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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) 254-1000
FACSIMILE (205) 254-1099
MONTGOMERY OFFICE:
ONE COMMERCE STREET
SUITE 302
MONTGOMERY, ALABAMA 36104
(334) 262-2001
Writer's Direct Dial No.: (205) 254-1055
March 28, 1997
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.
Please do not hesitate to contact the undersigned if you have
any questions or comments.
Very truly yours,
/s/ J. Michael Savage
_____________________
J. Michael Savage
JMS/ead
Enclosures
cc: Jack M. Wainwright, III
Larry M. Sellers
Kevin M. Rittelmeyer
James M. Pool
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number 0-14549
UNITED SECURITY BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
Alabama 63-0843362
_______________________________ __________________
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
131 West Front Street
Post Office Box 249
Thomasville, Alabama 36784
________________________________________ __________
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (334) 636-5424
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $0.01 per share (Title of class)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports) and (2) has been subject to such filing requirements
for the past 90 days. Yes [X]. No .
Shares of common stock ($0.01 par value) outstanding as of
December 31, 1996: 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 6, 1997, is $15.50.
(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
1997 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, 1996
TABLE OF CONTENTS
Sequential
Part Item Caption Page No.
I 1 Business 3
2 Properties 7
3 Pending Legal Proceedings 8
4 Submission of Matters to a vote of Security Holders 8
II 5 Market for Registrant's Common Equity and Related
Stockholder Matters 8
6 Selected Financial Data 9
7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
8 Financial Statements and Supplementary Data 32
9 Disagreements on Accounting and Financial Disclosure 56
III 10 Directors and Executive Officers of the Registrant 57
11 Executive Compensation 57
12 Security Ownership of Certain Beneficial Owners
and Management 57
13 Certain Relationships and Related Transactions 57
IV 14 Exhibits, Financial Statement Schedules
and Reports on Form 8-K 58
Signatures 59
Exhibits 60
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 nine banking offices which are located in
Thomasville, Coffeeville, Fulton, Gilbertown, Grove Hill, Butler,
Jackson, and Brent, Alabama, and its market area includes portions
of Bibb, Clarke, Choctaw, Marengo, Sumter, Washington, and Wilcox
Counties in Alabama, as well as Clarke, Lauderdale and Wayne
Counties in Mississippi. Bancshares has entered into an Agreement
and Plan of Merger, dated as of August 19, 1996 (the "Merger
Agreement"), pursuant to which First Bancshares, Inc. ("FBI") will
merge with and into Bancshares, and FBI's wholly-owned subsidiary
bank, First Bank and Trust, will merge with and into the Bank. This
merger is conditioned upon receipt of the necessary regulatory
approvals. As part of that process, the United States Department of
Justice (the "Justice Department") has issued a report to the
Federal Deposit Insurance Corporation ("FDIC") stating its belief
that the merger will not have a significantly adverse effect on
competition and concurring in the consummation of the merger
fifteen (15) days after the date of FDIC approval, on the condition
that Bancshares complies with certain conditions required by the
Justice Department, including the divestiture of one branch.
Management of Bancshares is of the opinion that the conditions
imposed by the Justice Department will not have a material effect
on its operations or properties.
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, 1996, the Bank had 107 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, 1996, $8,193,418 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 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
this 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 "full-scope,
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 competitiveness 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 eight 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. The Brent Branch was acquired on May 31,
1996. This branch is located in Brent, Alabama in a one-story brick
building with approximately 8,500 square feet. There are three
drive-in facilities at this location. 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.
There are currently 2,202,060 shares of Bancshares common
stock issued and 2,137,960 shares outstanding. As of December 31,
1996, there were approximately 572 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 17 sales of
Bancshares common stock since January 1, 1996 at prices ranging
from $10.00 to $15.50 per share.
Bancshares has paid dividends on its common stock on a
quarterly basis in the past three years as follows:
Dividend paid
on Common Stock
Fiscal Year (per share)
1994 $.42
1995 $.44
1996 $.52
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,
1996 1995 1994 1993 1992
(In Thousands of Dollars, Except Per Share Amounts)
Total Interest Income $ 18,150 $ 16,167 $ 14,025 $ 12,154 $ 12,348
Total Interest Expense 8,067 7,002 5,420 4,642 5,434
Net Interest Income $ 10,083 $ 9,165 $ 8,605 $ 7,512 $ 6,914
Provision for Possible Loan Losses 78 0 29 51 135
Net Interest Income After Provision
for Possible Loan Losses $ 10,005 $ 9,165 $ 8,576 $ 7,461 $ 6,779
Other Non-Interest Income 1,435 1,111 1,041 2,240 2,599
Other Non-Interest Expense (5,657) (5,229) (5,231) (5,137) (5,187)
Income Before Income Taxes $ 5,783 $ 5,047 $ 4,386 $ 4,564 $ 4,191
Applicable Income Taxes 1,520 1,432 1,161 1,374 1,134
Net Income $ 4,263 $ 3,615 $ 3,225 $ 3,190 $ 3,057
Per Common Share:
Net Income $ 1.99 $ 1.69 $ 1.51 $ 1.49 $ 1.43
Cash Dividends Declared $ 0.52 $ 0.44 $ 0.42 $ 0.36 $ 0.33
At December 31,
1996 1995 1994 1993 1992
Total Loans, Net $ 64,573 $ 54,203 $ 56,733 $ 52,945 $ 49,590
Total Assets $235,191 $197,468 $186,441 $168,782 $149,848
Total Deposits $179,926 $146,515 $142,284 $132,519 $130,816
Long-Term Debt $ 597 $ 681 $ 764 $ 5,847 $ 0
Total Shareholders' Equity $ 28,826 $ 25,229 $ 18,721 $ 19,611 $ 17,159
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 1996, 1995, and 1994. All yields
presented and discussed herein are based on the cash basis and not
on the tax-equivalent basis.
At December 31, 1996, United Security had consolidated assets
of approximately $235.2 million and operated nine banking locations
in three counties. These nine locations contributed approximately
$4.3 million to consolidated net income in 1996. United Security
Bank's sole business is banking; therefore, loans and investments
are the principal sources 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 or First Bancshares,
Inc.;
(5) rising interest rates adversely affect the demand for
consumer credit; and
(6) general economic conditions, either nationally or in
Alabama, are less favorable than expected.
On August 19, 1996, United Security Bancshares, Inc. signed a
definitive agreement to merge with First Bancshares, Inc. of Grove
Hill, Alabama. At December 31, 1996, First Bancshares had assets of
approximately $195.2 million and equity of approximately $18.8
million. The transaction is subject to shareholder approval and is
to be accounted for under the pooling-of-interest method of
accounting. If the transaction is approved, the merger is expected
to have a significant impact on the operation and financial
condition of United Security Bancshares, Inc. during the year 1997
and beyond.
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.
The acquisition of Brent Banking Company contributed
significantly to United Security's growth during 1996. It added
approximately $34 million in assets and one office in Bibb County,
Alabama.
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, 1996, 1995, and 1994.
Distribution of Assets, Liabilities, and Shareholders' Equity, with
Interest Rates and Interest Differentials
December 31,
1996 1995 1994
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) $ 63,232 $ 6,059 9.58% $ 56,956 $ 5,528 9.71% $ 55,842 $ 4,835 8.66%
Taxable Investments (Note B) 129,433 11,060 8.54% 109,288 9,673 8.85% 96,931 8,345 8.61%
Non-Taxable 14,945 949 6.35% 13,381 917 6.85% 12,308 835 6.78%
Federal Funds Sold 1,463 82 5.60% 792 49 6.19% 228 10 4.39%
Total Interest-Earning
Assets $209,073 $18,150 8.68% $180,417 $16,167 8.96% $165,309 $14,025 8.48%
Non-Interest Earning Assets:
Cash and Due from Banks 5,388 5,148 5,192
Premises 3,883 3,730 3,832
Other Assets 5,265 4,359 4,031
Allowance for Loan Losses
(Deduction) (1,014) (786) (765)
Total $222,595 $192,868 $177,599
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest-Bearing Liabilities:
Demand Deposits $ 29,489 $ 735 2.49% $ 23,907 $ 627 2.62% $ 27,080 $ 712 2.63%
Savings Deposits 16,459 452 2.75% 15,247 453 2.97% 14,898 443 2.97%
Time Deposits 97,368 5,393 5.54% 82,412 4,489 5.45% 76,248 3,458 4.54%
Other Liabilities 26,956 1,487 5.52% 23,457 1,433 6.11% 16,828 807 4.80%
Total Interest-Bearing
Liabilities $170,272 $ 8,067 4.74% $145,023 $ 7,002 4.83% $135,054 $ 5,420 4.01%
Non-Interest Bearing Liabilities:
Demand Deposits 23,232 23,079 21,898
Other 2,591 1,785 1,533
Shareholders' Equity 26,500 22,981 19,114
Total $222,595 $192,868 $177,599
Net Interest Earnings $ 10,083 $ 9,165 $ 8,605
Net Yield on Interest-
Earning Assets 4.82% 5.08% 5.21%
Note A -- For the purpose of these computations, non-accruing loans
are included in the average loan amounts outstanding.
Note B -- Taxable investments include all held-to-maturity,
available-for-sale, and trading account securities.
Loans and Allowances for Possible Loan Losses
Net loans increased in 1996 by $10.4 million. This increase of
19.13% is primarily the result of the acquisition of Brent Banking
Company in June 1996. Real estate loans outstanding increased 45.3%
to $23.6 million. Loans outstanding in the commercial, financial,
and agricultural category increased 8.8% from $34.1 million in 1995
to $37.1 million in 1996. Installment loans increased for the first
time in several years to $5.5 million. Most of these increases can
be attributed to the acquisition.
Consumer installment loans at year end 1996 represented 8.34%
of total loans. With the acquisition of Brent Banking Company at
mid-year 1996, and other programs taking precedence in 1996, the
Bank was unable to implement a home equity line for consumer loans
which was to be tied to the Bank's credit card program. Plans for
this program are still in place and scheduled for implementation in
1997. Additional plans for increasing the regular credit card
program in the Bibb County market are scheduled for implementation
in March of 1997.
The increase in real estate loans is almost exclusively due to
the acquisition of Brent Banking Company. Construction activity in
the trade area continues to be predominately commercial. The Bank
was able to secure some of the construction loan business for both
commercial and one-to-four family dwellings. The Bank continues to
support the local area through its affiliation with Allied
Community Development Corporation by providing rental housing for
low to moderate income families. In 1996, the Bank and Allied
Community Development Corporation assisted in providing 96 rental
units and a 14-unit assisted living facility in the trade area. The
Bank has invested approximately $1.9 million in limited
partnerships. These partnerships develop real estate which
qualifies for federal tax credits. The Bank's interest in these
partnerships are carried in Other Assets on the balance sheet.
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 in the allowance for loan loss account as of
December 31, 1996, was $1.191 million. This increase of
approximately $413,000 over year-end 1995 reflects the increase in
loans outstanding due to the acquisition of Brent Banking Company
and is considered by management to be an adequate reserve for
future loan losses. This allowance is 1.80% of total loans.
The following table shows the Bank's loan distribution as of
December 31, 1996, 1995, 1994, 1993 and 1992.
December 31,
1996 1995 1994 1993 1992
(In Thousands of Dollars)
Commercial, Financial, and Agricultural $37,134 $34,108 $34,676 $29,962 $25,073
Real Estate 23,632 16,267 17,240 16,224 16,909
Installment 5,527 5,095 6,146 8,295 9,274
Total $66,293 $55,470 $58,062 $54,481 $51,246
The amounts of total loans (excluding installment loans)
outstanding at December 31, 1996, 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 $24,055 $ 9,624 $ 3,455 $37,134
Real Estate -- Mortgage 5,840 13,729 4,063 23,632
Total $29,895 $23,353 $ 7,518 $60,766
Variable rate loans totaled approximately $12.2 million and
are included in the one-year category.
United Security Bank started the year 1996 with a balance in
the Reserve for Loan Loss Account of $778,391. Loans charged off in
1996 totaled $202,599. This is higher than the $84,786 charged off
in 1995 but was anticipated by management when the Brent Banking
Company acquisition was completed in June of 1996. Approximately
sixty percent (60%) of the loans charged off during the year were
at the Brent Office. Loans charged off other than at the Brent
Office totaled $81,000 and remained approximately the same as in
1995. Loan recoveries during 1996 on loans charged off totaled
$114,128, resulting in net loans charged off of $88,471. Management
added $78,000 to the reserve account from operating income during
the year and transferred $423,251 from the Brent Office Reserve
Account for a reserve balance at year end of $1.2 million.
At December 31, 1996, United Security had one loan considered
to be impaired under FAS114. The amount of this loan, which is on
non-accrual, is $557,345, and the related allowance is $55,000. The
average recorded investment in impaired loans during the year ended
December 31, 1996 was approximately $371,000. For the year ended
December 31, 1996, United Security did not recognize interest
income on the impaired loan during the period the loan was
considered impaired. United Security had no loans considered to be
impaired at December 31, 1995.
Non-Performing Assets
The following table presents information on non-performing
loans and real estate acquired in settlement of loans.
December 31,
1996 1995 1994 1993 1992
(In Thousands of Dollars)
Non-Performing Loans:
Loans Accounted for on a Non-Accrual Basis $ 852 $ 169 $ 270 $ 785 $ 152
Accruing Loans Past Due 90 Days or More 848 150 79 22 101
Real Estate Acquired in Settlement of Loans 0 0 55 145 556
Total $1,700 $ 319 $ 404 $ 952 $ 809
Percent of Net Loans and Other Real Estate 2.63% 0.59% 0.71% 1.79% 1.61%
NOTE: 1) 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."
2) As mentioned under "Loans and Allowances for Possible
Loan Losses," two loans represent a substantial
percentage of the increase in non-performing loans.
Without these credits, total non-performing loans would
be $675,000 and 1.02% of Net Loans and Other Real Estate.
In the opinion of management, non-performing loans and any
other loans which have been classified for regulatory purposes do
not represent or result from trends or uncertainties which will
materially impact future operating results, liquidity, or capital
resources. Management is not aware of information which would cause
serious doubts as to the ability of borrowers to comply with
present repayment terms. Non-performing assets as a percentage of
net loans and other real estate was 2.63%. This represents a
substantial increase over year end 1995. However, one loan accounts
for 91% of accruing loans past due 90 days or more. This loan,
although more than 90 days past due, was performing at year end
with regular monthly payments being made. This loan, as well as the
other loans past due 90 days or more and still accruing, is
reviewed closely by management and is allowed to continue accruing
only because of underlying collateral values and management's
belief that the financial strength of the borrowers is sufficient
to protect the Bank from loss. If at any time management determines
there may be a loss of interest or principal, these loans will be
changed to non-accrual and their asset value downgraded. Through
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 the 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. This
provision was $1,191,171 at year-end and represented 1.80% 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 five years indicated.
December 31,
1996 1995 1994 1993 1992
Percent Percent Percent Percent Percent
Category Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total
(In Thousands of Dollars)
Commercial,
Financial, and
Agricultural $ 774 56.0% $ 506 61.5% $ 501 59.7% $ 488 55.0% $ 426 49.0%
Real Estate 238 35.6 156 29.3 155 29.7 150 20.8 142 33.0
Installment 179 8.4 116 9.2 116 10.6 112 15.2 142 18.0
Totals $1,191 100% $ 778 100% $ 772 100% $ 750 100% $ 710 100%
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 last five years.
Management does not anticipate charge-offs in 1997 to exceed the
five-year average of $133,000. Loan charge offs of $202,000 in 1996
did exceed this average by $69,000. This increase was the result of
the addition of approximately $14 million in loans from the Brent
Banking Company acquisition. Loans charged off in 1996 from the
Brent portfolio amounted to $122,000 or 60% of the total loans
charged to the reserve for loan loss during the year.
Summary of Loan Loss Experience
This table summarizes the Bank's loan loss experience for each
of the five years indicated.
December 31,
1996 1995 1994 1993 1992
(In Thousands of Dollars)
Balance at Beginning of Period $ 778 $ 772 $ 750 $ 710 $ 627
Charge-Offs:
Commercial, Financial, and Agricultural 89 52 41 51 52
Real Estate -- Mortgage 0 0 5 6 61
Installment 104 25 25 46 60
Credit Cards 9 8 9 6 15
$ 202 $ 85 $ 80 $ 109 $ 188
Recoveries:
Commercial, Financial and Agricultural $ 67 $ 50 $ 38 $ 38 $ 64
Real Estate -- Mortgage 0 0 0 1 0
Installment 43 33 32 55 68
Credit Cards 4 8 3 4 4
$ 114 $ 91 $ 73 $ 98 $ 136
Net Charge-Offs (Deduction) $ (88) $ 6 $ (7) $ (11) $ (52)
Additions Charged to Operations 78 0 29 51 135
Reserve Acquired 423 0 0 0 0
Balance at End of Period $1,191 $ 778 $ 772 $ 750 $ 710
Ratio of Net Charge-Offs During Period to
Average Loans Outstanding 0.14% 0% 0.01% 0.02% 0.10%
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,
1996 1995 1994
(In Thousands of Dollars)
Total Loans Accounted for on a Non-Accrual Basis $ 852 $ 169 $ 270
Interest Income that Would Have Been Recorded
under Original Terms 58 23 53
Interest Income Reported and Recorded During
the Year 17 10 44
Total loans accounted for on a non-accrual basis increased by
$683,383 in 1996 to $852,447. One loan represents 81% of this
increase. This loan is a commercial loan with collateral.
Negotiations for payment through bankruptcy proceedings are
pending. Management believes we have adequately reserved for any
loss which may occur in this account as well as all other
non-accruing loans. 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
The United Security Bank trade area includes Clarke, Choctaw,
and Bibb Counties in Alabama. In addition, parts of Chilton, Hale,
Jefferson, Marengo, Monroe, Perry, Shelby, Tuscaloosa, Washington,
Sumter and Wilcox Counties in Alabama as well as parts of Clarke,
Lauderdale and Wayne Counties in Mississippi are included. There
are several major paper mills in our trade area including Alabama
River Paper, Boise Cascade, James River Corporation and MacMillan
Bloedel. In addition, there are several sawmills, lumber companies,
and pole and piling producers. The table below shows the dollar
amount of loans made to timber and timber-related companies and to
the principals and employees of those companies as of December 31,
1996. The amount of these loans decreased 6.5% from $20 million at
year end 1995 to $18.7 million at year end 1996. Timber related
loans as a percentage of total gross loans decreased from 36.10% in
1995 to 28.26% in 1996.
With the Brent Banking Company acquisition in June of 1996, we
were able to diversify our loan portfolio to some extent. However,
the Bibb County market as well as our previous market area is still
heavily dependent on the timber and timber related industries. We
do plan to pursue opportunities relating to the Mercedes plant
which will be located within 25 miles of our Brent Office. This
will include loans to employees of the plant and to business and
industry associated with this plant.
Timber Total Percentage of
Related Loans Gross Loans Total Loans
$18,734,983 $66,294,023 28.26%
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 believe that this concentration is excessive or that it
represents a trend which might materially impact future earnings,
liquidity, or capital resources of the Bank. Management 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 26.5% during the last three
years with a 15.1% increase in 1996. This growth was affected by
the interest rate environment, product expansion, continued
emphasis on service quality and the Brent Banking Company
acquisition. In June, 1996, Brent Banking Company was acquired and
this acquisition contributed $33 million to United Security Bank's
total deposits.
Average non-interest bearing demand deposits have increased
24.1% over the last three years, but the growth for 1996 was less
than 1%. The ratio of average non-interest bearing deposits to
average total deposits decreased in 1996 to 13.9% from 16% in 1995
and 15.6% in 1994. This decline can be attributed to the shift from
non-interest bearing demand deposits to interest bearing demand
deposits the Bank experienced in 1996. Average interest bearing
demand deposits increased 23.3% in 1996 and accounted for 17.7% of
total average deposits for the year compared to 16.5% in 1995 and
19.3% in 1994. The significant increase in interest-bearing demand
deposits is expected since the deposits acquired through the Brent
acquisition have a higher concentration of interest-bearing demand
deposits. The increase in the interest bearing accounts contributes
to a reduced gross interest margin.
During the last three years, average time deposits increased
31.9%. This represents an increase of over $23.5 million. Average
time deposits increased by 18.1% in 1996 compared to an increase of
8.1% in 1995 and 3.3% in 1994. Additionally, time deposits
represented 58.5% of the total average deposits in 1996 compared to
57% in 1995 and 54.4% in 1994. This growth in time deposits coupled
with the flat growth in interest bearing demand deposits suggests
that consumers were willing to sacrifice fund accessibility for a
higher interest rate in 1996.
Average savings deposits have grown 21.5% since the end of
1993. Average savings grew 7.9% in 1996. The ratio of average
savings to average total deposits declined to 9.9% in 1996 compared
to 10.5% in 1995 and 10.6% in 1994.
United Security's deposit base remains the primary source of
funding for the Bank. The average deposit base represented 74.8% of
average liabilities and equity in 1996. As seen in the following
table, overall rates on these deposits increased to 3.95% in 1996,
compared to 3.84% in 1995 and 3.29% in 1994. This rate increase
reflects the shift to interest bearing demand accounts and to the
higher rates of certificates of deposit. 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 deposit. This will be accomplished by
remaining safe and sound, enhancing our products, and providing
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,
1996 1995 1994
Amount Rate Amount Rate Amount Rate
(In Thousands of Dollars, Except Percentages)
Non-Interest Bearing DDA $ 23,232 $ 23,079 $ 21,898
Interest-Bearing Demand 29,489 2.49% 23,907 2.62% 27,080 2.63%
Savings 16,459 2.75 15,247 2.97 14,898 2.97
Time Deposits 97,368 5.54 82,412 5.45 76,248 4.54
Total $166,548 3.95% $144,645 3.84% $140,124 3.29%
Maturities of Time Certificates of Deposits and Other Time
Deposits of $100,000 or more outstanding at December 31, 1996, are
summarized as follows:
Time Other
Certificates Time
Maturities of Deposits Deposits Total
(In Thousands of Dollars)
3 Months or Less $ 6,686 $ 7,987 $14,673
Over 3 Through 6 Months 1,970 0 1,970
Over 6 Through 12 Months 2,507 0 2,507
Over 12 Months 5,914 0 5,914
Total $17,077 $ 7,987 $25,064
Investment Securities and Securities Available for Sale
Effective January 1, 1994, United Security Bank adopted
Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities" (SFAS 115).
SFAS 115 requires that debt securities, which the Company has both
the positive intent and ability to hold to maturity, should be
carried at amortized cost. These securities are classified as
investment securities in the consolidated financial statements.
Debt securities which the Company does not have the positive intent
and ability to hold to maturity and all marketable equity
securities, are carried at estimated fair value and are included in
securities available for sale in the consolidated financial
statements, exclusive of any such securities that are included in
trading securities. Unrealized holding gains and losses on
securities available for sale, net of taxes, are carried as a
separate component of stockholders' equity. All securities held are
classified as available for sale.
Investment securities decreased $23.07 million in July 1995
with the election to transfer the entire portfolio into available
for sale. This was done to provide additional flexibility in
managing the securities portfolio.
Securities available for sale include Collateralized Mortgage
Obligations (CMOs) of $103.86 million, other mortgage backed
securities of $30.18 million, state, county and municipal
securities of $16.60 million, and other securities of $0.20
million. The total securities portfolio increased $22.86 million or
17.72% from December 1995 to December 1996.
At December 1996, approximately $99.47 million in CMO's had
floating interest rates which reprice monthly and $4.39 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 are
also subject to any prepayments of principal due to prepayment,
refinancing, or foreclosure of the underlying mortgages. Although
maturities of the underlying mortgage loans may range up to 30
years, amortization and prepayments substantially shorten the
effective maturities of mortgage-backed securities. Transactions in
these securities have focused on the seven to ten year average life
goal. Principal and interest payments also add significant
liquidity to the balance sheet. In 1996, there was a continuing
emphasis in Collateralized Mortgage Obligations ("CMO's"), 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 CMO's
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
#1 -- Average Life Test --
The expected average life of the security must be less
than or equal to 10 years.
#2 -- Average Life Sensitivity Test --
The average life of the security will not extend by more
than 4 years or shorten by more than 6 years for
immediate Treasury curve shifts of +/- 300 basis points
(3%).
#3 -- Price Sensitivity Test --
The estimated price of the security will not change by
more than 17% for immediate Treasury curve shifts of +/-
300 basis points.
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 $31.06 million in securities which, at
December 31, 1996, were designated high risk. $9.43 million of
these securities were floating rate, and $21.63 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, 1996 of $1.04
million. Despite these unrealized losses, the securities in this
segment of the portfolio produced $4.35 million in interest income
and positive total return for 1996.
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 be prepaid, 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 $1.06 million in the securities
portfolio on December 31, 1996, versus net unrealized gain (net of
taxes) of $616,295 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 S in the "Notes to Consolidated
Financial Statements."
Condensed Portfolio Maturity Schedule
Dollar Portfolio
Maturity Summary Amount Percentage
Maturing in less than 1 year $ 951,673 0.63%
Maturing in 1 to 5 years 3,245,150 2.15%
Maturing in 5 to 10 years 6,949,017 4.61%
Maturing in over 10 years 139,638,118 92.61%
Total $150,783,958 100.00%
The following Marketable Equity Securities have been excluded from
the above Maturity Summary due to no stated maturity date.
Federal Home Loan Bank Stock $1,034,000
Mutual Funds $ 9,927
Other Marketable Securities $ 45,579
Condensed Portfolio Repricing Schedule
Dollar Portfolio
Repricing Summary Amount Percentage
Repricing in 30 days or less $ 99,490,380 65.98%
Repricing in 31 to 90 days 207,916 0.14%
Repricing in 91 days to 1 year 718,757 0.48%
Repricing in 1 to 5 years 3,245,149 2.15%
Repricing in 5 to 10 years 6,844,483 4.54%
Repricing in over 10 years 40,277,273 26.71%
Total $150,783,958 100.00%
Repricing in 30 days or less does not include:
Mutual Funds $ 9,927
Other Marketable Equity Securities $ 45,579
Repricing in 31 to 90 days does not include:
Federal Home Loan Bank Stock $1,034,100
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:
State, County and Municipal
Obligations $ 943 6.51% $3,050 6.68% $1,988 7.03% $ 10,617 5.98%
Mortgage-Backed
Securities $ 9 5.91% $ 53 5.37% $4,961 6.28% $129,021 8.75%
Other $ 0 0.00% $ 142 7.63% $ 0 0.00% $ 0 0.00%
Total $ 952 6.50% $3,245 6.70% $6,949 6.50% $139,638 8.53%
* 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 income
increased dramatically in 1996 compared to 1995 and 1994. The
majority of the profits realized in 1996 were generated in options
and other related transactions. Losses in the investment securities
area occurred in connection with United Security's asset and
liability management activities and disposition of some securities
which were acquired through the Brent Banking Company acquisition.
Options income and other off-balance sheet income rose 124% from
$221,797 to $497,387. Although this income should be considered
non-recurring, it is expected that $224,640 will be recognized in
1997. This income which will be received in 1997 is the result of
early termination of interest rate contracts and the deferred gains
and losses associated with these interest rate risk management
tools and is being amortized over the original life of the hedge.
The table below shows the associated net gains or (losses) for
the periods 1996, 1995, and 1994:
1996 1995 1994
Investment Securities $ (103,644) $ (103,414) $ (34,573)
Trading Account (2,031) 23,215 (97,525)
Options & Off-Balance Sheet Transactions 497,387 221,797 225,228
Total $ 391,712 $ 141,598 $ 93,130
Losses in 1996 from sales of investment securities and trading
account securities were net of gains of $384,287 and $36,250,
respectively. Volume of sales as well as other information on
securities is further discussed in Note C to the 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,
1996 1995 1994
(In Thousands of Dollars)
Investment Securities Held to Maturity:
U.S. Treasury and Agencies Securities $ 0 $ 0 $ 3,252
Obligations of States, Counties, and
Political Subdivisions 0 0 13,144
Mortgage-Backed Securities 0 0 5,631
Other Securities 0 0 100
Total $ 0 $ 0 $ 22,127
Investment Securities Available for Sale:
U.S. Treasury and Agency Securities $ 0 $ 0 $ 992
Obligations of States, Counties, and
Political Subdivisions 15,441 11,989 0
Mortgage-Backed Securities 133,494 114,880 93,928
Other Securities 1,239 1,159 815
Unrealized Gains (Losses) 1,700 986 (5,147)
$151,874 $129,014 $ 90,588
Total $151,874 $129,014 $112,715
The maturities and weighted average yields of investment
securities available-for-sale at the end of 1996 are presented in
the preceding table based on stated maturity. While the average
stated maturity of the Mortgage Backed Securities (excluding CMO's)
was 24.04 years, the average life expected is 12.80 years. The
average stated maturity of the CMO portion of portfolio was 25.47
years, and the average expected life was 16.82 years. The average
expected life of investment securities available-for-sale was 14.86
years with an average yield of 8.37 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:
1996 $22,364
1995 $22,369
1994 $17,652
Weighted Average Interest Rate at Year-End:
1996 5.44%
1995 5.82%
1994 5.90%
Maximum Amount Outstanding at Any Month's End:
1996 $32,571
1995 $26,698
1994 $17,980
Average Amount Outstanding During the Year:
1996 $26,259
1995 $19,657
1994 $10,931
Weighted Average Interest Rate During the Year:
1996 5.49%
1995 6.11%
1994 4.55%
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, 1996,
shareholders' equity totaled $28.8 million, or 12.3% of total
assets compared to 12.8% and 10% for the same periods in 1995 and
1994, respectively. This level of equity indicates to United
Security's shareholders, customers and regulators that United
Security is financially sound and offers the ability to sustain an
appropriate degree of leverage to provide a desirable level of
profitability and growth.
Over the last three years shareholders' equity grew from $19.6
million at the beginning of 1994 to $28.8 million at the end of
1996. All of this growth was the result of internally generated
retained earnings, with the exception of the market value
adjustment of $1,062,247 made for the available for sale
investments as required by Statement of Financial Accounting
Standards No. 115. (See Note A of the Consolidated Financial
Statements for additional information.) The internal capital
generation rate (net income less cash dividends as a percentage of
average shareholders' equity) was 11.9% in 1996, up from 11.6% in
1995.
On May 31, 1996, United Security acquired the assets and
assumed the liabilities of Brent Banking Company of Bibb County.
This transaction had no direct affect on shareholders' equity since
it was a purchase transaction.
United Security is required to comply with capital adequacy
standards established by the Federal Reserve and FDIC. Currently,
there are two basic measures of capital adequacy: a risk-based
measure and a leverage measure.
The risk-based capital standards are designed to make
regulatory capital requirements more sensitive to differences in
risk profile among banks and bank holding companies, to account for
off-balance sheet exposure, and to minimize disincentives for
holding liquid assets. Assets and off-balance sheet items are
assigned to broaden risk categories, each with a specified
risk-weighting factor. The resulting capital ratios represented
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 holding companies. Under the
final rule, institutions are generally directed not to include the
component of common stockholders' equity created by SFAS115, (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 l Capital"). The remainder ("Tier II Capital")
may consist of a limited amount of other preferred stock, mandatory
convertible securities, subordinated debt, and a limited amount of
the allowance for loan losses. The sum of Tier l Capital and Tier
II Capital is "total risk-based capital".
The banking regulatory agencies have also adopted regulations
which supplement the risk based guidelines to include a minimum
leverage ratio of 3% of Tier l Capital to total assets less
goodwill (the "leverage ratio"). Depending upon the risk profile of
the institution and other factors, the regulatory agencies may
require a leverage ratio of 1% or 2% higher than the minimum 3%
level.
The following chart summarizes the applicable bank regulatory
capital requirements. United Security's capital ratios at December
31, 1996, substantially exceeded all regulatory requirements.
Risk-Based Capital Requirements
Minimum United Security's
Regulatory Ratio at
Requirement December 31, 1996
Tier I Capital to Risk-Adjusted Assets 4.00% 20.51%
Total Capital to Risk-Adjusted Assets 8.00% 21.47%
Tier I Leverage Ratio 3.00% 11.57%
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 $1.1 million or $.52 per share compared to $.44
per share in 1995 and $.42 per share in 1994. The total cash
dividends represented a payout ratio of 26.08% in 1996 with a
payout ratio of 26.02% and 27.84% in 1995 and 1994 respectively.
This is the eighth consecutive year that United Security has
increased cash dividends.
Ratio Analysis
The following table presents operating and capital ratios for
each of the last three years.
Year Ended December 31,
1996 1995 1994
Return on Average Assets 1.92% 1.87% 1.82%
Return on Average Equity 16.09% 15.73% 16.87%
Cash Dividend Payout Ratio 26.08% 26.02% 27.84%
Average Equity to Average Assets Ratio 11.91% 11.92% 10.76%
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 $34,967,000 at December 31, 1996.
Investment securities maturing or repricing in the same time
frame totaled $107,886,000 or 71% of the investment portfolio at
year-end 1996. In addition, principal payments on mortgage-backed
securities totaled $3,260,000 in 1996. For repricing purposes,
$1,896,000 in payments have been included in the one year or less
categories in the "Interest Rate Sensitivity Analysis," reflecting
recent prepayment experience.
The liability portion of the balance sheet provides liquidity
through interest-bearing and non-interest bearing deposit accounts.
Federal Funds purchased, securities sold under agreements to
repurchase, 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 general
levels of interest rates.
The balance of cash and cash equivalents increased at December
31, 1996, by $1,883,198. This increase was primarily a result of
net cash received in the acquisition of Brent Banking Company and
lower loan levels. 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 9.37 percent of total
liabilities and equity.
United Security currently has up to $30 million in borrowing
capacity from the Federal Home Loan Bank and $11 million in
established Federal Funds Lines.
Measuring Interest Rate Sensitivity: Gap analysis is a
technique used to measure interest rate sensitivity, an example of
which is presented below. Assets and liabilities are placed in gap
intervals based on their repricing dates. Assets and liabilities
for which no specific repricing dates exist are placed in gap
intervals based on management's judgment concerning their most
likely repricing behaviors. Derivatives used in interest rate
sensitivity management are also included in the applicable gap
intervals.
A net gap for each time period is calculated by subtracting
the liabilities repricing in that interval from the assets
repricing. A positive gap -- more assets repricing than liabilities
- -- will benefit net interest income if rates are rising and will
detract from net interest income in a falling rate environment.
Conversely, a negative gap -- more liabilities repricing than
assets -- will benefit net interest income in a declining interest
rate environment and will detract from net interest income in a
rising interest rate environment.
Gap analysis is the simplest representation of United
Security's interest rate sensitivity. However, it cannot reveal
the impact of factors such as administered rates (e.g., the prime
lending rate), pricing strategies on consumer and business
deposits, changes in balance sheet mix, or the effect of various
options embedded in balance sheet instruments.
The accompanying table shows United Security's rate sensitive
position at December 31, 1996, as measured by gap analysis. Over the
next 12 months approximately $13 million more interest earning
assets than interest bearing liabilities can be repriced to current
market rates at least once. This analysis indicates that United
Security has a positive gap within the next 12 month range and net
interest income should benefit from a rising rate environment
according to the table.
Interest Rate Sensitivity Analysis
December 31, 1996
(In Thousands of Dollars)
0-3 4-12 1-5 Over 5 Non-Rate
Months Months Years Years Sensitive Total
Earning Assets:
Loans $ 19,312 $ 15,717 $ 24,123 $ 5,421 $ 0 $ 64,573
Taxable Investment Securities 105,520 1,422 7,568 20,766 0 135,276
Tax-Exempt Investment Securities 233 711 3,050 12,604 0 16,598
Total Earning Assets $125,065 $ 17,850 $ 34,741 $ 38,791 $ 0 $216,447
Interest-Bearing Liabilities:
Interest-Bearing Demand Deposits
Demand Deposits $ 31,064 $ 0 $ 10,355 $ 0 $ 0 $ 41,419
Savings Deposits 6,517 151 9,775 0 0 16,443
Time Deposits 37,274 32,408 27,694 0 0 97,376
Other Liabilities 22,385 63 336 261 0 23,045
Non-Interest-Bearing Liabilities
Demand Deposits 601 0 0 0 24,094 24,695
Shareholders' Equity 0 0 0 0 13,469 13,469
Total Funding Sources $ 97,841 $ 32,622 $ 48,160 $ 261 $ 37,563 $216,447
Interest Sensitivity Gap (Balance Sheet) $ 27,224 $(14,772) $(13,419) $ 38,530 $(37,563) $ 0
Off-Balance Sheet $ 587 $ 0 $ (587) $ 0 $ 0 $ 0
Interest Sensitive Gap $ 27,811 $(14,772) $(14,006) $ 38,530 $(37,563) $ 0
Cumulative Interest-Sensitive Gap $ 27,811 $ 13,039 $ (967) $ 37,563 $ 0 $ 0
Note: Management adjustments reflects United Security's anticipated
repricing sensitivity of non-maturity deposit products.
Historically, balances on non-maturity deposit accounts have
remained relatively stable despite changes in market interest
rates. Management has classified certain of these accounts as
non-rate sensitive based on a management's historical pricing
practices and runoff experience. Approximately 10% of the
interest-bearing demand deposit account balances and 60% of
the savings account balances are classified as over one year.
Certain interest-sensitive assets and liabilities are included
in the table based on historical repricing experience and
expected prepayments in the case of Mortgage Backed Securities
rather than contractual maturities. Non-accruing loans are
included in loans at the contractual maturity.
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 S 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 Ranges Maturity
1 Pay Fixed $ 587 $ 0 $ 10 Prime Rate 6.80% 21 mos.
Caps and Floors:
Contracts Terms Ranges Maturity
3 Caps Purchased $30,000 $ 297 $ 180 6.45% to 6.75% 19-37 mos.
4 Floors Purchased 25,000 101 10 4.00% to 8.25% 12-24 mos.
2 Caps Sold 20,000 (82) (78) 7.45% 23-37 mos.
$75,587 $ 316 $ 122
Income Taxes
The effective tax rate as a percentage of pre-tax income was
26.3% in 1996 compared to 28.4% and 26.5% in 1995 and 1994,
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".
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, 1996, the Bank had
outstanding standby letters of credit and commitments to make loans
of $6,807,823 and $36,462,517, 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, 1996, the Bank's options written totaled $4,000,000.
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. There were no
commitments to buy or sell securities for delayed delivery as of
December 31, 1996.
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 $839,923 or 9.2% in 1996
compared to 6.9% and 14.5% increases in 1995 and 1994 respectively.
Volume, rate, and yield changes contributed to the growth in net
interest income. Average interest-earning assets increased by $28.7
million or 15.9% in 1996. This increase in interest-earning assets
is partly offset by the volume increase of $25.2 million or 17.4%
in average interest-bearing liabilities. These increases were
mostly due to the Brent Banking Company acquisition. 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 1996, average
interest-earning assets outgained average interest-bearing
liabilities by $3.4 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 4.8% in 1996 compared to 5.1% and 5.2% in 1995
and 1994, 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, as noted in the table "Distribution of Assets,
Liabilities, and Shareholders' Equity, with Interest Rates and
Interest Differentials", increased 17.4% in 1996, while the average
rate of interest paid decreased from 4.83% in 1995 to 4.74% in
1996, a decrease of 9 basis points. Average interest-earning assets
increased 15.9% in 1996, while the average yield decreased from
8.96% in 1995 to 8.68% in 1996, a decrease of 28 basis points. Net
yield on average interest earning assets decreased 26 basis points
from 1995 to 1996. The slower decline in interest rates paid on
liabilities is due in part to the higher rates paid on the time
deposits acquired with Brent Banking Company.
The percentage of earning assets funded by interest-bearing
liabilities also affects the Bank's interest margin. United
Security's earning assets are funded by interest-bearing
liabilities, non-interest bearing demand deposits, and
shareholders' equity. The net return on earning assets funded by
non-interest-bearing demand deposits and shareholders' equity
exceeds the net return on earning assets funded by interest-bearing
liabilities. United Security maintains a relatively consistent
percentage of earning assets funded by interest-bearing
liabilities. In 1996, 81% of the Bank's average earning assets were
funded by interest-bearing liabilities as opposed to 80% in 1995
and 82% in 1994. Net interest income is improved as earning assets
are funded by a decreasing percentage of interest-bearing
liabilities.
Summary of Operating Results
Year Ended December 31,
1996 1995 1994
(In Thousands of Dollars)
Total Interest Income $18,150 $16,167 $14,025
Total Interest Expense 8,067 7,002 5,420
Net Interest Income $10,083 $ 9,165 $ 8,605
Provision for Possible Loan Losses 78 0 29
Net Interest Income After Provision for
Possible Loan Losses $10,005 $ 9,165 $ 8,576
Non-Interest Income 1,435 1,111 1,041
Non-Interest Expense (5,658) (5,229) (5,231)
Income Before Income Taxes $ 5,782 $ 5,047 $ 4,386
Applicable Income Taxes 1,520 1,432 1,161
Net Income $ 4,262 $ 3,615 $ 3,225
Changes in Interest Earned and Interest Expense Resulting from
Changes in Volume and Changes in Rates
1996 Compared to 1995 1995 Compared to 1994 1994 Compared to 1993
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 $ 605 $ (74) $ 531 $ 98 $ 595 $ 693 $ 368 $ (73) $ 295
Taxable Investments 1,735 (348) 1,387 1,089 239 1,328 1,009 525 1,534
Non-Taxable
Investments 102 (70) 32 73 9 82 119 (39) 80
Federal Funds 38 (5) 33 34 5 39 (52) 14 (38)
Total Interest-
Earning Assets $2,480 $(497) $1,983 $1,294 $ 848 $2,142 $1,444 $ 427 $1,871
Interest Expense On:
Demand Deposits $ 140 $ (32) $ 108 $ (82) $ (3) $ (85) $ 41 $ (63) $ (22)
Savings Deposits 34 (35) (1) 10 0 10 40 (1) 39
Time Deposits 829 75 904 296 735 1,031 105 57 162
Other Liabilities 201 (147) 54 370 256 626 434 165 599
Total Interest-
Bearing Liabilities $1,204 $(139) $1,065 $ 594 $ 988 $1,582 $ 620 $ 158 $ 778
Increase in Net
Interest Income $1,276 $(358) $ 918 $ 700 $(140) $ 560 $ 824 $ 269 $1,093
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 charge-offs
exceeded recoveries by $114,128 during the year. Management
transferred $78,000 from earnings plus an addition of $423,251 from
the Brent Bank acquisition. The provision for possible loan losses
increased to 1.80% of total loans up from 1.40% in 1995. 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 4.8% in 1996
compared to a 1.2% increase in 1995 and a 2.8% decrease in 1994.
The increase in service charge income resulted primarily from the
increases in the number of deposit accounts, mostly because of the
Brent Bank acquisition, and changes in products and pricing of
certain deposit accounts and related services. Insurance premiums
and commissions income continued to decline. This income is
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 includes safe deposit box fees,
credit and debit card fees, letters of credit fees, and other
customer charges and income generated from the Bond Division formed
during the latter part of 1996. Other income increased to $169,086
in 1996 and accounted for 16.2% of non-interest income (excluding
security related income) compared to 13.2% in 1995 and 11.1% in
1994. The newly formed Bond Division contributed $16,233 to
non-interest income; however, a more significant contribution from
the Bond Division is expected in 1997.
Non-recurring items of non-interest income include all the
securities gains (losses) discussed previously. Investment
securities had a total loss of $103,644 in 1996 compared to a
$103,414 loss in 1995 and a $34,573 loss in 1994. The investment
securities loss of $103,644 and the trading securities loss of
$2,031 in 1996 was offset by an option income of $497,387 in 1996.
The combination of these accounts yielded a net income of $391,712
in securities related non-interest income in 1996 compared to
$141,598 in 1995, and $93,130 in 1994. 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 investments portfolio strategies, interest
rate changes, and the short, intermediate, and long-term outlook
for the economy. The investment strategy for the past three years
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. Management
expects this strategy to continue to 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's non-interest expense was impacted by the Brent Banking
Company acquisition within the last half of 1996 and to a limited
extent, the start-up of a new bond division within the last quarter
of 1996.
The ratio of non-interest expenses to average assets continues
to improve even with the June, 1996 acquisition of Brent Banking
Company because the acquisition's impact on average assets is more
immediate than the impact on non-interest expenses. United Security
Bank's total non-interest expense as a percentage of average assets
was 2.5%, 2.7%, and 3.0% in 1996, 1995, and 1994, respectively.
Specific areas of non-interest expense such as salaries and
intangible asset amortization were, however, significantly
increased.
Salaries increased $325,100 or 13.60% in 1996. $209,817 of
this increase was the direct result of the Brent Bank acquisition
and the start-up of the Bond Division. At December 31, 1996, United
Security had 107 full-time equivalent employees compared to 90 in
1995 and 94 in 1994. The 17 employee increase is due to 15
employees being added with the Brent Bank acquisition and two
additions due to the Bond Division start up. Even so, United
Security's assets per employee remained $2.2 million in 1996
compared to $2.2 million in 1995 and $2.0 million in 1994, and
deposits per employee increased to $1.7 million in 1996 from $1.6
million in 1995 and $1.5 million in 1994. Improvements in these
employee productivity measurements is a result of effective
utilization of human resources, investments in technology, and a
concerted effort to carefully manage employee levels.
The amortization of intangible assets has a significant
increase of $69,897 in 1996 due to the acquisition of Brent Banking
Company. Goodwill, organization cost, and core deposit intangibles
are included in the intangible assets and are amortized over a
maximum of twenty years.
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 $108,776 or 14.7% in 1996,
$94,829 or 10.4% in 1995, and $85,902 or 10% in 1994.
Occupancy expense includes depreciation, rents, utilities,
maintenance, insurance, taxes, and other expenses associated with
the nine buildings occupied by United Security as well as the
vacant building adjacent to the Main Office. Occupancy expense
increased 14.5% in 1996, which can also be attributed to the
acquisition of Brent Bank.
Furniture and equipment expense increased 3.9% in 1996, 3.9%
in 1995, and 2.9% in 1994. 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 the investments will have a short-term impact on
equipment depreciation expense, management expects that long-term
cost savings will be realized in the area of employee productivity,
stationery and supplies, postage and communication expense. It is
for this reason that expenditures in new banking technology will
continue.
Other expenses consist 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 total of these
categories of expenses continues to decline. The decline of 5.2% in
1996 and 3.6% in 1995 can be directly attributed to the reduction
in the FDIC insurance premium expense.
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, 1996 and 1995, and the related consolidated statements
of income, shareholders' equity, and cash flows for each of the
three years in the period ended December 31, 1996. 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, 1996 and 1995, and the consolidated
results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity
with generally accepted accounting principles.
/s/ Smith, Dukes & Buckalew, L.L.P.
Mobile, Alabama
January 17, 1997
UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CONDITION
December 31, 1996 and 1995
1996 1995
ASSETS
Cash and due from banks $ 8,233,120 $ 5,749,922
Federal Funds sold -0- 600,000
Total cash and cash equivalents 8,233,120 6,349,922
Investment securities available for sale 150,839,464 127,876,055
Other investments 1,034,100 1,138,200
Loans 66,294,023 55,469,552
Unearned interest on loans (529,631) (487,995)
Allowance for possible loan losses (1,191,171) (778,391)
Loans, net 64,573,221 54,203,166
Premises and equipment 4,118,562 3,616,182
Accrued interest receivable 1,570,844 1,594,147
Other assets 4,821,812 2,690,100
Total assets $235,191,123 $197,467,772
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Demand -- non-interest bearing $ 24,694,668 $ 24,365,287
Demand -- interest bearing 33,425,315 23,125,800
Savings 16,442,903 14,800,275
Time, $100,000 and over 25,063,835 18,243,648
Other time 80,299,006 65,979,705
Total deposits 179,925,727 146,514,715
Federal funds purchased 1,375,000 -0-
U.S. Treasury tax and loan 988,975 369,272
Other borrowings 20,000,000 22,000,000
Dividend payable 277,935 235,176
Accrued interest payable 909,313 792,077
Other liabilities 2,207,438 1,563,396
Long-term debt 680,556 763,889
Total liabilities 206,364,944 172,238,525
SHAREHOLDERS' EQUITY
Common stock, $.01 par value per share,
2,400,000 shares authorized; 2,202,060
shares issued 22,021 22,021
Surplus 5,761,552 5,761,552
Net unrealized gain on available
for sale securities 1,062,247 616,295
Retained earnings 22,234,779 19,083,799
Treasury stock, at cost -- 64,100 shares (254,420) (254,420)
28,826,179 25,229,247
Total liabilities and shareholders'
equity $235,191,123 $197,467,772
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, 1996, 1995 and 1994
1996 1995 1994
INTEREST INCOME
Interest and fees on loans $ 6,058,873 $ 5,527,989 $ 4,835,402
Interest on investment securities:
Taxable -0- 352,649 809,396
Tax-exempt -0- 475,504 834,756
Dividends -0- -0- 6,186
-0- 828,153 1,650,338
Interest on investment securities
available for sale:
Taxable 11,008,350 9,243,855 7,258,866
Tax-exempt 948,802 441,846 -0-
Dividends 400 5,000 -0-
Interest on trading account
securities 8,844 13,177 40,798
Interest on federal funds sold 81,673 49,171 9,853
Interest on rate swaps (net) 43,093 58,072 230,294
Total interest income 18,150,035 16,167,263 14,025,551
INTEREST EXPENSE
Interest on deposits 6,579,787 5,569,434 4,612,775
Interest on short-term borrowings 1,440,485 1,202,557 497,681
Interest on long-term debt 46,806 230,238 309,734
Total interest expense 8,067,078 7,002,229 5,420,190
NET INTEREST INCOME 10,082,957 9,165,034 8,605,361
PROVISION FOR POSSIBLE LOAN LOSSES 78,000 -0- 28,936
NET INTEREST INCOME AFTER PROVISION
FOR POSSIBLE LOAN LOSSES 10,004,957 9,165,034 8,576,425
NON-INTEREST INCOME
Service and penalty charges on
deposit accounts 855,124 816,153 806,620
Credit life insurance commissions 19,318 25,470 35,384
Other income 169,086 128,113 105,561
Investment securities gains
(losses), net (103,644) (103,414) (34,573)
Trading securities gains (losses), net (2,031) 23,215 (97,525)
Other securities related income 497,387 221,797 225,228
1,435,240 1,111,334 1,040,695
NON-INTEREST EXPENSES
Salaries and wages 2,715,969 2,390,869 2,352,929
Employee benefits 395,734 352,735 352,026
Occupancy expense 350,470 306,111 314,011
Furniture and equipment expense 682,433 656,697 631,968
Stationery and operating supplies 136,648 130,294 135,226
FDIC assessment 1,500 190,264 301,559
Telephone expense 170,897 162,838 168,782
Amortization 75,001 5,104 22,909
Other expenses 1,129,126 1,034,365 951,448
5,657,778 5,229,277 5,230,858
Income before income taxes 5,782,419 5,047,091 4,386,262
Applicable income taxes 1,519,700 1,432,000 1,161,000
Net income $ 4,262,719 $ 3,615,091 $ 3,225,262
Average number of shares outstanding 2,137,960 2,137,960 2,137,920
Net income per common share $ 1.99 $ 1.69 $ 1.51
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, 1996, 1995 and 1994
1996 1995 1994
COMMON STOCK
Balance at January 1 $ 22,021 $ 137,628 $ 137,628
Reduction of par value from $.25
per share to $.01 per share -0- (115,607) -0-
Balance at December 31 22,021 22,021 137,628
SURPLUS
Balance at January 1 5,761,552 5,645,945 5,645,715
Sale of 134 shares treasury stock -0- -0- 230
Reduction of par value from $.25
per share to $.01 per share -0- 115,607 -0-
Balance at December 31 5,761,552 5,761,552 5,645,945
RETAINED EARNINGS
Balance at January 1 19,083,799 16,409,411 14,082,092
Net income 4,262,719 3,615,091 3,225,262
Dividends:
1994 -- $.42 per share -0- -0- (897,943)
1995 -- $.44 per share -0- (940,703) -0-
1996 -- $.52 per share (1,111,739) -0- -0-
Balance at December 31 22,234,779 19,083,799 16,409,411
TREASURY STOCK, at cost
Balance at January 1 (254,420) (254,420) (254,420)
Purchase of 134 shares -0- -0- 4,862
Sale of 134 shares -0- -0- (4,862)
Balance at December 31 (254,420) (254,420) (254,420)
NET UNREALIZED GAIN (LOSS) ON
AVAILABLE FOR SALE SECURITIES
Balance at January 1 616,295 (3,217,137) -0-
Effect of adoption of FAS 115 -0- -0- 266,972
Net change in unrealized gain (loss) 445,952 3,833,432 (3,484,109)
Balance at December 31 1,062,247 616,295 (3,217,137)
Total shareholders' equity $28,826,179 $25,229,247 $18,721,427
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, 1996, 1995 and 1994
1996 1995 1994
Cash flows from operating activities:
Net income $ 4,262,719 $ 3,615,091 $ 3,225,262
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 417,780 414,471 437,505
Provision for possible loan losses 78,000 -0- 28,936
Deferred income taxes 55,420 74,778 43,008
Amortization of intangible assets 75,001 5,104 22,909
Investment securities losses 103,644 103,414 34,573
Loss (gain) on sale of premises
and equipment 1,004 (4,425) (815)
Loss on sale of other real estate -0- 15,501 7,751
Net securities premium amortization 1,233,462 780,239 1,207,661
Decrease in trading securities -0- -0- 1,980,000
(Increase) decrease in:
Interest receivable 270,171 259,839 (398,734)
Other assets 144,671 (620,362) (617,624)
Increase (decrease) in:
Interest payable (5,851) (8,570) 229,450
Other liabilities 306,907 207,617 (328,691)
Net cash provided by operating
activities 6,942,928 4,842,697 5,871,191
Cash flows from investing activities:
Purchases of investment securities
available for sale (56,778,937) (51,466,914) (71,547,140)
Proceeds from sales of investment
securities available for sale 34,584,320 38,699,021 39,234,730
Proceeds from maturities and
prepayments of investment
securities available for sale 4,933,910 2,952,139 12,422,395
Purchase of investment securities -0- (1,397,040) (2,904,751)
Proceeds from maturities and prepayments
of investment securities -0- 506,931 5,481,033
Proceeds from redemptions of FHLB Stock 503,000 102,100 -0-
Purchases of FHLB Stock (398,900) (434,800) (10,000)
Net cash received in acquisition of bank 8,605,941 -0- -0-
Net decrease (increase) in loans 4,965,532 2,530,254 (3,817,178)
Purchase of premises and equipment (192,656) (154,812) (416,688)
Proceeds from sales of premises and equipment 28,542 5,412 815
Proceeds from sale of other real estate -0- 39,500 82,964
Net cash used in investing activities (3,749,248) (8,618,209) (21,473,820)
Cash flows from financing activities:
Net increase (decrease) in demand
and savings deposits (2,795,676) (2,106,514) 5,522,142
Net increase in time deposits 2,642,805 6,337,288 4,242,382
Net (decrease) increase in short-term
borrowings (5,297) 4,717,184 8,936,156
Repayment of long-term debt (83,333) (5,083,333) (83,334)
Dividends paid (1,068,981) (930,014) (867,818)
Acquisition of treasury stock -0- -0- (4,862)
Sale of treasury stock -0- -0- 5,091
Net cash (used in) provided by
financing activities (1,310,482) 2,934,611 17,749,757
Net increase (decrease) in cash
and cash equivalents 1,883,198 (840,901) 2,147,128
Cash and cash equivalents, beginning of year 6,349,922 7,190,823 5,043,695
Cash and cash equivalents, end of year $ 8,233,120 $ 6,349,922 $ 7,190,823
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 7,949,842 $ 7,010,799 $ 5,190,740
Income taxes $ 1,546,522 $ 1,358,486 $ 1,115,801
Supplemental schedule of noncash investing
and financing activities:
Dividends declared but unpaid $ 277,935 $ 235,176 $ 224,486
Sales of other real estate financed
by the Bank $ -0- $ 35,500 $ -0-
Transfer of securities from held to
maturity to available for sale $ -0- $ 23,073,766 $ 5,785,905
UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Years Ended December 31, 1996, 1995 and 1994
The purchase of the stock of Brent Banking Company as of June
1, 1996, resulted in an increase in the following assets and
liabilities:
1996 1995 1994
Assets Acquired (Fair Value)
Investment securities available for sale $ 6,337,938 $ -0- $ -0-
Loans 15,413,587 -0- -0
Premises and equipment 757,050 -0- -0-
Accrued interest receivable 246,868 -0- -0-
Other assets 2,339,731 -0- -0-
Liabilities Assumed and Savings Deposits
Demand deposits 15,067,200 -0- -0-
Time deposits 18,496,683 -0- -0-
Accrued interest payable 123,088 -0- -0-
Other liabilities 14,144 -0- -0-
Net cash received $ 8,605,941 $ -0- $ -0-
The Notes to Consolidated Financial Statements are an integral part of these statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, Wilcox, Bibb, Jefferson, Shelby, Chilton, Hale,
Tuscaloosa, Monroe and Perry Counties in Alabama as well as Clarke,
Lauderdale, and Wayne Counties in Mississippi.
Note A -- Summary of Significant Accounting Policies
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 Statement of Financial
Accounting Standards No. 115, Accounting for Certain Investments in
Debt and Equity Securities (SFAS115) 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
SFAS115 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, SFAS115
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 SFAS115 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 are included in other
assets and are amortized straight-line over the life of the
agreement. Changes in the estimated fair values 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 and has
performed in accordance with the contractual terms for a reasonable
period of time and the ultimate collectibility of the total
contractual principal and interest is no longer in doubt.
Allowance for possible loan losses
The allowance for 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 do 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 is
significant enough to ensure the performance of the loan under the
original terms of the agreement. The Bank generally will charge-off
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.
Intangible Assets
Goodwill, organization cost, and core deposit intangibles are
included in other assets and are amortized using the straight-line
method. Goodwill is being amortized over twenty years, organization
cost over five years, and core deposits from six to ten 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 L.
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
$4,051,429 in 1996 and $3,215,232 in 1995.
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, 1996 and 1995 are as follows:
1996 1995
Amortized Market Amortized Market
Cost Value Cost Value
Investment securities available for sale:
Obligations of states, counties,
and political subdivisions $ 15,440,811 $ 16,598,295 $ 11,989,206 $ 13,430,403
Mortgage-backed securities 133,494,458 134,043,841 114,879,683 114,424,053
Corporate notes 149,580 141,822 -0- -0-
Other -- non-debt 55,019 55,506 21,093 21,599
149,139,868 150,839,464 126,889,982 127,876,055
Other investments:
Federal Home Loan Bank Stock 1,034,100 1,034,100 1,138,200 1,138,200
Total $150,173,968 $151,873,564 $128,028,182 $129,014,255
Unrealized gains and losses on investment securities and investment
securities available for sale at December 31, 1996 and 1995 are as
follows:
1996 1995
Unrealized Unrealized Unrealized Unrealized
Gains Losses Gains Losses
Investment securities available for sale:
Obligations of states, counties,
and political subdivisions $ 1,165,882 $ 8,398 $ 1,441,197 $ -0-
Mortgage-backed securities 3,123,619 2,574,236 3,518,259 3,973,889
Corporate notes -0- 7,758 -0- -0-
Other -- non-debt 487 -0- 506 -0-
Total $ 4,289,988 $ 2,590,392 $ 4,959,962 $ 3,973,889
The maturity of the debt securities are presented in the following
table:
1996
Amortized Market
Cost Value
Investment securities available for sale:
Maturing within one year $ 934,774 $ 951,673
Maturing after one but before five years 3,098,763 3,245,150
Maturing after five but before ten years 7,007,263 6,949,017
Maturing after ten years 138,044,049 139,638,118
Total $149,084,849 $150,783,958
Proceeds from sales of investment securities available for sale
were $34,584,320 in 1996, $38,699,021 in 1995, and $39,234,730 in
1994. Gross gains realized on those sales were $384,287 in 1996,
$511,610 in 1995, and $604,634 in 1994. Gross losses realized on
those sales were $487,931 in 1996, $615,024 in 1995, and $639,207
in 1994.
Proceeds from sales of debt securities in the trading accounts were
$6,312,656 in 1996, $19,197,227 in 1995, and $21,634,133 in 1994.
Gross realized gains on those sales were $36,250 in 1996, $84,125
in 1995, and $156,382 in 1994. Gross realized losses on those sales
were $38,281 in 1996, $60,910 in 1995, and $253,907 in 1994.
Investment securities with a carrying value of $55,814,676 and
$37,085,102 at December 31, 1996 and 1995, 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 SFAS115.
Note D -- Loans
At December 31, 1996 and 1995, the composition of the loan
portfolio was as follows:
1996 1995
Commercial, financial, and agricultural $37,133,563 $34,107,901
Real estate mortgage 23,632,610 16,267,120
Installment 5,527,850 5,094,531
Total $66,294,023 $55,469,552
Maturities of loan balances (excluding installment loans) are as
follows:
1996
Maturing
After
One Year
Within But Within After
One Year Five Years Five Years Total
Commercial, financial and
agricultural $24,055,148 $ 9,623,604 $ 3,454,811 $37,133,563
Real estate mortgage 5,839,845 13,729,720 4,063,045 23,632,610
Total $29,894,993 $23,353,324 $ 7,517,856 $60,766,173
1995
Maturing
After
One Year
Within But Within After
One Year Five Years Five Years Total
Commercial, financial and
agricultural $25,350,901 $ 8,305,000 $ 452,000 $34,107,901
Real estate mortgage 3,281,120 9,585,000 3,401,000 16,267,120
Total $28,632,021 $17,890,000 $ 3,853,000 $50,375,021
The Bank grants commercial, real estate, and installment loans
to customers primarily in Clarke, Choctaw, Marengo, Sumter,
Washington, Wilcox, Bibb, Jefferson, Shelby, Chilton, Hale, and
Perry 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, 1996, approximately
$18.7 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 $8.8 million to employees of those
industries.
Loans on which the accrual of interest has been discontinued
amounted to $852,447 and $169,064 at December 31,1996 and 1995,
respectively. If interest on those loans had been accrued, such
income would have approximated $57,939 and $22,727 for 1996 and
1995, respectively. Interest income actually recorded on those
loans amounted to $16,990, $10,407 and $44,378 for 1996, 1995 and
1994, respectively.
Note E -- Allowance for Possible Loan Losses
A summary of the transactions in the allowance for possible loan
losses follows:
1996 1995 1994
Balance at beginning of year $ 778,391 $ 772,000 $ 750,000
Acquired in branch acquisition 423,251 -0- -0-
Provision for possible loan losses 78,000 -0- 28,936
Loans charged off (202,599) (84,786) (79,946)
Recoveries of loans previously charged off 114,128 91,177 73,010
Balance at end of year $1,191,171 $ 778,391 $ 772,000
At December 31, 1996, the Company had one loan considered to be
impaired. The amount of this loan which is on non-accrual is
$557,345 and the related allowance is $55,000. The average recorded
investment in impaired loans during the year ended December 31,
1996 was approximately $371,000. For the year ended December 31,
1996, the Company did not recognize interest income on the impaired
loan during the period the loan was considered impaired. The
Company had no loans considered to be impaired at December 31,
1995.
Note F -- Premises and Equipment
Premises and equipment are summarized as follows:
December 31,
1996 1995
Land $ 447,554 $ 372,554
Premises 4,372,205 3,727,205
Furniture, fixtures and equipment 3,485,865 3,327,582
8,305,624 7,427,341
Less accumulated depreciation 4,187,062 3,811,159
Total $4,118,562 $3,616,182
Depreciation expense of $417,780, $414,671 and $437,505, was
recorded in 1996, 1995, and 1994, 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 reflected in other assets on the balance sheet and
are as follows:
Current
Year
Percentage Income Carrying Amount
Ownership (Loss) 1996 1995
Guilford Affordable Housing
Fund I 27.5% $(113,896) $ 886,104 $ 820,000
Guilford Affordable Housing
Fund VII 49.5% (16,642) 883,358 750,000
Guilford Affordable Housing
Fund VIII 5% (5,610) 74,390 80,000
Guilford Affordable Housing
Fund XI 5% (936) 134,064 80,000
$(137,084) $1,977,916 $1,730,000
The assets and liabilities of these partnerships consists 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, 1996 in the amount of $885,000.
Note H -- Other Real Estate
Other real estate aggregated $2 at December 31, 1996 and 1995,
respectively, and is included in other assets on the Consolidated
Statements of Condition.
Note I -- Deposits
At December 31, 1996, the scheduled maturities of the Bank's time
deposits are as follows:
1997 $ 78,315,715
1998 12,448,055
1999 6,949,244
2000 6,381,911
2001 and thereafter 1,267,916
$105,362,841
Note J -- 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 amount of $20,000,000 and $22,000,000
at December 31, 1996 and 1995, respectively, consists of loans from
the Federal Home Loan Bank. The cost of these borrowings during
1996 and 1995 varied from 2.00% to 5.70% and 3.20% to 6.40%,
respectively. Investment securities are pledged to secure these
borrowings.
Note K -- Long-Term Debt
Long-term debt consist of a 6.5% note from Federal Home Loan Bank.
The note 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:
1997 $ 83,333
1998 83,333
1999 83,333
2000 83,333
2001 83,333
Thereafter 263,891
Note L -- 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 have
been restated to reflect the stock split.
Note M -- Income Taxes
For the years ended December 31, 1996, 1995 and 1994, income tax
expense attributable to income from operations consists of:
Year Ended December 31,
1996 1995 1994
Currently payable:
Federal $1,245,390 $1,173,037 $ 984,734
State 218,890 184,185 133,258
Total 1,464,280 1,357,222 1,117,992
Deferred:
Federal 49,310 73,963 38,266
State 6,110 815 4,742
Total 55,420 74,778 43,008
Total income taxes:
Federal 1,294,700 1,247,000 1,023,000
State 225,000 185,000 138,000
Total $1,519,700 $1,432,000 $1,161,000
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:
1996 1995 1994
Percent Percent Percent
of Pretax of Pretax of Pretax
Amount Earnings Amount Earnings Amount Earnings
Income tax expense
at Federal
statutory rate $1,966,022 34.0% $1,716,011 34.0% $1,491,329 34.0%
Increase (decrease)
resulting from:
Tax-exempt
interest (347,241) (6.0%) (334,021) (6.6%) (307,824) (7.0%)
State income tax
expense net of
Federal income
tax benefit 148,500 2.6% 122,100 2.4% 91,080 2.1%
Tax credits (low
income housing) (275,000) (4.8%) (125,000) (2.5%) (120,000) (2.7%)
Other 27,419 0.5% 52,910 1.1% 6,415 0.1%
Income tax expense $1,519,700 26.3% $1,432,000 28.4% $1,161,000 26.5%
The sources of timing differences and the resulting net deferred
income taxes were as follows:
1996 1995 1994
Provision for depreciation $ 16,389 $ 13,001 $ (9,172)
Provision for possible loan losses 29,351 -0- 3,289
Unrealized loss on trading securities -0- -0- 38,158
Accretion not taxable 9,680 7,487 10,733
Sale of other real estate -0- 16,833 -0-
Other differences -- net -0- 37,457 -0-
Total $ 55,420 $ 74,778 $ 43,008
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax
liabilities at December 31, 1996 and 1995, are presented below:
1996 1995
Deferred tax assets:
Allowance for loan losses $ 179,230 $ 70,726
Accrued vacation 22,001 22,001
Capital loss carryover 23,138 -0-
Total assets 224,369 92,727
Deferred tax liabilities:
Premises and equipment 530,899 374,055
Unrealized gain on securities available for sale 615,594 361,576
Other deferred tax liabilities 75,272 49,347
Total liabilities 1,221,765 784,978
Net deferred tax liability $ 997,396 $692,251
The Company believes that the deferred tax assets are recoverable.
Note N -- 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 Company 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 towards the purchase of Company stock. The Company
made matching contributions totaling $108,776, $94,829 and $85,902
in 1996, 1995, and 1994, respectively.
Note O -- 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
$991,075 and $1,957,884 at December 31,1996 and 1995, respectively.
During 1996 $441,190 of new loans were made, and repayments totaled
$1,407,999.
These parties also maintained deposits in the Bank of $2,961,426 at
December 31, 1996.
Note P -- 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 preceding years. As of
December 31, 1996, approximately $8,193,418 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 1996 and 1995 with the minimum bank regulatory capital
requirements.
Minimum
Regulatory United Security Bank
Requirement 1996 1995
Tier I capital to risk - adjusted assets 4.00% 20.51% 23.69%
Total capital to risk - adjusted assets 8.00% 21.47% 24.44%
Tier I leverage ratio 3.00% 11.57% 12.46%
Note Q -- Operating Leases
The Company leases office space, data processing and other
equipment under operating leases.
The following is a schedule by years of future minimum rental
payments required under operating leases having initial or
remaining noncancelable terms in excess of one year as of December
31, 1996:
Year ending December 31,
1997 $155,136
1998 103,619
1999 28,123
2000 225
2001 -0-
Total rental expense under all operating leases was $140,346,
$129,065, and $131,280, in 1996, 1995, and 1994, respectively.
Note R -- 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 S -- 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, 1996, the Bank estimates its credit
risk on purchased caps and floors in the event of total
counterparty default to be $428,334. All of the Bank's financial
instruments are held for risk management and not for trading
purposes.
At December 31, 1996 and 1995, derivative financial instruments
with off-balance sheet risk are summarized as follows:
Contract Amount
1996 1995
Financial instruments whose contractual
amounts represent credit risk:
Commitments to make loans $36,462,517 $28,329,347
Standby letters of credit $ 6,807,823 $ 1,352,853
Financial instruments whose credit risk
is less than contractual amounts:
Options written $ 4,000,000 $ 2,000,000
Commitments to purchase securities
for delayed delivery $ -0- $ 1,268,500
Commitments to sell securities
for delayed delivery $ -0- $ 3,900,100
Interest rate swap agreements $ 586,646 $10,890,343
Interest rate floors purchased $25,000,000 $35,000,000
Interest rate caps purchased $30,000,000 $58,089,029
Interest rate caps written $20,000,000 $10,000,000
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. Upon issuance of standby letters of credit, note agreements
with provisions for collateral are generally signed.
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. There were no commitments outstanding at December 31, 1996.
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 floors to
protect CMO floaters and variable rate loans against a decline in
rates. The Bank uses caps purchased to partially hedge against
rising interest rates on their floating rate short term borrowings
and to un-cap a portion of their floating rate CMO portfolio. They
also use caps purchased matched with sold caps to raise by 100
basis points the cap on certain CMO floaters. These matches are
also referred to as "corridors". The cost of the caps and floors
are amortized straight-line over the life of these instruments. The
income derived from these instruments is recorded on the accrual
basis. The income and amortization from these instruments is
recorded in net interest income and resulted in a reduction in net
interest income of $238,900, $42,985, and $114,380 in 1996, 1995,
and 1994, respectively.
The following table details various information regarding swaps,
caps and floors used for purposes other than trading as of December
31, 1996.
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 $ 586,646 $ -0- $ 10,378 8.53% 6.80% 1.71 90
Caps:
Purchased 30,000,000 297,040 180,206 .00% N/A 2.13 30 - 90
Sold 20,000,000 (81,827) (78,228) N/A .00% 2.44 30
Floors
purchased 25,000,000 101,143 10,000 .00% N/A 1.38 30 - 90
$75,586,646 $316,356 $122,356
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,
1996, 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 $ 586,646 $586,646 $ -0- $ -0-
Caps:
Purchased 30,000,000 -0- 10,000,000 20,000,000
Sold 20,000,000 -0- 10,000,000 10,000,000
Floors purchased 25,000,000 -0- 25,000,000 -0-
$75,586,646 $586,646 $45,000,000 $30,000,000
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 $365,492, as of December 31, 1996.
Those amounts are scheduled to be amortized into income in the
following periods: $224,640 gain in 1997, $82,572 gain in 1998 and
$58,280 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 T -- Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, Disclosures
about Fair Value of Financial Instruments (SFAS107) 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.
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 values 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
equal to the carrying value of such deposits. Demand deposits
include noninterest bearing demand deposits, savings accounts, NOW
accounts and money market demand accounts.
Time Deposits: The fair value of relatively short-term time
deposits is equal to their carrying values. Discounted cash flows
have been used to value long-term time deposits. The discount rate
used is based on interest rates currently being offered by the Bank
on comparable deposits as to amount and term.
Short-term borrowings: These borrowings 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 values approximate carrying values.
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, 1996 At December 31, 1995
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
Financial Instruments:
Assets:
Cash and due from
banks $ 8,233,120 $ 8,233,120 $ 5,749,922 $ 5,749,922
Federal funds sold -0- -0- 600,000 600,000
Investment securities
available for sale 150,839,464 150,839,464 127,864,402 127,864,402
Other investments -
FHLB stock 1,034,100 1,034,100 1,138,200 1,138,200
Accrued interest
receivable 1,570,844 1,570,844 1,594,147 1,594,147
Loans, net 64,573,221 66,673,221 54,203,166 54,583,000
Off balance sheet
instruments 316,356 113,000 660,473 1,343,570
Liabilities:
Demand and savings
deposits 74,562,886 74,562,886 62,291,362 62,291,362
Time deposits 105,362,841 105,805,000 84,223,353 84,521,000
Short-term borrowings 23,738,975 23,738,975 22,369,272 22,369,272
Accrued interest payable 909,313 909,313 792,077 792,077
FHLB long-term debt 680,556 654,000 763,889 746,000
Note U -- Mergers and Acquisitions
On May 31, 1996, the Company completed the acquisition of Brent
Banking Company of Brent, Alabama in a cash transaction. The
acquisition was accounted for as a purchase. At the date of
acquisition, Brent had assets of $38.4 million and equity of $4.5
million. The cash purchase price was $7.05 million for all of the
outstanding shares of Brent. The total purchase price exceeded the
fair value of net assets acquired by approximately $2.3 million
which is being amortized over 20 years as goodwill. On August 19,
1996, the Company signed a definitive agreement to merge with First
Bancshares, Inc. (FBI) of Grove Hill, Alabama. The agreement calls
for the exchange of 5.8321 shares of United Security Bancshares for
each share of FBI for a total of 1,398,788 shares to be exchanged
for 100% of the FBI common stock. At December 31, 1996, FBI had
assets of approximately $195.2 million and equity of approximately
$18.8 million. The transaction is subject to regulatory and
shareholder approval and is to be accounted for under the
pooling-of-interests method of accounting.
Note V -- United Security Bancshares, Inc. (Parent Company Only)
Financial Information
Balance Sheets
December 31,
1996 1995
ASSETS
Cash on deposit $ 7,099 $ 41,801
Dividend receivable 277,935 235,176
Investment in United Security Bank 28,773,501 25,175,793
Investments available for sale 45,579 11,653
$29,104,114 $25,464,423
LIABILITIES
Dividend payable $ 277,935 $ 235,176
SHAREHOLDERS' EQUITY 28,826,179 25,229,247
$29,104,114 $25,464,423
Statements of Income
Year Ended December 31,
1996 1995 1994
Income
Dividends received:
Subsidiary $1,141,739 $ 990,703 $ 897,943
Other 400 5,000 6,186
Interest income 4,621 583 793
Total income 1,146,760 996,286 904,922
Expenses 35,798 44,229 8,285
INCOME BEFORE EQUITY IN
UNDISTRIBUTED INCOME OF
SUBSIDIARY 1,110,962 952,057 896,637
Equity in undistributed
income of subsidiary 3,151,757 2,663,034 2,328,625
Net income $4,262,719 $3,615,091 $3,225,262
Statements of Cash Flows
Year Ended December 31,
1996 1995 1994
CASH FLOWS FROM
OPERATING ACTIVITIES
Net income $ 4,262,719 $ 3,615,091 $ 3,225,262
Adjustments to reconcile net income to net
cash provided by operating activities:
Undistributed income of subsidiary (3,151,757) (2,663,034) (2,328,625)
Increase in dividend receivable (42,759) (10,690) (30,126)
Decrease in other assets -0- 17,019 -0-
Decrease in other liabilities -0- (6,000) -0-
Net cash provided by operating activities 1,068,203 952,386 866,511
CASH FLOWS FROM
INVESTING ACTIVITIES
Purchase of investment securities
available for sale (33,926) (6,653) -0-
CASH FLOWS FROM
FINANCING ACTIVITIES
Purchase of treasury stock -0- -0- (4,862)
Sale of treasury stock -0- -0- 5,091
Cash dividends paid (1,068,980) (930,012) (867,818)
Net cash used in financing activities (1,068,980) (930,012) (867,589)
Increase (decrease) in cash (34,703) 15,721 (1,078)
Cash at beginning of year 41,802 26,081 27,159
Cash at end of year $ 7,099 $ 41,802 $ 26,081
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, 1996.
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,
1996.
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, 1996.
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, 1996.
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, 1996 and 1995.
Consolidated Statements of Shareholders" Equity,
December 31, 1996, 1995, and 1994.
Consolidated Statements of Income,
December 31, 1996, 1995, and 1994.
Consolidated Statements of Cash Flows,
December 31, 1996, 1995, and 1994.
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.
(10)(d) Agreement and Plan of Merger dated as of
August 19, 1996, incorporated by
reference to Registrant's Form S-4
(No. 333-2124) filed February 6, 1997.
(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, 1996.
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 18, 1997
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 18, 1997
Jack M. Wainwright, III Officer, and Director
(Principal Executive Officer)
/s/ Larry M. Sellers Treasurer March 18, 1997
Larry M. Sellers (Principal Financial Officer
Principal Accounting Officer)
/s/ Gerald P. Corgill Director March 18, 1997
Gerald P. Corgill
Director
Roy G. Cowan
/s/ William G. Harrison Director March 18, 1997
William G. Harrison
/s/ Hardie B. Kimbrough Director March 18, 1997
Hardie B. Kimbrough
/s/ James L. Miller Director March 18, 1997
James L. Miller
/s/ D. C. Nichols Director March 18, 1997
D. C. Nichols
/s/ Harold H. Spinks Director March 18, 1997
Harold H. Spinks
/s/ James C. Stanley Director March 18, 1997
James C. Stanley
/s/ Howard M. Whitted Director March 18, 1997
Howard M. Whitted
EXHIBIT 22
List of Subsidiaries
Name Where Organized
United Security Bank Alabama