the bank, including low and moderate-income neighborhoods. The
regulatory agency's assessment of the bank's record is made
available to the public. Further, such assessment is required of
any bank that has applied to, among other things, establish a new
branch office that will accept deposits, relocate an existing
office or merge or consolidate with, or acquire the assets or
assume the liabilities of, a federally regulated financial
institution.
In August 1989, the Financial Institutions Reform, Recovery,
and Enforcement Act of 1989 ("FIRREA") was enacted. FIRREA, among
other things, abolished the Federal Savings and Loan Insurance
Corporation and established two new insurance funds under the
jurisdiction of the Federal Deposit Insurance Corporation: the
Savings Association Insurance Fund (the "SAIF") and the Bank
Insurance Fund ("BIF"). The Bank's deposits are insured by the BIF.
Effective January 1, 1996, the FDIC has adopted a new risk-based
premium schedule of rates for annual insurance assessments paid by
banks whose deposits are insured by the BIF. The new schedule will
reduce assessments for all but the riskiest institutions. Under the
new schedule, annual assessments range from $.00 to $.27 for every
$100.00 of the Bank's assessment base (which is the sum of all
demand and savings deposits plus accrued interest less unposted
debits, pass through reserve balances, and other items) with a
minimum assessment of $1,000.00 per institution per semi-annual
period. The FDIC may adjust the assessment rates semiannually as
necessary to maintain BIF reserves of at least 1.25% of total
deposits insured ($1.25 per $100.00 of deposits insured) but cannot
increase or decrease the rates by any more than 5 basis points
(.05%) in the aggregate without opportunity for notice and comment.
The actual assessment rate applicable to a particular
institution depends upon a risk assessment classification assigned
to the institution by the FDIC. The FDIC will assign each financial
institution to one of three capital groups--well capitalized,
adequately capitalized, or undercapitalized, as defined in the
regulations implementing the prompt corrective action provisions of
FDICIA--and to one of three subgroups within a capital group on the
basis of supervisory evaluations by the institution's primary
federal, and, if applicable, state supervisors and other
information relevant to the institution's financial condition and
the risk posed to the applicable insurance fund. The Bank's current
risk assessment classification is "well-capitalized," for which the
current assessment rate is $.04 per $100 of its assessment base.
Legislation has been introduced in the House of Representatives
that would merge the BIF with the SAIF to create a single federal
insurance program for all depository institutions. This
legislation, if passed, could impose a material increase in
assessment rates for BIF insured institutions.
FIRREA also imposes, with certain limited exceptions, a "cross
guarantee" on the part of commonly-controlled depository
institutions. Under this provision, if one depository institution's
subsidiary of a multi-unit holding company fails or requires FDIC
assistance, the FDIC may assess a commonly-controlled depository
institution for the estimated losses suffered by the FDIC. Although
the FDIC's claim is junior to the claims of nonaffiliated
depositors, holders of secured liabilities, general creditors, and
subordinated creditors, it is superior to the claims of
shareholders.
In 1992, the Federal Deposit Insurance Corporation Improvement
Act of 1991 ("FDICIA") was enacted. FDICIA authorizes the Bank
Insurance Fund ("BIF") to borrow up to $30 billion from the United
States Treasury to be repaid by the banking industry through
deposit insurance assessments. FDICIA required the federal banking
agencies and the FDIC, as insurer, to take prompt action to resolve
the problems of insured depository institutions. All depository
institutions will be classified into one of five categories ranging
from well-capitalized to critically undercapitalized. As an
institution's capital level declines, it would become subject to
increasing regulatory scrutiny and tighter restrictions. FDICIA
further requires an increase in the frequency of "fullscope,
on-site" examinations and expands the current audit requirements.
In addition, federal banking agencies are mandated to review and
prescribe uniform accounting standards that are at least as
stringent as Generally Accepted Accounting Principles. FDICIA
permits the merger or acquisition of any depository institutions
with any other, provided that the transaction is approved by the
resulting entity's appropriate federal banking agency. This would
permit, for the first time, direct mergers between banks and thrift
institutions.
Among other things, FDICIA requires the federal banking
agencies to take "prompt corrective action" in respect of banks
that do not meet minimum capital requirements, as defined by the
regulations implementing FDICIA. If a depository institution fails
to meet regulatory capital requirements, regulatory agencies can
require submission and funding of a capital restoration plan by the
institution to limit growth, require the raising of additional
capital and, ultimately, require the appointment of a conservator
or receiver for the institution. Under FDICIA, a bank holding
company must guarantee that an undercapitalized subsidiary bank
meets its capital restoration plan, subject to certain limitations.
Because of concerns relating to the competiveness and the
safety and soundness of the industry, the Congress is considering,
even after the enactment of FIRREA and FDICIA, a number of
wide-ranging proposals for altering the structure, regulation and
competitive relationships of the nation's financial institutions.
Among such bills are proposals to prohibit banks and bank holding
companies from conducting certain types of activities, to subject
banks to increased disclosure and reporting requirements, to
eliminate the present restriction on interstate branching by banks,
to alter the statutory separation of commercial and investment
banking and to further expand the powers of banks, bank holding
companies and competitors of banks.
Federal law and regulations adopted by the Board of Governors
and the FDIC (the "Agencies") require banks to define the
geographic areas they serve and the services provided in these
geographic areas. These agencies are required to consider
compliance with these regulations and the services made available
to geographic areas served in ruling on applications by banks for
branches and other deposit facilities, relocation of banking
offices and approval of mergers, consolidations, acquisitions of
assets or assumptions of liabilities. The Board of Governors is
also required to consider compliance with these regulations in
ruling on applications under the Bank Holding Company Act for,
among other things, the approval of the acquisition of shares of a
bank.
Under federal law, restrictions are placed on extensions of
credit by the Bank to insiders of Bancshares, to insiders of the
Bank and to insiders of correspondent banks and on extensions of
credit by such correspondent banks to insiders of Bancshares or the
Bank.
Recent legislation reduced substantially the limitations
against branching by Alabama banks. Effective September 29, 1995,
Alabama banks may establish a branch or office in any location
within Alabama upon prior approval of the Superintendent of Banks.
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. This legislation is
likely to increase competition within the State of Alabama among
banking institutions located in Alabama and from banking
institutions outside of Alabama, many of which are larger than
Bancshares.
Dividend Restrictions. In addition to the Alabama statutory
dividend restrictions discussed above under the caption "Bank
Regulation," federal banking regulators are authorized to prohibit
banks and bank holding companies from paying dividends which would
constitute an unsafe and unsound banking practice. The Board of
Governors has indicated that it would generally be an unsafe and
unsound practice to pay dividends except out of operating earnings.
Effect of Governmental Policies. The earnings and business of
Bancshares and the Bank are and will be affected by the policies of
various regulatory authorities of the United States, especially the
Board of Governors. Important functions of the Board of Governors,
in addition to those enumerated above, are to regulate the supply
of credit and to deal with general economic conditions within the
United States. The instruments of monetary policy employed by the
Board of Governors for these purposes influence in various ways the
overall level of investments, loans, other extensions of credit and
deposits, and the interest rates paid on liabilities and received
on assets.
In view of the changing conditions in the national economy, in
the money markets, in the federal government's fiscal policies and
in the relationships of international currencies, as well as the
effect of actions by the Board of Governors, no predictions can be
made as to how these external variables, over which Bancshares'
management has no control, may in the future affect possible
interest rates, deposit levels, loan demand or the business and
earnings of Bancshares and the Bank.
Capital Adequacy Requirements. In July of 1988, the Basle
Committee on Banking Regulations and Supervisory Practices (which
included representatives of the United States and eleven other
countries) issued proposals for the international convergence of
capital measurement and capital standards for international banks.
Each of the three agencies responsible for risk-based capital
requirements, the Comptroller of the Currency (the "Comptroller"),
the Board of Governors and the FDIC, have issued their final
risk-based capital guidelines (the "Capital Guidelines").
Generally, the Capital Guidelines significantly revise the
definition of capital and establish minimum capital standards in
relation to assets and off-balance sheet exposures as adjusted for
credit risks. Capital is classified into two tiers. The first tier
("Tier I") consists primarily of equity stock, as reduced by
goodwill. The supplementary or second tier ("Tier II") consists of
allowances for loan losses and other forms of capital, such as,
among other things, specific types of preferred stock, mandatory
convertible securities and term subordinated debt. Subordinated and
intermediate-term preferred stock debt included in Tier II capital
is limited to a maximum of 50 percent of Tier I capital. Also, Tier
II capital cannot exceed 100 percent of Tier I capital, which
places more emphasis on tangible equity than does the present
primary capital test. The Capital Guidelines also assign
risk-weightings to various types of bank assets to take into
account different risks associated with different activities. Banks
must have a capital to risk-weighted asset ratio of 8 percent, 4
percent of that amount to consist of Tier I capital.
The foregoing is a brief summary of certain statutes, rules
and regulations affecting Bancshares and the Bank. Numerous other
statutes and regulations have an impact on the operations of these
entities.
Tax Considerations. The Revenue Reconciliation Act of 1993
(the "Act") revised the federal income tax provisions respecting
the taxation of corporations by increasing the top marginal federal
income tax rate from 34% to 35% beginning January 1, 1993.
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.
The Bank has operated from its main office at 131 West Front
Street since 1959. It is in a two-story building with approximately
17,000 square feet. During 1986, construction upon Bancshares' and
the Bank's main offices at 131 West Front Street, Thomasville, was
completed. Approximately 10,000 square feet of office space was
added as a result of this construction.
The Bank operates seven branches in addition to its main
office. The Highway 43 branch is located at the intersection of
State Highway 43 and Nichol Avenue and is in a one-story brick
building with approximately 3,500 square feet. The Coffeeville
branch is located on Highway 84 in Coffeeville, approximately 33
miles from Thomasville, and it is in a one-story brick building of
approximately 2,000 square feet. The Fulton branch is located on
State Highway 178, approximately eight miles from Thomasville, in
a one-story frame building of approximately 2,000 square feet. The
Butler branch is located at 305 South Mulberry Street, Butler,
Alabama in a one-story brick building of approximately 12,000
square feet. There are four drive-in teller facilities at this
location. The Gilbertown branch, which consists of a one-story
brick building of approximately 2,000 square feet, is located at
the intersection of High Street and Highway 17 in Gilbertown,
Alabama. There is one drive-in facility at this location. The Grove
Hill branch is located at 131 Main Street in Grove Hill, Alabama.
This branch is in a one-story brick building with approximately
2,700 square feet and two drive-in facilities. The Jackson Branch
opened on November 19, 1990, and is located at the intersection of
Highway 69 and College Avenue in Jackson, Alabama. The building is
a one-story brick building of approximately 2,800 square feet with
two drive-in facilities. All of the Bank's offices are owned in fee
by the Bank without encumbrance.
Item 3. Pending 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.
At the 1995 Annual meeting of Bancshares, the shareholders of
Bancshares approved an amendment to the Amended Articles of
Incorporation of Bancshares increasing its authorized shares from
600,000 shares, with a par value of $.25 per share, to 2,400,000
shares, with a par value of $.01 per share and authorizing a split
of each issued and outstanding share of Bancshares common stock
into four shares of common stock, each with a par value of $.01
(the "Stock Split"). There are currently 2,202,060 shares of
Bancshares common stock issued and 2,137,960 shares outstanding. As
of December 31, 1995, there were approximately 564 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 sold in private transactions.
Management of Bancshares is aware of approximately 19 sales of
Bancshares common stock since January 1, 1995 at prices ranging
from $10.00 to $11.50 per share (adjusted for the stock split).
Bancshares has paid dividends on its common stock on a
quarterly basis in the past three years. On December 21, 1993,
Bancshares declared a ten percent stock dividend payable to
shareholders of record on that date. As a result, Bancshares
distributed 50,047 shares before January 31, 1994. The dividends
retroactively adjusted for the 10% stock dividend in 1993 and the
stock split are as follows:
Dividend paid
on Common Stock
Fiscal Year (per share)
1993 $.3625
1994 $.42
1995 $.44
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, and such
description is incorporated herein by reference.
Item 6. Selected Financial Information.
UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARY
SELECTED FINANCIAL INFORMATION
Year Ended December 31,
1995 1994 1993 1992 1991
(In Thousands of Dollars, Except Per Share Amounts)
Total Interest Income $ 16,167 $ 14,025 $ 12,154 $ 12,384 $ 12,698
Total Interest Expense 7,002 5,420 4,642 5,434 6,810
Net Interest Income $ 9,165 $ 8,605 $ 7,512 $ 6,914 $ 5,888
Provision for Possible Loan Losses 0 29 51 135 328
Net Interest Income After Provision
for Possible Loan Losses $ 9,165 $ 8,576 $ 7,461 $ 6,779 $ 5,560
Other Non-Interest Income 1,111 1,041 2,240 2,599 2,146
Other Non-Interest Expense (5,229) (5,231) (5,137) (5,187) (4,624)
Income Before Income Taxes $ 5,047 $ 4,386 $ 4,564 $ 4,191 $ 3,082
Applicable Income Taxes 1,432 1,161 1,374 1,134 948
Net Income $ 3,615 $ 3,225 $ 3,190 $ 3,057 $ 2,134
Per Common Share:
Net Income $ 1.69 $ 1.51 $ 1.49 $ 1.43 $ 1.00
Cash Dividends Declared $ 0.44 $ 0.42 $ 0.36 $ 0.33 $ 0.28
At December 31,
1995 1994 1993 1992 1991
Total Loans, Net $ 54,203 $ 56,733 $ 52,945 $ 49,590 $ 52,769
Total Assets $197,468 $186,441 $168,782 $149,848 $144,182
Total Deposits $146,515 $142,284 $132,519 $130,816 $122,005
Long-Term Debt $ 681 $ 764 $ 5,847 $ 0 $ 0
Total Shareholders' Equity $ 25,229 $ 18,721 $ 19,611 $ 17,159 $ 14,551
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
The following discussion and financial information are
presented to aid in an understanding of the current financial
position and results of operations of United Security Bancshares,
Inc. ("United Security"), and should be read in conjunction with
the Audited Financial Statements and Notes thereto included herein.
United Security is the parent holding company of United Security
Bank (the "Bank"), and it has no operations of consequence other
than the ownership of its subsidiary. The emphasis of this
discussion will be on the years 1995, 1994, and 1993. All yields
presented and discussed herein are based on the cash basis and not
on the tax-equivalent basis.
At December 31, 1995, United Security had consolidated assets
of approximately $197.5 million and operated eight banking
locations in a two-county area. These eight locations contributed
over $3.6 million to consolidated net income in 1995. United
Security Bank's sole business is banking; therefore, loans and
investments are the 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; and
(E) the effect of interest rate changes on liquidity and
interest rate sensitivity management.
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 others, the following 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 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) United Security encounters difficulty in integrating the
operations of Brent Banking Company;
(5) rising interest rates adversely affect the demand for the
new consumer home equity line of credit to be introduced
in 1996; and
(6) 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 and 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.
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 attempting
to maintain a 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 the three
years ended December 31, 1995, 1994, and 1993.
Distribution of Assets, Liabilities, and Shareholders' Equity, with
Interest Rates and Interest Differentials
December 31,
1995 1994 1993
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-Domestic
(Note A) $ 56,956 $ 5,528 9.71% $ 55,842 $ 4,835 8.66% $ 51,603 $ 4,540 8.80%
Taxable Investments
(Note B) 109,288 9,673 8.85% 96,931 8,345 8.61% 84,905 6,811 8.02%
Non-Taxable 13,381 917 6.85% 12,308 835 6.78% 10,572 755 7.14%
Federal Funds Sold 792 49 6.19% 228 10 4.39% 1,530 48 3.14%
Total Interest-
Earning Assets $180,417 $16,167 8.96% $165,309 $14,025 8.48% $148,610 $12,154 8.18%
Non-Interest Earning
Assets:
Cash and Due
from Banks 5,148 5,192 4,624
Premises 3,730 3,832 3,823
Other Assets 4,359 4,031 2,256
Allowance for Loan
Losses (Deduction) (786) (765) (729)
Total $192,868 $177,599 $158,584
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest-Bearing
Liabilities:
Demand Deposits $ 23,907 $ 627 2.62% $ 27,080 $ 712 2.63% $ 25,569 $ 734 2.87%
Savings Deposits 15,247 453 2.97% 14,898 443 2.97% 13,545 404 2.98%
Time Deposits 82,412 4,489 5.45% 76,248 3,458 4.54% 73,824 3,296 4.46%
Other Liabilities 23,457 1,433 6.11% 16,828 807 4.80% 6,778 208 3.07%
Total Interest-
Bearing
Liabilities $145,023 $ 7,002 4.83% $135,054 $ 5,420 4.01% $119,716 $ 4,642 3.88%
Non-Interest Bearing
Liabilities:
Demand Deposits 23,079 21,898 18,716
Other 1,785 1,533 1,728
Shareholders' Equity 22,981 19,114 18,424
Total $192,868 $177,599 $158,584
Net Interest Earnings $ 9,165 $ 8,605 $ 7,512
Net Yield on Interest-
Earning Assets 5.08% 5.21% 5.05%
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 accounting securities.
Loans and Allowances for Possible Loan Losses
Net loans decreased in 1995 to $54,203,166, primarily as a
result of several large lines of credit paying out or paying down
in the fourth quarter. The total decrease in the loan portfolio
amounted to $2.5 million or 4.46% of gross loans outstanding.
Commercial loans decreased 1.64% to $34,107,901, and real estate
loans decreased 5.64% to $16,267,120. Construction activity in the
trade area tends to be predominantly commercial. During the year,
the Bank has been able to secure some of the construction loan
business in this area.
Consumer installment loans continued to decline in 1995. The
decrease of 17.11% in this area left $5,094,531 in total consumer
installment loans outstanding on December 31, 1995. The Bank
intends to market a new home equity line for consumer loans tied to
our credit card program in the spring of 1996. This new product
should help to retain some of the consumer loans and generate
additional loans as well.
An allowance for loan losses is maintained by the Bank to
provide for the coverage of potential losses in the loan portfolio.
The level of this reserve is based on management's combined
evaluation of the credit risk of each loan. A risk rating is
assigned to each loan, and this rating is reviewed at least
annually. In assigning risk, management takes into consideration
the capacity of the borrower to repay the loan, the collateral
value, recent loan loss experience, current economic conditions and
other factors.
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 are
generally recognized as losses if they become 90 days or more
delinquent. 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 individual loans is conducted periodically
by branch and by officer. Gross and net charge-offs in the current
year are analyzed when determining the amount of the reserve. The
current level of the allowance in relation to the total loans
outstanding and to historical loss levels is included in this
calculation.
Loan officers and other personnel handling loan transactions
undergo continuous training dedicated to improving the credit
quality as well as the yield of the loan portfolio. United Security
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 of $778,391 in the allowance for loan loss account
as of December 31, 1995, is considered by management to be
adequate. The allowance is 1.40% of total loans.
The following table shows the Bank's loan distribution as of
December 31, 1995, 1994, and 1993.
December 31,
1995 1994 1993
(In Thousands of Dollars)
Commercial, Financial, and Agricultural $34,108 $34,676 $29,962
Real Estate 16,267 17,240 16,224
Installment 5,095 6,146 8,295
Total $55,470 $58,062 $54,481
The amounts of total loans (excluding installment loans)
outstanding at December 31, 1995, 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 After
One Year Five Years Five Years Total
(In Thousands of Dollars)
Commercial, Financial, and Agricultural $25,351 $ 8,305 $ 452 $34,108
Real Estate -- Mortgage 3,281 9,585 3,401 16,267
Total $28,632 $17,890 $ 3,853 $50,375
Variable rate loans totaled approximately $11.1 million and
are included in the one-year category.
Gross charge-offs for the year totaled $84,786. This is
approximately equal to the gross charge-offs for 1994. The Bank was
in a net recovered position for the year as recoveries on prior
charge-offs exceeded current gross charge-offs by $6,391.
Non-performing assets as a percentage of total loans and other real
estate was .59% which is not a significant change from the previous
year. Accruing loans past due 90 days or more at year-end increased
from $79,000 in 1994 to $150,000 in 1995. These loans are reviewed
closely by management and are allowed to continue accruing only
because of underlying collateral values or due to the financial
strength of the borrowers. 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 down graded.
NOTE: The Bank had no loans considered to be impaired as
defined by Statement of Financial Accounting Standards
Number 114 "Accounting by Creditors for Impairment of a
Loan" which was adopted in 1995.
Non-Performing Assets
The following table presents information on non-performing
loans and real estate acquired in settlement of loans.
December 31,
1995 1994 1993
(In Thousands of Dollars)
Non-Performing Loans:
Loans Accounted for on a Non-Accrual Basis $ 169 $ 270 $ 785
Accruing Loans Past Due 90 Days or More 150 79 22
Real Estate Acquired in Settlement of Loans 0 55 145
Total $ 319 $ 404 $ 952
Percent of Net Loans and Other Real Estate 0.59% 0.71% 1.79%
NOTE: The Bank had no restructured loans as defined by
Financial Accounting Standards Board ("FASB") Statement
Number 15, "Accounting by Debtors and Creditors for
Troubled Debt Restructurings."
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. Total
non-performing loans decreased during 1995 by 21% and represent
only .59% of net loans. Non-performing loans continue to decline
for several reasons. Through continuous training, our lending
officers are directed by the Bank's conservative 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.
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 reported as interest
income, 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 United Security Bank to immediately
charge-off 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. The
provision was $778,391 at year-end and represented 1.40% of total
loans outstanding. Management believes this allowance is adequate
to absorb any future loan losses.
Allocation of Allowance for Possible Loan Losses
The following table shows an allocation of the allowance for
possible loan losses for each of the three years.
December 31,
1995 1994 1993
Percent Percent Percent
Category Amount of Total Amount of Total Amount of Total
(In Thousands of Dollars)
Commercial, Financial, and Agricultural $ 506 65% $ 501 65% $ 488 65%
Real Estate 156 20 155 20 150 20
Installment 116 15 116 15 112 15
Totals $ 778 100% $ 772 100% $ 750 100%
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, and non-accrual loans. Management
considers this allocation as a guide and not restrictive to each
category.
Net charge-offs as shown in the "Summary of Loan Loss
Experience" below indicates the trend for the past five years.
Management does not anticipate charge-offs in 1996 to exceed the
five-year average of $187,000.
Summary of Loan Loss Experience
This table summarizes the Bank's loan loss experience for each
of the five years indicated.
December 31,
1995 1994 1993 1992 1991
(In Thousands of Dollars)
Balance at Beginning of Period $ 772 $ 750 $ 710 $ 627 $ 624
Charge-Offs:
Commercial, Financial, and Agricultural 52 41 51 52 306
Real Estate -- Mortgage 0 5 6 61 98
Installment 25 25 46 60 68
Credit Cards 8 9 6 15 0
$ 85 $ 80 $ 109 $ 188 $ 472
Recoveries:
Commercial, Financial and Agricultural $ 50 $ 38 $ 38 $ 64 $ 67
Real Estate -- Mortgage 0 0 1 0 4
Installment 33 32 55 68 76
Credit Cards 8 3 4 4 0
$ 91 $ 73 $ 98 $ 136 $ 147
Net Charge-Offs (Deduction) $ 6 $ (7) $ (11) $ (52) $(325)
Additions Charged to Operations 0 29 51 135 328
Balance at End of Period $ 778 $ 772 $ 750 $ 710 $ 627
Ratio of Net Charge-Offs During Period to
Average Loans Outstanding 0% 0.01% 0.02% 0.10% 0.61%
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,
1995 1994 1993
(In Thousands of Dollars)
Total Loans Accounted for on a Non-Accrual Basis $169 $270 $785
Interest Income that Would Have Been Recorded
under Original Terms 23 53 65
Interest Income Reported and Recorded During
the Year 10 44 35
Total loans accounted for on a non-accrual basis decreased by
$100,603 in 1995. Total non-accruing loans at year-end were
$169,064. Lending officers and other personnel involved in the
lending process receive ongoing training, and emphasis is placed on
the quality of our loan portfolio. The Bank has no foreign loans.
The Bank does not make loans on commercial property outside our
market area. The Bank continues to be conservative in its lending
directives.
Timber Industry Concentration
United Security Bank is located in Clarke and Choctaw
Counties, Alabama. Our trade area, however, covers portions of six
counties in Alabama and three counties in Mississippi and is in the
heart of the timber producing area in the State of Alabama. Our
neighboring counties of Marengo, Monroe, Washington, and Wilcox are
all in the top ten counties in the State in timber production. We
have several major paper mills in our trading area including
Alabama River Paper, Boise Cascade, James River Corporation, and
MacMillan Bloedel. In addition, there are several sawmills, lumber
companies, and pole and piling producers. This table shows the
dollar amount of loans made to timber and timber-related companies
and to the principals and employees of those companies as of
December 31, 1995. The amount of these loans decreased from $22
million in 1994 to $20 million in 1995, a decrease of 9.3%.
Timber-related loans as a percentage of total gross loans decreased
from 38.04% in 1994 to 36.10% in 1995. The Bank's concentration in
the timber industry as of December 31, 1995, is shown below.
Timber Total Percentage of
Related Loans Gross Loans Total Loans
$20,027,101 $55,469,552 36.10%
Management understands the concern for 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 feel 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 does
realize the Bank is heavily dependent on the economic health of the
timber-related industries. The Bank 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
Bank's total loan portfolio.
Deposits
Average total deposits have grown 14.9% during the last three
years with a 3.2% increase in 1995. This growth can be attributed
to the rate environment, product expansion, continued emphasis on
quality service, and the Bank's safety and soundness.
Average non-interest bearing demand deposits have increased
31% over the last three years. The growth for 1995 was 5.4%. The
ratio of average non-interest bearing deposits to average total
deposits also increased in 1995 to 16% from 15.6% in 1994 and 14.2%
in 1993. The growth of United Security's non-interest bearing
demand deposits can be attributed in part to the Bank's product
enhancements such as the introduction of image checking technology
and 24-hour account accessibility. This increase in non-interest
bearing deposits continues to contribute to the gross interest
margin.
Another contributing factor in the growth in non-interest
bearing demand deposits is the shift from interest bearing demand
deposits the Bank experienced in 1995. Average interest-bearing
demand deposits decreased 11.7% in 1995 and accounted for 16.5% of
total average deposits for the year compared to 19.3% in 1994 and
19.4% in 1993. While some of these interest-bearing demand deposits
moved to the non-interest bearing demand deposit accounts, it is
clear that most transferred to time deposits.
During the last three years, average time deposits increased
11.8%. This represents an increase of over $8.6 million. Average
time deposits increased by 8.1% in 1995 compared to an increase of
3.3% in 1994 and .1% in 1993. Additionally, time deposits
represented 57% of the total average deposits in 1995 compared to
54.4% in 1994 and 56.1% in 1993. This growth in time deposits
coupled with the losses in interest-bearing demand deposits
suggests that consumers were willing to sacrifice fund
accessibility for a higher interest rate in 1995. This activity
confirms the theory that the interest-bearing demand deposits were
somewhat inflated in 1994 due to consumers waiting for rates to
rise.
Average savings deposits have grown 26.4% since the end of
1992. This growth slowed in 1995 with a growth rate of 2.3%. The
ratio of average savings to average total deposits, however, stayed
consistent at 10.5% in 1995 compared to 10.6% in 1994 and 10% in
1993.
United Security's deposit base remains the primary source of
funding for the Bank. The average deposit base represented 75% of
average liabilities and equity in 1995. As seen in the table on the
following page, overall rates on these deposits increased to 3.84%
in 1995 compared to 3.29% in 1994 and 3.36% in 1993. This rate
increase reflects the rising rate environment in 1995 as well as
the shift from interest-bearing demand accounts to the higher rates
of certificates of deposits. Emphasis continues to be placed upon
attracting consumer deposits. It is United Security's intent to
expand its consumer deposit base in order to continue to fund asset
growth through growth in both demand deposits and consumer
certificates of deposits. This will be accomplished by remaining
safe and sound, enhancing our products, and providing aggressive
quality service.
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,
1995 1994 1993
Amount Rate Amount Rate Amount Rate
(In Thousands of Dollars, Except Percentages)
Non-Interest Bearing DDA $ 23,079 $ 21,898 $ 18,716
Interest-Bearing Demand 23,907 2.62% 27,080 2.63% 25,569 2.87%
Savings 15,247 2.97 14,898 2.97 13,545 2.98
Time Deposits 82,412 5.45 76,248 4.54 73,824 4.46
Total $144,645 3.84% $140,124 3.29% $131,654 3.36%
Maturities of Time Certificates of Deposits and Other Time
Deposits of $100,000 or more outstanding at December 31, 1995, are
summarized as follows:
Time Other
Certificates Time
Maturities of Deposits Deposits Total
(In Thousands of Dollars)
3 Months or Less $ 3,463 $ 4,317 $ 7,780
Over 3 Through 6 Months 2,497 0 2,497
Over 6 Through 12 Months 856 0 856
Over 12 Months 7,111 0 7,111
Total $13,927 $ 4,317 $18,244
Investment Securities and Securities Available for Sale
At December 31, 1995, total securities were $129 million. All
securities held were classified as available for sale.
Investment securities decreased $23.07 million with the
election in July, 1995 to transfer the entire portfolio into
available for sale.
Securities available for sale include Collateralized Mortgage
Obligations (CMOs) of $100.45 million, other mortgage backed
securities of $13.97 million, state, county and municipal
securities of $13.43 million, and other securities of $1.1 million.
The total securities portfolio increased $16.29 million or 14.45%
from December 1994 to December 1995.
At December 1995, approximately $97.53 million in CMOs had
floating interest rates which reprice monthly and $2.93 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 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 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 seven to ten year average life goal. Principal and
interest payments also add significant liquidity to the balance
sheet. In 1995, there was a continuing emphasis in Collateralized
Mortgage Obligations ("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.
The Federal Financial Institution Examination Council requires
that all MBS derivatives be tested for suitability as an investment
in the portfolio of financial institutions. These tests are run at
purchase and periodically thereafter.
FFIEC Policy Statement -- Derivative MBS Tests
Tests
#1 -- Average Life Test
Expected Average Life must be less than or equal to 10 years.
#2 -- Average Life Sensitivity Test
Extends by more than 4 years or shortens by more than 6 years
for immediate Treasury curve shifts of +/-300 basis points.
#3 -- Price Sensitivity Test
Estimated price changes by more than 17% for immediate
Treasury curve shifts of +/-300 basis points. (Price change
measured from the offer, using constant spread to Treasury
from Bid price.)
The FFIEC Policy Statement specifically exempts floating-rate
CMOs from the average life and average life sensitivity tests (#1
and #2) if the instrument is uncapped at the time of purchase or on
subsequent re-testing dates.
Securities that do not pass the applicable tests are
designated "high risk". Institutions that hold high risk securities
other than for trading may do so only to reduce interest rate risk.
United Security held $30.93 million in securities which, at
December 31, 1995, were designated high risk. $18.92 million of
these securities were floating rate, and $10.18 million were
inverse floating 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, 1995 of $1.82
million. Despite these unrealized losses, the securities in this
segment of the portfolio produced $2.76 million in interest income
and positive total return for 1995.
The securities portfolio and its various components are
monitored, and assessments are made regularly relative to United
Security's exposure to high risk investments. 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 in that mortgages collateralizing
these securities can prepay, thereby affecting the yield of the
securities and their carrying amounts. Such an occurrence is most
likely in periods of low interest rates when borrowers refinance
their mortgages, creating prepayments on their existing mortgages.
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 value 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 gains (net of taxes) of $616,295 in the securities
portfolio on December 31, 1995 versus net unrealized loss (net of
taxes) of ($3,217,137) one year ago.
United Security uses other off balance sheet derivative
products for hedging purposes. These include interest rate swaps,
caps, floors and options. The use and detail regarding these
products are fully discussed under "Liquidity and Interest Rate
Sensitivity Management" and in Note R in the "Notes to Consolidated
Financial Statements."
Reversing the 1994 trend, 1995 can be described as a year of
falling interest rates. Interest rates declined over 200 basis
points for all maturities of one year or longer. In addition, the
yield curve flattened dramatically from a spread of approximately
200 basis points in December of 1994 to 87 basis points at December
31, 995. Short-term interest rates are generally influenced by the
monetary policy stance of the Federal Reserve while longer term
rates are determined by the market's perception of future inflation
and real returns. The long end of the curve saw another year of
consumer inflation below 3% and with mixed economic signals and
slower growth the outlook is for lower inflation in the future. The
year ahead should see the curve steepen, particularly with the
Federal Reserve easing short-term rates. The risk of much slower
growth, higher unemployment, declining production, and possible
recessions in Europe and Japan continues to be greater than the
risk of inflation. United Security will continue to invest in
rate-sensitive securities which should have less price exposure to
changes in interest rates. It is expected that there will be
continued use of various on and off balance sheet techniques to
manage interest rate risk in the securities portfolio.
Condensed Portfolio Maturity Schedule
Dollar Portfolio
Maturity Summary Amount Percentage
Maturing in less than 1 year $ 0 0%
Maturing in 1 to 5 years 1,185,835 0.92%
Maturing in 5 to 10 years 1,108,523 0.86%
Maturing in over 10 years 126,708,244 98.22%
Total $129,002,602 100.00%
Condensed Portfolio Repricing Schedule
Dollar Portfolio
Repricing Summary Amount Percentage
Repricing in 30 days or less $ 97,559,848 75.63%
Repricing in 31 to 90 days 1,138,200 0.88%
Repricing in 91 days to 1 year 0 0.00%
Repricing in 1 to 5 years 1,269,238 0.98%
Repricing in 5 to 10 years 1,108,523 0.86%
Repricing in over 10 years 27,926,793 21.65%
Total $129,002,602 100.00%
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:
Obligations of SCMs $1,186 6.69% $1,108 6.47% $ 11,136 6.09%
Mortgage-Backed
Securities 93 7.46% 114,331 9.51%
Other $1,148 7.39%
Total $1,148 7.39% $1,279 6.75% $1,108 6.47% $125,467 9.21%
*Available for Sale Securities are stated at Market Value and Market Yield
Securities Gains and Losses
Non-interest income from securities transactions, trading
account transactions, and associated option premium and off-balance
sheet income was up slightly in 1995 compared to 1994 but
significantly less than in 1993. The majority of the profits
realized in 1995 were generated in options and other related
transactions. Losses in the investment securities area were a
result of a restructuring of the fixed-rate portion of the
portfolio into floating rates or other fixed rates for greater
future returns.
The table below shows the associated net gains or (losses) for
the periods 1995, 1994, and 1993:
1995 1994 1993
Investment Securities $(103,414) $(34,573) $ 900,837
Trading Account 23,215 (97,525) 80,402
Options & Off-Balance Sheet
Transactions 221,797 225,228 257,471
Total $ 141,598 $ 93,130 $1,238,710
Losses in 1995 from sales of investment securities were net of
gains of $511,610. Volume of sales as well as other information on
securities is further discussed in Note C to the "Notes to Consolidated
Financial Statements."
Investment Securities and Investment Securities Available for Sale
The following table sets forth the carrying value of
investment securities at the dates indicated.
December 31,
1995 1994 1993
(In Thousands of Dollars)
Investment Securities Held to Maturity:
U.S. Treasury and Agencies Securities $ 0 $ 3,252 $ 3,171
Obligations of States, Counties, and
Political Subdivisions 0 13,144 11,524
Mortgage-Backed Securities 0 5,631 15,860
Other Securities 0 100 99
$ 0 $ 22,127 $ 30,654
Investment Securities Available for Sale:
U.S. Treasury and Agency Securities $ 0 $ 992 $ 5,657
Obligations of States, Counties, and
Political Subdivisions 11,989 0 0
Mortgage-Backed Securities 114,880 93,928 64,664
Other Securities 1,148 815 805
Unrealized Gains (Losses) 986 (5,147) 0
$129,003 $ 90,588 $ 71,126
Total $129,003 $112,715 $101,780
The maturities and weighted average yields of the investment
securities available-for-sale at the end of 1995 are presented in
the preceding table based on stated maturity. While the average
stated maturity of the Mortgage-Backed Securities (excluding CMO's)
was 25.80 years, the average life expected was 10.64 years. The
average stated maturity of the CMO portion of the portfolio was
27.34 years, and the average expected life was 17.63 years. The
average expected life of investment securities available for sale
was 15.65 years with an average yield of 8.86 percent.
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-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.
Other Short-Term Borrowings
(In Thousands of Dollars)
Year Ended December 31:
1995 $22,369
1994 $17,652
1993 $ 8,176
Weighted Average Interest Rate at Year-End:
1995 5.82%
1994 5.90%
1993 2.19%
Maximum Amount Outstanding at Any Month's End:
1995 $26,698
1994 $17,980
1993 $ 8,716
Average Amount Outstanding During the Year:
1995 $19,657
1994 $10,931
1993 $ 2,040
Weighted Average Interest Rate During the Year:
1995 6.11%
1994 4.55%
1993 2.64%
Balances in these accounts fluctuate dramatically on a
day-to-day basis. Rates on these balances also fluctuate daily, but
as you can see in the chart above, they generally depict the
current interest rate environment.
The increase in short-term borrowings over the last two years
can be attributed mainly to borrowings from the Federal Home Loan
Bank of Atlanta which the Bank joined in 1992.
Shareholders' Equity
United Security has always placed great emphasis on
maintaining its strong capital base. At December 31, 1995,
shareholders' equity totaled $25.2 million, or 12.8% of total
assets compared to 10% and 11.6% for the same periods in 1994 and
1993, respectively. This level of equity assures United Security's
shareholders, customers and regulators that United Security is
financially sound and offers the ability to sustain an appropriate
level of profitability and growth.
Over the last three years shareholders' equity grew from $17.2
million at the beginning of 1993 to $25.2 million at the end of
1995. All of this growth was a result of internally generated
retained earnings, with the exception of the market value
adjustment made for the available for sale investments as required
by Statement of Financial Accounting Standards No. 115. (See Note
A of the "Notes to Consolidated Financial Statements" for additional
information.) This accounting change, adopted in 1994, accounted
for over half of the equity increase in 1995. The internal capital
generation rate (net income less cash dividends as a percentage of
average shareholders' equity) was 11.6% in 1995, down from 12.2% in
1994.
At United Security's annual meeting on April 25, 1995,
the shareholders ratified a change in the par value of the
Company's stock from $.25 to $.01 per share. Additionally, the
shareholders approved an increase in the number of authorized
shares from 600,000 shares to 2,400,000 shares in order for the
Company to effect a four-for-one split of its stock payable to the
shareholders of record on that date. This action had no effect on
the total amount of shareholders' equity.
United Security is required to comply with capital
adequacy standards established by the banking regulatory agencies.
Currently, the two basic measures of capital adequacy are the
risk-based measure and the 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 broad 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
adopted initiatives to begin considering interest rate risk in
computing risk-based capital ratios. On December 14, 1994, the
Federal Reserve Board adopted amendments to its risk based capital
guidelines for state member banks and bank holding companies. Under
the final rule, institutions are generally directed not to include
the component of common stockholders equity created by SFAS 115
(net unrealized holding gains and losses on securities available
for sale).
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 I 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 I Capital and Tier
II Capital is "total risk-based capital".
The banking regulatory agencies have also adopted regulations
which supplement the risk-based guidelines to include a minimum
leverage ratio of 3% of Tier I 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 following chart summarizes the applicable bank regulatory
capital requirements. United Security's capital ratios at December
31, 1995, substantially exceeded all regulatory requirements.
Risk-Based Capital Requirements
Minimum United Security's
Regulatory Ratio at
Requirement December 31, 1995
Tier I Capital to Risk-Adjusted Assets 4.00% 23.69%
Total Capital to Risk-Adjusted Assets 8.00% 24.44%
Tier I Leverage Ratio 3.00% 12.46%
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 paid were $940,703 or $.44 per share compared to $.42 per
share in 1994 and $.3625 per share in 1993. The total cash
dividends represented a payout ratio of 26.02% in 1995 with a
payout ratio of 27.84% and 24.36% in 1994 and 1993, respectively.
This is the seventh consecutive year that United Security has
increased cash dividends. The per share dividends are adjusted to
reflect the four-for-one split authorized in 1995.
Ratio Analysis
The following table presents operating and capital ratios for
each of the last three years.
Year Ended December 31,
1995 1994 1993
Return on Average Assets 1.87% 1.82% 2.01%
Return on Average Equity 15.73% 16.87% 17.31%
Cash Dividend Payout Ratio 26.02% 27.84% 24.36%
Average Equity to Average Assets Ratio 11.92% 10.76% 11.62%
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 sensitivity management focuses on the
maturity structure of assets and liabilities and their repricing
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 $28.63 million at December 31, 1995.
Investment securities maturing or repricing in the same time
frame totaled $98.70 million or 76.51% of the investment portfolio
at year-end 1995. In addition, principal payments on
mortgage-backed securities totaled $2.82 million in 1995. For
repricing purposes, $3.67 million in payments have been included in
the one year or less categories in the Interest Rate Sensitivity
Analysis, reflecting recent prepayment experience.
The liabilities 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 and short-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.
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 the general
level of interest rates.
The balance of cash and cash equivalents decreased at December
31, 1995, by $840,901. This decrease was the result of cash used in
investing activities exceeding cash provided by operating and
financing activities. Net income was the primary contributor from
operating activities, while deposit growth was the main contributor
to cash from financing activities. The primary sources of cash
flows for United Security are earnings, proceeds from sales,
payments and maturities of investment securities, and deposit
growth, and short-term borrowings.
Proceeds from sales and maturities of investments have
consistently been reinvested in the investment portfolio. Although
the majority of the 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 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 to purchase additional investments.
United Security currently has long-term debt and short-term
borrowings that on average represent 11.7 percent of total
liabilities and equity.
United Security's total deposits have shown steady growth each
year since 1990. This growth occurred primarily in time deposits.
All deposit functions experienced growth in 1995 except
interest-bearing demand deposits. This increase in deposits has
been used primarily to finance a portion of the increase in the
investment securities portfolio.
The following table shows United Security's rate sensitive
position at December 31, 1995, as measured by gap analysis (the
difference between the earning asset and interest-bearing liability
amounts eligible to be repriced to current market rates in
subsequent periods).
Interest Rate Sensitivity Analysis
December 31, 1995
(In Thousands of Dollars)
Over 5
Years and
0-3 4-12 1-5 Non-Rate
Months Months Years Sensitive Total
Earning Assets:
Loans $ 16,690 $ 13,093 $ 19,691 $ 4,729 $ 54,203
Taxable Investment Securities 100,216 2,754 13,202 0 116,172
Tax-Exempt Investment Securities 0 0 1,186 12,245 13,431
Total Earning Assets $116,906 $ 15,847 $ 34,079 $ 16,974 $183,806
Interest-Bearing Liabilities:
Non-Interest-Bearing Demand Deposits $ 0 $ 0 $ 0 $ 24,366 $ 24,366
Interest-Bearing Deposits
Demand 23,126 0 0 0 23,126
Savings 0 180 14,620 0 14,800
Certificates of Deposits 22,351 31,441 30,432 0 84,224
Borrowings 22,390 63 336 344 23,133
Shareholders' Equity 0 0 0 14,157 14,157
Total Funding Sources $ 67,867 $ 31,684 $ 45,388 $ 38,867 $183,806
Interest Sensitivity Gap (Balance Sheet) $ 49,039 $(15,837) $(11,309) $(21,983) $ 0
Off-Balance Sheet $(19,037) $ 0 $ 19,037 $ 0 $ 0
Interest Sensitive Gap $ 30,002 $(15,837) $ 7,728 $(21,983) $ 0
Cumulative Interest-Sensitive Gap $ 30,002 $ 14,165 $ 21,893 $ 0 $ 0
In addition to 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 the cap rate. All
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 R of the "Notes to Consolidated Financial
Statements."
Interest Rate Protection Contracts
Contract Terms
Notional Carrying Estimated Weighted Average Rate
Amount Value Fair Value Receive Pay Maturity
(in Thousands)
Swaps:
Contracts Terms
1 Pay Fixed 890 0 14 Prime Rate 6.80% 21 mos.
2 Receive Fixed 10,000 0 676 7.49% 1 mo. LIBOR 23 to 43 mos.
Caps and Floors:
Contracts Terms Ranges Maturity
5 Caps Purchased 58,089 336 23 6.45% to 8.00% 4 - 35 mos.
5 Floors Purchased 35,000 386 680 4.00% to 9.00% 18 - 36 mos.
1 Cap Sold 10,000 (42) (30) 7.45% 35 mos.
113,979 680 1,363
Income Taxes
The effective tax rate as a percentage of pre-tax income was
28.4% in 1995 compared to 26.5% and 30.0% in 1994 and 1993,
respectively. These rates are lower than the maximum Federal
statutory rate of 35% due primarily to tax exempt interest income
and tax credits generated by investments in low income housing
partnerships. The Company's taxable income was also only in the 34%
tax bracket. The Company's effective tax rate should continue to be
lower than the maximum Federal rates in future years.
Deferred income taxes are reported for timing differences
between items of income and expense reported in the financial
statements and those reported for income tax purposes. Deferred
taxes are computed in accordance with SFAS No. 109 "Accounting for
Income Taxes" which was adopted in 1993.
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, 1995, the Bank had
outstanding standby letters of credit and commitments to make loans
of $1,352,853 and $28,329,347, 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, 1995, the Bank's options written totaled $2,000,000.
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. The Bank's
commitments to buy and sell securities for delayed delivery as of
December 31, 1995, totaled $1,268,500 and $3,900,100, respectively.
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 $588,609 or 6.9% in 1995
compared to 14.5% and 8.6% increases in 1994 and 1993,
respectively. Volume, rate, and yield changes contributed to the
growth in net interest income. Average interest-earning assets
increased by $15.1 million or 9.1% in 1995. This increase in
interest-earning assets is partly offset by the volume increase of
$10 million or 7.4% in average interest-bearing liabilities. 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 deposits. In 1995, average
interest-earning assets outgained average interest-bearing
liabilities by $5.1 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 5.1% in 1995 compared to 5.2% and
5.1% in 1994 and 1993, respectively.
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 increased 7.4% in 1995, while the average rate of
interest paid increased from 4.01% in 1994 to 4.83% in 1995, an
increase of 82 basis points. Average interest-earning assets
increased 9.1% in 1995, while the average yield increased from
8.48% in 1994 to 8.96% in 1995, an increase of 48 basis points. Net
yield on average interest-earning assets, however, decreased only
13 basis points from 1994 to 1995.
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 1995, 80% of the Bank's average earning assets were
funded by interest-bearing liabilities as opposed to 82% in 1994
and 81% in 1993. The earning assets funded by interest-bearing
liabilities had a favorable effect on the net interest income.
Summary of Operating Results
Year Ended December 31,
1995 1994 1993
(In Thousands of Dollars)
Total Interest Income $16,167 $14,025 $12,154
Total Interest Expense 7,002 5,420 4,642
Net Interest Income $ 9,165 $ 8,605 $ 7,512
Provision for Possible Loan Losses 0 29 51
Net Interest Income After Provision for
Possible Loan Losses $ 9,165 $ 8,576 $ 7,461
Other Non-Interest Income 1,111 1,041 2,240
Other Non-Interest Expense (5,229) (5,231) (5,137)
Income Before Income Taxes $ 5,047 $ 4,386 $ 4,564
Applicable Income Taxes 1,432 1,161 1,374
Net Income $ 3,615 $ 3,225 $ 3,190
Changes in Interest Earned and Interest Expense Resulting from
Changes in Volume and Changes in Rates
1995 Compared to 1994 1994 Compared to 1993 1993 Compared to 1992
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 $ 98 $ 595 $ 693 $ 368 $ (73) $ 295 $ (64) $(473) $(537)
Taxable Investments 1,089 239 1,328 1,009 525 1,534 457 (218) 239
Non-Taxable Investments 73 9 82 119 (39) 80 98 (5) 93
Federal Funds 34 5 39 (52) 14 (38) 12 (2) 10
Total Interest-
Earning Assets $1,294 $ 848 $2,142 $1,444 $ 427 $1,871 $ 503 $(698) $(195)
Interest Expense On:
Demand Deposits $ (82) $ (3) $ (85) $ 41 $ (63) $ (22) $ 96 $(118) $ (22)
Savings Deposits 10 0 10 40 (1) 39 46 (45) 1
Time Deposits 296 735 1,031 105 57 162 5 (637) (632)
Other Liabilities 370 256 626 434 165 599 (59) (80) (139)
Total Interest-
Bearing Liabilities $ 594 $ 988 $1,582 $ 620 $ 158 $ 778 $ 88 $(880) $(792)
Increase in Net
Interest Income $ 700 $(140) $ 560 $ 824 $ 269 $1,093 $ 415 $ 182 $ 597
Provision for Possible Loan Losses
The provision for possible loan losses is an expense used to
establish the allowance for possible 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 future losses. Net recoveries
on prior charge-offs exceeded loans charged-off during the year
1995. As a result, no provision from current earnings was necessary
to maintain the reserve for loan losses. For additional analysis
and discussion of the allowance for loan losses, refer to the
section entitled "Loans and Allowance for Possible Loan Losses."
Non-Interest Income
Non-interest income consists of revenues generated from 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.
Fee income from service charges increased 1.2% in 1995
compared to a 2.8% decrease in 1994. The increase in service charge
income resulted primarily from the introduction of the commercial
demand deposit account analysis product. This product allows the
Bank to evaluate and effectively price the commercial demand
deposit account. Insurance premiums and commissions income
continued to decline. This income originated primarily from the
sale of credit life and accident and health insurance to consumer
loan customers. The decline in insurance income resulted from
declining volumes of credit life insurance written for customers,
coupled with lower premium rates for the last four years. Insurance
premiums and commissions income are not expected to increase due to
the uncertainty in the credit life insurance market.
Other non-interest income including safe deposit box fees,
credit card fees, letters of credit fees and other customer charges
increased to $128,113 in 1995 and accounted for 13.2% of
non-interest income (excluding security related income) compared to
11.1% in 1994 and 13.3% in 1993.
Non-recurring items of non-interest income include all the
securities gains (losses) discussed previously. Investment
securities had a total loss of $103,414 in 1995 compared to a
$34,573 loss in 1994 and a $900,837 gain in 1993. The investment
securities loss of $103,414 in 1995 was offset by a trading
securities gain of $23,215 and an option income of $221,797 in
1995. The combination of these accounts yielded a net income of
$141,598 in securities related non-interest income in 1995 compared
to $93,130 in 1994, and $1,238,710 in 1993. Income generated in the
area of securities gains and losses (which is also discussed under
a separate category "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. The investment strategy in 1994 and 1995 was directed more
toward interest income generated by the investment portfolio by
restructuring the fixed-rate portion of the portfolio into floating
rates or other fixed rates. This strategy will also enhance
future earnings.
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.
Non-Interest Expense
Non-interest expenses consist primarily of four major
categories: salaries and employee benefits, occupancy expense,
furniture and equipment expense, and other expense. United Security
Bank's non-interest expense remains relatively high when compared
to other banks of similar size because United Security Bank
operates eight banking offices. However, management's efforts to
control these expenses continue to show positive results. United
Security Bank's total non-interest expense as a percentage of
average assets was 2.7%, 3.0%, and 3.2% in 1995, 1994, and 1993,
respectively. The lower ratio of non-interest expenses to average
assets in 1995 is due to a 8.6% increase in average assets while
non-interest expenses were constant.
The control over non-interest expense growth was enhanced by
the Bank's success in effectively utilizing human resource
management to maximize productivity. Salaries and benefits
increased 1.4% in 1995, decreased less than 1% in 1994, and
increased 3.2% in 1993. The low growth in salaries and benefits
expense is due to a reduction in full-time equivalent employees. At
December 31, 1995, United Security had 90 full-time equivalent
employees compared to 94 at December 31, 1994 and 96.5 in 1993.
Assets per employee increased to $2.2 million in 1995 compared to
$2 million in 1994 and $1.7 million in 1993. Deposits per employee
also have steady improvements. In 1995, deposits per employee
increased to $1.6 million from $1.5 million 1994 and $1.4 million
in 1993. Improvements in these employee productivity measures
resulted from effective utilization of human resources, investments
in technology, and a concerted effort to carefully manage employee
levels. Current levels of employment have been achieved through
attrition.
United Security sponsors an Employee Stock Ownership Plan with
401(k) provisions. Employee participation continues to increase;
therefore, the Bank's matching contribution expense has increased.
The contribution expense increased to $94,829 or 10.4% in 1995,
$85,902 or 10% in 1994, and $78,075 or 6.6% in 1993.
Occupancy expense includes depreciation, rents, utilities,
maintenance, insurance, taxes, and other expenses associated with
the eight buildings occupied by United Security as well as the
vacant building adjacent to the Main Office. Occupancy expense
decreased 2.5% in 1995, increased 1.2% in 1994, and decreased 3% in
1993.
Furniture and equipment expense increased 3.9% in 1995, 2.9%
in 1994, and 5.5% in 1993. During much of this three-year period,
United Security made a significant investment in new check
processing technology and in personal computer networking
technology. While these investments will have a short-term impact
on equipment depreciation expense, long-term cost savings are
expected in the areas of employee productivity, stationery and
supplies, postage, and communication expense. It is for this reason
that expenditure in new banking technology will continue through
1996 and beyond.
Other expense 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 miscellaneous expenses. The success achieved
in containing costs in this category of expenses is evidenced by
the 3.6% decline in 1995, compared to the 5.5% increase in 1994 and
the 9.5% decline in 1993. The decline in 1995 is directly
attributed to the reduction in the FDIC insurance premium expense.
The FDIC insurance expense declined by 36.9% in 1995 as a result of
the risk-based assessment being reduced from $.23 per $100 of
insured deposits to $.04 per $100. Additional savings are expected
in this category in 1996 since the savings realized in 1995 was
only for half of the year.
Item 8. Financial Data and Supplementary Data.
INDEPENDENT AUDITOR'S REPORT
Board of Directors
United Security Bancshares, Inc.
Thomasville, Alabama
We have audited the accompanying consolidated statements of
condition of United Security Bancshares, Inc. and subsidiary as of
December 31, 1995 and 1994, and the related consolidated statements
of income, shareholders' equity, and cash flows for each of the
three years in the period ended December 31, 1995. These
consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion
on these consolidated 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
consolidated financial statements are free of material
misstatements. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated
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 consolidated
financial position of United Security Bancshares, Inc. and
subsidiary as of December 31, 1995 and 1994, and the consolidated
results of their operations and their cash flows for each of the
three years in the period ended December 31, 1995, in conformity
with generally accepted accounting principles.
Smith, Duke & Buckalew
Mobile, Alabama
January 12, 1996
UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CONDITION
December 31, 1995 and 1994
1995 1994
ASSETS
Cash and due from banks $ 5,749,922 $ 7,190,823
Federal Funds sold 600,000 -0-
Total cash and cash equivalents 6,349,922 7,190,823
Investment securities (market value of
$21,594,206) -0- 22,126,539
Investment securities available for sale 127,864,402 89,782,161
Other investments (market value of $1,138,200
in 1995 and $805,500 in 1994) 1,138,200 805,500
Loans 55,469,552 58,061,776
Unearned interest on loans (487,995) (556,356)
Allowance for possible loan losses (778,391) (772,000)
Loans, net 54,203,166 56,733,420
Premises and equipment 3,616,182 3,876,828
Accrued interest receivable 1,594,147 1,853,986
Other assets 2,701,753 4,071,778
Total assets $197,467,772 $186,441,035
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Demand -- non-interest bearing $ 24,365,287 $ 23,491,541
Demand -- interest bearing 23,125,800 26,582,602
Savings 14,800,275 14,323,733
Time, $100,000 and over 18,243,648 16,066,788
Other time 65,979,705 61,819,277
Total deposits 146,514,715 142,283,941
Federal funds purchased -0- 7,400,000
Securities sold under repurchase agreements 0- 220,614
U.S. Treasury tax and loan 369,272 531,474
Other borrowings 22,000,000 9,500,000
Dividend payable 235,176 224,486
Accrued interest payable 792,077 800,647
Other liabilities 1,563,396 911,224
Current portion long-term debt 83,333 5,083,333
Long-term debt 680,556 763,889
Total liabilities 172,238,525 167,719,608
SHAREHOLDERS' EQUITY
Common stock, par value per share,
$.01 in 1995, $.25 in 1994;
authorized, 2,400,000 shares in 1995,
600,000 shares in 1994;
issued, 2,202,060 shares in 1995,
550,515 shares in 1994 22,021 137,628
Surplus 5,761,552 5,645,945
Net unrealized gain (loss) on available
for sale securities 616,295 (3,217,137)
Retained earnings 19,083,799 16,409,411
Treasury stock, at cost -- 64,100 and 16,025
shares in 1995 and 1994, respectively (254,420) (254,420)
25,229,247 18,721,427
Total liabilities and shareholder's
equity $197,467,772 $186,441,035
The Notes to Consolidated Financial Statements are an integral part of these statements.
UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1995, 1994 and 1993
1995 1994 1993
INTEREST INCOME
Interest and fees on loans $ 5,527,989 $ 4,835,402 $ 4,539,777
Interest on investment securities:
Taxable 352,649 809,396 1,969,521
Tax-exempt 475,504 834,756 755,431
Dividends -0- 6,186 4,025
828,153 1,650,338 2,728,977
Interest on investment securities
available for sale:
Taxable 9,243,855 7,258,866 4,675,841
Tax-exempt 441,846 -0- -0-
Dividends 5,000 -0- -0-
Interest on trading account
securities 13,177 40,798 34,833
Interest on federal funds sold 49,171 9,853 47,960
Interest on rate swaps (net) 58,072 230,294 126,788
Total interest income 16,167,263 14,025,551 12,154,176
INTEREST EXPENSE
Interest on deposits 5,569,434 4,612,775 4,434,510
Interest on short-term borrowings 1,202,557 497,681 114,891
Interest on long-term debt 230,238 309,734 92,799
Total interest expense 7,002,229 5,420,190 4,642,200
NET INTEREST INCOME 9,165,034 8,605,361 7,511,976
PROVISION FOR POSSIBLE LOAN LOSSES -0- 28,936 51,254
NET INTEREST INCOME AFTER PROVISION
FOR POSSIBLE LOAN LOSSES 9,165,034 8,576,425 7,460,722
NON-INTEREST INCOME
Service and penalty charges on
deposit accounts 816,153 806,620 829,657
Credit life insurance commissions 25,470 35,384 38,234
Other income 128,113 105,561 133,109
Investment securities gains
(losses), net (103,414) (34,573) 900,837
Trading securities gains
(losses), net 23,215 (97,525) 80,402
Option income 221,797 225,228 257,471
1,111,334 1,040,695 2,239,710
NON-INTEREST EXPENSES
Salaries and wages 2,390,869 2,352,929 2,358,847
Employee benefits 352,735 352,026 356,555
Occupancy expense 306,111 314,011 310,356
Furniture and equipment expense 656,697 631,968 613,987
Stationery and operating supplies 130,294 135,226 103,086
FDIC assessment 190,264 301,559 290,407
Telephone expense 162,838 168,782 165,563
Other expenses 1,039,469 974,357 938,108
5,229,277 5,230,858 5,136,909
Income before income taxes 5,047,091 4,386,262 4,563,523
Applicable income taxes 1,432,000 1,161,000 1,373,678
Net income $ 3,615,091 $ 3,225,262 $ 3,189,845
Average number of shares
outstanding 2,137,960 2,137,920 2,136,036
Net income per common share $ 1.69 $ 1.51 $ 1.49
The Notes to Consolidated Financial Statements are an integral part of these statements.
UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years Ended December 31, 1995, 1994 and 1993
1995 1994 1993
COMMON STOCK
Balance at January 1 $ 137,628 $ 137,628 $ 125,117
10% stock dividend -0- -0- 12,511
Reduction of par value from
$.25 per share to $.01
per share (115,607) -0- -0-
Balance at December 31 22,021 137,628 137,628
SURPLUS
Balance at January 1 5,645,945 5,645,715 3,756,903
Sale of 134 shares treasury
stock -0- 230 -0-
Sale of 1,040 shares of treasury
stock -0- -0- 12,050
10% stock dividend -0- -0- 1,876,762
Reduction of par value from
$.25 per share to $.01
per share 115,607 -0- -0-
Balance at December 31 5,761,552 5,645,945 5,645,715
RETAINED EARNINGS
Balance at January 1 16,409,411 14,082,092 13,558,512
Net income 3,615,091 3,225,262 3,189,845
Dividends:
1993 -- $.3625 per share -0- -0- (776,992)
1993 -- 10% stock dividend -0- -0- (1,889,273)
1994 -- $.42 per share -0- (897,943) -0-
1995 -- $.44 per share (940,703) -0- -0-
Balance at December 31 19,083,799 16,409,411 14,082,092
TREASURY STOCK, at cost
Balance at January 1 (254,420) (254,420) (281,460)
Purchase of 134 shares -0- 4,862 -0-
Sale of 134 shares -0- (4,862) -0-
Sale of 1,040 shares -0- -0- 27,040
Balance at December 31 (254,420) (254,420) (254,420)
NET UNREALIZED GAIN (LOSS) ON
AVAILABLE FOR SALE SECURITIES
Balance at January 1 (3,217,137) -0- -0-
Effect of adoption of FAS 115 -0- 266,972 -0-
Net change in unrealized
gain (loss) 3,833,432 (3,484,109) -0-
Balance at December 31 616,295 (3,217,137) -0-
Total shareholder's equity $25,229,247 $18,721,427 $19,611,015
The Notes to Consolidated Financial Statements are an integral part of these statements.
UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1995, 1994 and 1993
1995 1994 1993
Cash flows from operating activities:
Net income $ 3,615,091 $ 3,225,262 $ 3,189,845
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation 414,471 437,505 415,799
Provision for possible loan losses -0- 28,936 51,254
Deferred income taxes 74,778 43,008 33,797
Amortization of intangible assets 5,104 22,909 24,408
Investment securities( gains)
losses 103,414 34,573 (900,837)
Gain on sale of premises and
equipment (4,425) (815) (26,373)
Loss on sale of other real estate 15,501 7,751 99,299
Net securities premium
amortization 780,239 1,207,661 665,780
Decrease (increase) in trading
securities -0- 1,980,000 (1,980,000)
(Increase) decrease in:
Interest receivable 259,839 (398,734) (21,437)
Other assets (620,362) (617,624) (258,965)
Increase (decrease) in:
Interest payable (8,570) 229,450 44,873
Other liabilities 207,617 (328,691) 53,877
Net cash provided by operating
activities 4,842,697 5,871,191 1,391,320
Cash flows from investing activities:
Purchases of investment securities
available for sale (51,901,714) (71,557,140) -0-
Proceeds from sales of investment
securities available for sale 38,801,121 39,234,730 -0-
Proceeds from maturities and
prepayments of investment
securities available for sale 2,952,139 12,422,395 -0-
Purchase of investment securities (1,397,040) (2,904,751) (84,378,861)
Proceeds from sales of investment
securities -0- -0- 69,927,630
Proceeds from maturities and
prepayments of investment
securities 506,931 5,481,033 115,000
Net decrease (increase) in loans 2,530,254 (3,817,178) (3,401,169)
Purchase of premises and equipment (154,812) (416,688) (593,056)
Proceeds from sales of premises
and equipment 5,412 815 -0-
Proceeds from sale of other real
estate 39,500 82,964 305,000
Net cash used in investing
activities (8,618,209) (21,473,820) (18,025,456)
Cash flows from financing activities:
Net increase (decrease) in demand
and savings deposits (2,106,514) 5,522,142 2,992,938
Net increase (decrease) in time
deposits 6,337,288 4,242,382 (1,289,777)
Net increase in short-term
borrowings 4,717,184 8,936,156 8,715,932
Proceeds from issuance of
long-term debt -0- -0- 6,000,000
Repayment of long-term debt (5,083,333) (83,334) (69,444)
Dividends paid (930,014) (867,818) (776,576)
Acquisition of treasury stock -0- (4,862) -0-
Sale of treasury stock -0- 5,091 39,090
Net cash provided by financing
activities 2,934,611 17,749,757 15,612,163
Net (decrease) increase in cash and
cash equivalents (840,901) 2,147,128 (1,021,973)
Cash and cash equivalents,
beginning of year 7,190,823 5,043,695 6,065,668
Cash and cash equivalents,
end of year $ 6,349,922 $ 7,190,823 $ 5,043,695
Supplemental disclosures of cash
flow information:
Cash paid during the period for:
Interest $ 7,010,799 $ 5,190,740 $ 4,597,448
Income taxes $ 1,358,486 $ 1,115,801 $ 1,396,946
Supplemental schedule of noncash
investing and financing activities:
Other real estate acquired in
settlement of loans $ -0- $ -0- $ 57,215
Dividends declared but unpaid $ 235,176 $ 224,486 $ 194,360
Sales of other real estate
financed by the Bank $ 35,500 $ -0- $ 62,825
Transfer of securities from
held to maturity to available
for sale $ 23,073,766 $ 5,785,905 $ -0-
The Notes to Consolidated Financial Statements are an integral part of these statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A -- Summary of Significant Accounting Policies
Description of Business
United Security Bancshares, Inc. (the Company) and its subsidiary,
United Security Bank (the Bank) provide commercial banking services
to customers located primarily in Clarke, Choctaw, Marengo, Sumter,
Washington, and Wilcox Counties in Alabama as well as Clarke,
Lauderdale, and Wayne Counties in Mississippi.
Principles of consolidation
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiary, the Bank. All significant
intercompany balances and transactions have been eliminated.
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.
Securities
Securities are held in three portfolios; trading account
securities, held to maturity securities, and securities available
for sale. Trading account securities are stated at market value.
Investment securities held to maturity are stated at cost adjusted
for amortization of premiums and accretion of discounts. With
regard to investment securities held to maturity, management has
the intent and ability to hold such securities until maturity. On
January 1, 1994, the Company adopted Financial Accounting Statement
No. 115, Accounting for Certain Investments in Debt and Equity
Securities ("FAS115") which requires that investment securities
available for sale be reported at fair value with any unrealized
gains or losses excluded from earnings and reflected as a separate
component of shareholders' equity. The adoption of FAS115 did not
affect the Company's methodology for determining the carrying value
of its trading account securities or its investment securities held
to maturity. Additionally, FAS115 specifies accounting principles
in regard to transfers among the three portfolios and the
conditions that would permit such transfers. Investment securities
available for sale are classified as such due to the fact that
management may decide to sell certain securities prior to maturity
for liquidity, tax planning or other valid business purposes. The
adoption of FAS115 resulted in the addition of $266,972 to
shareholders' equity at January 1, 1994, representing the
tax-effected net unrealized gain on the Company's available for
sale portfolio at that date. Subsequent increases and decreases in
the net unrealized gain (loss) on the portfolio of securities
available for sale will be reflected as adjustments to the carrying
value of the portfolio and as adjustments to the component of
shareholders' equity.
Interest earned on investment securities held to maturity,
investment securities available for sale, and trading account
securities is included in interest income. 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 non-interest income
in the consolidated statements of income.
Derivative financial instruments
As part of the Company's overall interest rate risk management, the
Company uses interest rate protection contracts consisting of
interest rate swaps, caps and floors. 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 is included in other
assets and are amortized straight-line over the life of the
agreement. Changes in the estimated fair value of interest rate
protection contracts are not reflected in the financial statements
until realized.
Loans and interest income
Loans are reported at the principal amounts outstanding less
unearned income and the allowance for possible loan losses.
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.
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, 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 possible loan losses
The allowance for possible loan losses is maintained at a level
which, in management's judgement, 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, credit
concentrations, historical trends, specific impaired loans, and
economic conditions. Loans evaluated for impairment does not
include smaller balance homogenous loans such as consumer
installment and real estate mortgage loans. Larger balance loans
which are classified as either doubtful or loss are evaluated for
impairment and allowances are determined based on collateral values
or the present value of estimated cash flows. Non-accrual loans are
not considered impaired if the value of their underlying collateral
indicates the performance of the loan under the original terms of
the agreement. The Bank generally charges off on loans that become
four months past due subject to evaluation of the collateral. The
allowance is increased by a provision for loan losses, which is
charged to expense and reduced by charge-offs, net of recoveries.
Changes in the allowance relating to impaired loans are charged or
credited to the provision for loan losses. Because of uncertainties
inherent in the estimation process, management's estimate of credit
losses inherent in the loan portfolio and the related allowance may
change in the near term.
Amortization of Intangibles
Core deposit intangibles are included in other assets and are
amortized using the straight-line method over a period based on the
life of the intangible which generally varies from 6 to 10 years.
Impairment of these assets is evaluated annually by management
based upon the existence of the deposits originally acquired.
Premises and equipment
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.
Other real estate
Real estate acquired through foreclosure is valued at the lower of
its fair market value or the recorded investment in the loan. If
the fair value of the real estate is less than the Bank's recorded
investment at the time of foreclosure, the write-down is charged to
the allowance for possible loan losses. Subsequent declines in fair
value are charged to other real estate expense.
Income taxes
Deferred income taxes are reported for timing differences between
items of income and expense reported in the consolidated financial
statements and those reported for income tax purposes. The
differences relate primarily to depreciation, provision for
possible loan losses, and unrealized losses on trading securities.
Deferred taxes are computed on the liability method as prescribed
in SFAS No. 109 "Accounting for Income Taxes".
Treasury Stock
Treasury stock repurchases and sales are accounted for using the
cost method.
Earnings per share
Earnings per share are calculated based on the weighted average
number of shares outstanding during the period, after giving
retroactive effect to a four-for-one stock split as explained in
Note K.
Use of estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Reclassifications
Certain previously reported amounts have been reclassified to
conform with current presentation.
Note B -- Restrictions on Cash and Due From Banks
The Bank is required to maintain average reserve balances with the
Federal Reserve Bank. The average reserve balance maintained was
$3,215,232 in 1995 and $3,390,918 in 1994.
Note C -- Investment Securities and Investment Securities Available
for Sale
The adjusted cost and approximate market value of investment
securities and investment securities available for sale at December
31, 1995 and 1994 are as follows:
1995 1994
Amortized Market Amortized Market
Cost Value Cost Value
Investment securities:
U.S. Treasury and Agency $ -0- $ -0- $ 3,251,621 $ 2,785,220
Obligations of states,
counties, and political
subdivisions -0- -0- 13,144,296 13,013,072
Mortgage-backed securities -0- -0- 5,630,921 5,693,726
Corporate -0- -0- 99,701 102,188
-0- -0- 22,126,539 21,594,206
Investment securities available
for sale:
U.S. Treasury and Agency -0- -0- 992,218 867,701
Obligations of states,
counties, and political
subdivisions 11,989,206 13,430,403 -0- -0-
Mortgage-backed securities 114,879,683 114,424,053 93,927,921 88,905,180
Other -- non-debt 9,440 9,946 9,440 9,280
126,878,329 127,864,402 94,929,579 89,782,161
Other investments:
Federal Home Loan Bank
Stock 1,138,200 1,138,200 805,500 805,500
Total $128,016,529 $129,002,602 $117,861,618 $112,181,867
Unrealized gains and losses on investment securities and investment
securities available for sale at December 31, 1995 and 1994 are as
follows:
1995 1994
Unrealized Unrealized Unrealized Unrealized
Gains Losses Gains Losses
Investment securities:
U.S. Treasury and Agency $ -0- $ -0- $ -0- $ 466,401
Obligations of states,
counties, and political
subdivisions -0- -0- 227,954 359,178
Mortgage-backed securities -0- -0- 71,807 9,002
Other -0- -0- 2,487 -0-
-0- -0- 302,248 834,581
Investment securities available
for sale:
U.S. Treasury and Agency -0- -0- -0- 124,517
Obligations of states,
counties, and political
subdivisions 1,441,197 -0- -0- -0-
Mortgage-backed securities 3,518,259 3,973,889 663,879 5,686,620
Other -- non-debt 506 -0- -0- 160
4,959,962 3,973,889 663,879 5,811,297
Total $ 4,959,962 $ 3,973,889 $ 966,127 $ 6,645,878
The maturity of the debt securities are presented in the following
table:
1995
Amortized Market
Cost Value
Investment securities $ -0- $ -0-
Investment securities available for sale:
Maturing within one year $ -0- $ -0-
Maturing after one but before five years 1,184,035 1,278,626
Maturing after five but before ten years 1,009,546 1,108,523
Maturing after ten years 124,675,308 125,467,307
Total $126,868,889 $127,854,456
Proceeds from sales of investment securities available for sale
were $38,801,121 in 1995 and $39,234,730 in 1994. Gross gains
realized on those sales were $511,610 in 1995 and $604,634 in 1994.
Gross losses realized on those sales were $615,024 in 1995 and
$638,937 in 1994.
Proceeds from sales of debt securities in the trading accounts were
$19,197,227 in 1995 and $21,634,133 in 1994. Gross realized gains
on those sales were $84,125 in 1995 and $156,382 in 1994. Gross
realized losses on those sales were $60,910 in 1995 and $253,907 in
1994.
Investment securities with a carrying value of $37,085,102 and
$36,241,000 at December 31, 1995 and 1994, respectively, were
pledged to secure public deposits and for other purposes.
Securities transfers
During 1995 and 1994, the Bank transferred securities from the held
to maturity portfolio to the available for sale portfolio. The 1994
transfer was made due to conditions created by the rising rate
environment. In July, 1995, the Bank decided to move all of their
remaining held to maturity securities to available for sale to
allow the Bank more flexibility in managing the portfolio. These
transfers were made at market value in accordance with FAS115.
Note D -- Loans
At December 31, 1995 and 1994, the composition of the loan
portfolio was as follows:
1995 1994
Commercial, financial, and agricultural $34,107,901 $34,675,754
Real estate mortgage 16,267,120 17,240,201
Installment 5,094,531 6,145,821
Total $55,469,552 $58,061,776
The Bank grants commercial, real estate, and installment loans to
customers primarily in Clarke, Choctaw, Marengo, Sumter,
Washington, and Wilcox Counties in Alabama, as well as Clarke,
Lauderdale, and Wayne Counties in 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, 1995, approximately $20 million of the Bank's loan
portfolio consisted of loans to customers in the timber and
timber-related industries. This total includes loans of
approximately $9.4 million to employees of those industries.
Loans on which the accrual of interest has been discontinued
amounted to $169,064 and $269,667 at December 31, 1995 and 1994,
respectively. If interest on those loans had been accrued, such
income would have approximated $22,727 and $52,585 for 1995 and
1994, respectively. Interest income actually recorded on those
loans amounted to $10,407 and $44,378 for 1995 and 1994,
respectively.
Note E -- Allowance for Possible Loan Losses
A summary of the transactions in the allowance for possible loan
losses follows:
1995 1994 1993
Balance at beginning of year $ 772,000 $ 750,000 $ 710,000
Provision for possible loan losses -0- 28,936 51,254
Loans charged off (84,786) (79,946) (108,865)
Recoveries of loans previously charged off 91,177 73,010 97,611
Balance at end of year $ 778,391 $ 772,000 $ 750,000
At December 31, 1995, the Bank had no loans considered to be
impaired as defined by FAS114.
Note F -- Premises and Equipment
Premises and equipment are summarized as follows:
December 31,
1995 1994
Land $ 372,554 $ 372,554
Premises 3,727,205 3,689,415
Furniture, fixtures and equipment 3,327,582 3,232,205
7,427,341 7,294,174
Less accumulated depreciation 3,811,159 3,417,346
Total $3,616,182 $3,876,828
Depreciation expense of $414,471, $437,505 and $415,799, was
recorded in 1995, 1994, and 1993, respectively, on premises and
equipment.
Note G -- Investment in Limited Partnerships
The Bank has invested in four limited partnerships accounted for
under the equity method. These partnerships develop real estate
which qualify for Federal tax credits. The Bank's interest in these
partnerships are as follows:
Current
Percentage Year Carrying Amount
Ownership Income 1995 1994
Guilford Affordable Housing
Fund I 27.5% $ -0- $ 820,000 $ 670,000
Guilford Affordable Housing
Fund VII 49.5% -0- 750,000 600,000
Guilford Affordable Housing
Fund VIII 5% -0- 80,000 -0-
Guilford Affordable Housing
Fund XI 5% -0- 80,000 -0-
$ -0- $1,730,000 $1,270,000
The assets and liabilities of these partnerships consist primarily
of apartment complexes and related mortgages, and the Bank's
carrying value approximates their 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, 1995 in the amount of $1,270,000.
Note H -- Other Real Estate
Other real estate aggregated $2 and $55,003 at December 31, 1995
and 1994, respectively, and is included in other assets on the
Consolidated Statements of Condition.
Note I -- Short-Term Borrowings
Federal funds purchased and securities sold under agreements to
repurchase generally mature within one to four days from the
transaction date. Treasury tax and loan deposits are on demand.
Other borrowed funds in the amounts of $22,000,000 and $9,500,000
at December 31, 1995 and 1994, respectively, consist of loans from
the Federal Home Loan Bank. The cost of these borrowings during
1995 and 1994 varied from 3.20% to 6.40% and 3.06% to 6.50%,
respectively. Investment securities are pledged to secure these
borrowings.
Note J -- Long-Term Debt
Long-term debt consisted of the following at year-end:
1995 1994
Floating rate note due August 6, 1995 $ -0- $ 5,000,000
6.5% note 763,889 847,222
763,889 5,847,222
Less current portion (83,333) (5,083,333)
$ 680,556 $ 763,889
The 6.5% note from Federal Home Loan Bank is due in equal monthly
principal installments of $6,944.44 with a final installment due on
February 2, 2005. This note is secured by investment securities
pledged to the Federal Home Loan Bank.
Principal payments required on long-term debt for each of the next
five years is as follows:
1996 $ 83,333
1997 83,333
1998 83,333
1999 83,333
2000 83,333
Thereafter 347,224
Note K -- Change in Par Value and Stock Split
At the Company's annual meeting on April 25, 1995, the shareholders
ratified a change in the par value of the Company's stock from $.25
to $.01 per share. Additionally, the shareholders also approved an
increase in the number of authorized shares from 600,000 shares to
2,400,000 shares in order for the Company to effect a four-for-one
split of its stock payable to shareholders of record on that date.
All references in the accompanying financial statements to the
average number of common shares and per share amounts for 1994 and
1993 have been restated to reflect the stock split.
Note L -- Income Taxes
For the years ended December 31, 1995, 1994 and 1993, income tax
expense attributable to income from operations consists of:
Year Ended December 31,
1995 1994 1993
Currently payable:
Federal $1,173,037 $ 984,734 $1,196,881
State 184,185 133,258 143,000
Total 1,357,222 1,117,992 1,339,881
Deferred:
Federal 73,963 38,266 30,071
State 815 4,742 3,726
Total 74,778 43,008 33,797
Total income taxes:
Federal 1,247,000 1,023,000 1,226,952
State 185,000 138,000 146,726
Total $1,432,000 $1,161,000 $1,373,678
Income tax expense attributable to income from operations differed
from the amount computed by applying the Federal statutory income
tax rate to pretax earnings for the following reasons:
1995 1994 1993
Percent Percent Percent
of Pretax of Pretax of Pretax
Amount Earnings Amount Earnings Amount Earnings
Income tax expense
at Federal
statutory rate $1,716,011 34.0% $1,491,329 34.0% $1,551,557 34.0%
Increase (decrease)
resulting from:
Tax-exempt
interest (334,021) 6.6%) (307,824) (7.0%) (280,495) (6.2%)
State income tax
expense net of
Federal income
tax benefit 184,185 3.7% 133,258 3.0% 143,000 3.1%
Tax credits (low
income housing) (125,000) (2.5%) (120,000) (2.7%) (60,000) (1.3%)
Other (9,175) (0.2%) (35,763 (0.8%) 19,616 0.4%
Income tax expense $1,432,000 28.4% $1,161,000 26.5% $1,373,678 30.0%
The sources of timing differences and the resulting net deferred
income taxes were as follows:
1995 1994 1993
Provision for depreciation $ 13,001 $ (9,172) $ 22,403
Provision for possible loan losses -0- 3,289 8,917
Unrealized loss on trading securities -0- 38,158 (38,158)
Accretion not taxable 7,487 10,733 30,788
Sale of other real estate 16,833 -0- -0-
Other differences -- net 37,457 -0- 9,847
Total $ 74,778 $ 43,008 $ 33,797
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax
liabilities at December 31, 1995 and 1994, are presented below:
1995 1994
Deferred tax assets:
Allowance for loan losses $ 70,726 $ 73,269
Accrued vacation 22,001 22,001
Write-down of other real estate -0- 16,682
Net unrealized loss on securities available for sale -0- 1,930,282
Total assets 92,727 2,042,234
Deferred tax liabilities:
Premises and equipment 374,055 356,952
Unrealized gain on securities available for sale 361,576 -0-
Other deferred tax liabilities 49,347 9,897
Total liabilities 784,978 366,849
Net deferred tax asset (liability) $(692,251) $1,675,385
The Company believes that the deferred tax assets are recoverable.
Note M -- Employee Benefit Plan
The Bank sponsors an Employee Stock Ownership Plan with 401(k)
provisions. This plan covers substantially all employees and allows
employees to contribute up to 15 percent of their compensation on
a before-tax basis. The Bank may match employee contributions
dollar for dollar up to five percent of an employee's compensation.
Employees have the option to allocate some or all of their
contributions and employer match towards the purchase of Company
stock. The Bank made matching contributions totaling $94,829,
$85,902 and $78,075 in 1995, 1994 and 1993, respectively. The ESOP
held 34,720 and 34,068 shares as of December 31, 1995 and 1994,
respectively as adjusted for the stock split explained in Note K.
Note N -- Related Party Transactions
The Bank has granted loans to its executive officers and directors
and their associates. Related party loans are made on substantially
the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with unrelated
persons and do not involve more than a normal risk of
collectibility. The aggregate dollar amount of these loans was
$1,957,884 and $2,134,580 at December 31, 1995 and 1994,
respectively. During 1995, $687,050 of new loans were made, and
repayments totaled $863,746. These parties also maintained deposits
in the Bank of $3,396,092 at December 31, 1995.
Note O -- Regulatory Matters
Dividends are paid by the Company from its assets which are mainly
provided by 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. The
approval of the State Superintendent of Banks is required to pay
dividends in excess of the Bank's earnings retained in the current
year plus retained net income of the two previous years. As of
December 31, 1995, approximately $7,441,820 of the Bank's retained
earnings were available for distribution without prior regulatory
approval.
The Bank is also required to maintain minimum amounts of capital to
total "risk weighted" assets, as defined by the banking regulators.
The following chart summarizes a comparison of the bank's capital
ratios for 1995 and 1994 with the minimum bank regulatory capital
requirements.
Minimum
Regulatory United Security Bank
Requirement 1995 1994
Tier I capital to risk - adjusted assets 4.00% 23.69% 26.24%
Total capital to risk - adjusted assets 8.00% 24.44% 27.17%
Tier I leverage ratio 3.00% 12.46% 11.76%
Note P -- Operating Leases
The Company leases 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 noncancelable terms in excess of one year as of December
31, 1995:
Year ending December 31,
1996 $ 83,973
1997 77,475
1998 31,379
1999 -0-
2000 -0-
Total minimum payments required $192,827
Total rental expense under all operating leases was $129,065,
$131,280 and $153,304, in 1995, 1994 and 1993, respectively.
Note Q -- Contingencies
The Company is a defendant in several lawsuits arising in the
normal course of business. Legal counsel did not render an opinion
as to the ultimate exposure of the Company in any of the lawsuits,
however, management intends to vigorously defend these lawsuits and
believes the ultimate outcome of these lawsuits will not have a
material adverse effect on the financial position of the Company or
will be covered by insurance.
Note R -- Derivative Financial Instruments
The Bank is a party to derivative 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
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, 1995, the Bank estimates its credit
risk on purchased caps and floors in the event of total
counterparty default to be $1,363,069. All of the Bank's financial
instruments are held for risk management and not for trading
purposes.
At December 31, 1995 and 1994, derivative financial instruments
with off-balance sheet risk are summarized as follows:
Contract Amount
1995 1994
Financial instruments whose contractual
amounts represent credit risk:
Commitments to make loans $ 28,329,347 $ 23,978,123
Standby letters of credit 1,352,853 179,193
Financial instruments whose credit risk
is less than contractual amounts:
Options written 2,000,000 3,000,000
Commitments to purchase securities
for delayed delivery 1,268,500 -0-
Commitments to sell securities
for delayed delivery 3,900,100 7,000,000
Interest rate swap agreements 10,890,343 30,396,197
Interest rate floors purchased 35,000,000 40,000,000
Interest rate caps purchased 58,089,029 70,500,000
Interest rate caps written 10,000,000 -0-
Since many commitments to make loans expire without being used, the
amount does not necessarily represent future cash commitments.
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.
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 securities
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, caps, and floors.
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 a portion of
its floating rate securities to fixed rate securities except for
one swap which is used to convert a fixed rate loan to prime.
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 interest rate
caps to hedge against rising interest rates on the Bank's $22
million floating rate short-term borrowings. The remaining caps are
used to un-cap a portion of the Bank's floating rate CMO portfolio
which totals approximately $95 million at December 31, 1995. The
Bank uses floors to protect CMO floaters against a decline in
rates. The Bank sold a $10 million cap which matched a $10 million
purchased cap to effectively raise the cap 100 basis points on a
$10 million CMO floater which had been classified as "high risk"
because rates were approaching the original cap rate. The cost of
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 $42,895, $114,380, and $103,627
in 1995, 1994, and 1993, respectively.
The following table details various information regarding swaps,
caps and floors used for purposes other than trading as of December
31, 1995.
Weighted
Weighted Average
Estimated Weighted Average Repricing
Notional Carrying Fair Average Rate Years to Frequency
Amount Value Value Received Paid Expiration (Days)
Swaps:
Pay fixed
versus
prime $ 890,343 $ -0- $ 14,752 8.84% 6.80% 2.71 90
Receive fixed
versus 1 mo.
LIBOR 10,000,000 -0- 675,599 7.49% 6.31% 2.71 30
Caps:
Purchased 58,089,029 336,102 22,907 .00 .00 1.46 30 - 90
Sold 10,000,000 (42,000) (30,000) N/A N/A 2.89 30
Floors
purchased 35,000,000 386,059 680,000 1.00% N/A 2.21 30 - 90
$113,979,372 $680,161 $1,363,258
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,
1995, such swaps, caps and floors were associated with the
following asset or liability categories:
Notional Principle Associated With
Notional Fixed Floating Floating Rate
Amount Rate Loans Rate Securities Borrowings
Swaps:
Pay fixed $ 890,343 $890,343 $ -0- $ -0-
Receive fixed 10,000,000 -0- 10,000,000 -0-
Caps:
Purchased 58,089,029 -0- 36,089,029 22,000,000
Sold 10,000,000 -0- 10,000,000 -0-
Floors purchased 35,000,000 -0- 35,000,000 -0-
$113,979,372 $890,343 $91,089,029 $22,000,000
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 $68,147, as of December 31, 1995.
Those amounts are scheduled to be amortized into income in the
following periods: $34,406 gain in 1996, $25,584 gain in 1997,
$5,601 loss in 1998 and $13,758 gain in 1999.
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.
Note S -- Fair Value of Financial Instruments
Financial Accounting Statement No. 107, Disclosures about Fair
Value of Financial Instruments ("FAS107"), requires disclosure of
fair value information about financial instruments, whether or not
recognized on the face of the balance sheet, 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, which is
permitted by the provisions of FAS107.
The following methods and assumptions were used by the Company in
estimating the fair value of its financial instruments:
Cash and due from banks: Fair value equals the carrying value of
such assets.
Federal funds sold: Due to the short-term nature of these assets,
the carrying values of these assets approximate their fair value.
Investment securities available for sale: Fair values for
investment securities are based on quoted market prices.
Accrued interest receivable: 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 value of the Company's
off-balance-sheet instruments (futures, forwards, swaps, caps,
floors and options written) are based on quoted market prices. The
Company's loan commitments are negotiated at current market rates
and are relatively short-term in nature and, as a matter of policy,
the Company generally makes commitments for fixed rate loans for
relatively short periods of time, therefore, the estimated value of
the Company's loan commitments approximates carrying amount.
Demand and savings deposits: The fair values of demand deposits
are, as required by FAS107, equal to the carrying value of such
deposits. Demand deposits include noninteresting 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 consist of 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 value approximate carrying value.
FHLB 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, 1995
Carrying Estimated
Amount Fair Value
Financial Instruments:
Assets:
Cash and due from banks $ 5,749,922 $ 5,749,922
Federal funds sold 600,000 600,000
Investment securities available for sale 127,864,402 127,864,402
Other investments - FHLB stock 1,138,200 1,138,200
Accrued interest receivable 1,594,147 1,594,147
Loans 55,469,552 55,849,000
Off balance sheet instruments 660,473 1,343,570
Liabilities:
Demand and savings deposits 62,291,362 62,291,362
Time deposits 84,223,353 84,521,000
Short-term borrowings 22,369,272 22,369,272
Accrued interest payable 792,077 792,077
FHLB long-term debt 763,889 746,000
Note T -- United Security Bancshares, Inc. (Parent Company Only)
Financial Information
Balance Sheets
December 31,
1995 1994
ASSETS
Cash on deposit $ 41,801 $ 26,081
Dividend receivable 235,176 224,486
Investment in United Security Bank 25,175,793 18,679,327
Other assets 11,653 22,019
$25,464,423 $18,951,913
LIABILITIES
Dividend payable $ 235,176 $ 224,486
Other liabilities -0- 6,000
235,176 230,486
SHAREHOLDERS' EQUITY 25,229,247 18,721,427
$25,464,423 $18,951,913
Statements of Income
Year Ended December 31,
1995 1994 1993
Income
Dividends received:
Subsidiary $ 990,703 $ 897,943 $ 739,562
Other 5,000 6,186 -0-
Interest income 583 793 121
Total income 996,286 904,922 739,683
Expenses 44,229 8,285 -0-
INCOME BEFORE EQUITY IN
UNDISTRIBUTED INCOME OF
SUBSIDIARY 952,057 896,637 739,683
Equity in undistributed
income of subsidiary 2,663,034 2,328,625 2,450,162
Net income $3,615,091 $3,225,262 $3,189,845
Statements of Cash Flows
Year Ended December 31,
1995 1994 1993
CASH FLOWS FROM
OPERATING ACTIVITIES
Net income $ 3,615,091 $ 3,225,262 $ 3,189,845
Adjustments to reconcile net income to net
cash provided by operating activities:
Undistributed income of subsidiary (2,663,034) (2,328,625) (2,450,162)
Increase in dividend receivable (10,690) (30,126) (416)
Decrease in other assets 10,366 -0- -0-
Decrease in other liabilities (6,000) -0- -0-
Net cash provided by operating activities 945,733 866,511 739,267
CASH FLOWS FROM
FINANCING ACTIVITIES
Purchase of treasury stock -0- (4,862) -0-
Sale of treasury stock -0- 5,091 39,090
Cash dividends paid (930,012) (867,818) (776,576)
Net cash used in financing activities (930,012) (867,589) (737,486)
Increase (decrease) in cash 15,721 (1,078) 1,781
Cash at beginning of year 26,081 27,159 25,378
Cash at end of year $ 41,802 $ 26,081 $ 27,159
Note U -- Subsequent Events
On January 15, 1996, the Company signed an agreement to acquire all
of the outstanding shares of Brent Banking Company for $7.05
million in cash. At December 31, 1995, Brent had assets of $36
million and equity of $4.7 million.
Note V -- Accounting Standards Not Yet Adopted
The Company has not yet adopted the provisions of SFAS 121,
however, the adoption of this standard is not expected to have a
significant impact in the financial position of the Company.
Item 9. Disagreements 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, 1995.
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,
1995.
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, 1995.
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, 1995.
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,
1995 and 1994.
Consolidated Statements of Shareholders' Equity,
December 31, 1995, 1994, and 1993.
Consolidated Statements of Income, December 31,
1995, 1994, and 1993.
Consolidated Statements of Cash Flows, December
31, 1995, 1994, and 1993.
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) Articles of Incorporation of Bancshares,
incorporated herein by reference to the
Exhibits to Form 10-K for the year ended
December 31, 1987.
(3)(b) Articles of Amendment to the Articles of
Incorporation of Bancshares incorporated
herein by reference to the Exhibits to
Form 10-K for the year ended December 31,
1992.
(3)(c) Amended and Restated Articles of
Incorporation of Bancshares incorporated
herein by reference to the Exhibits to
Form 10-Q for the Quarter ended June 30,
1995.
(3)(d) Bylaws of Bancshares, incorporated herein
by reference to the Exhibits to Form 10-K
for the year ended December 31, 1987.
(10)(a) The United Security Bancshares, Inc. Employee
Stock Ownership Plan, dated January 1, 1992,
incorporated herein by reference to the
Exhibits to Form 10-K for the year ended
December 31, 1992.
(10)(b) Employment Agreement dated November 1, 1995,
between Bancshares and Jack M. Wainwright,
III, incorporated by reference to Exhibit to
Form 10-K for the year ended December 31,
1994.
(10)(c) Form of Indemnification between Bancshares and
its directors, incorporated herein by
reference to the Exhibits to Form 10-K for the
year ended December 31, 1994.
(13) Bancshares' definitive proxy statement for
1995 annual meeting of shareholders, to be filed
within 120 days after the end of the fiscal year
ended December 31, 1995, furnished for the
information of the Commission.
(22) List of Subsidiaries of Bancshares.
(b) Reports on Form 8-K
No report on Form 8-K was filed during the last
quarter of the year ended December 31, 1995.
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/ Jack M. Wainwright, III March 19, 1996
Jack M. Wainwright, III
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
/s/ Jack M. Wainwright, III President, Chief Executive March 19, 1996
Jack M. Wainwright, III Officer, and Director
(Principal Executive Officer)
/s/ Larry M. Sellers Treasurer March 19, 1996
Larry M. Sellers (Principal Financial Officer
Principal Accounting Officer)
/s/ L. C. Boney, Jr. Director March 19, 1996
L. C. Boney, Jr.
/s/ Gerald P. Corgill Director March 19, 1996
Gerald P. Corgill
/s/ Roy G. Cowan Director March 19, 1996
Roy G. Cowan
/s/ William G. Harrison Director March 19, 1996
William G. Harrison
/s/ Hardie B. Kimbrough Director March 19, 1996
Hardie B. Kimbrough
/s/ James L. Miller Director March 19, 1996
James L. Miller
/s/ D. C. Nichols Director March 19, 1996
D. C. Nichols
/s/ Harold H. Spinks Director March 19, 1996
Harold H. Spinks
/s/ James C. Stanley Director March 19, 1996
James C. Stanley
/s/ Howard M. Whitted Director March 19, 1996
Howard M. Whitted
EXHIBIT 22
List of Subsidiaries
Name Where Organized
United Security Bank Alabama