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MAYNARD, COOPER & GALE, P.C.
1901 Sixth Avenue North
Suite 2400 AmSouth/Harbert Plaza
Birmingham, Alabama 35203-2602
(205) 254-1000
FACSIMILE (205) 254-1999
March 31, 1998
FILED VIA EDGAR
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: United Security Bancshares, Inc.
Annual Report of 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
C. Matthew Lusco
James M. Pool
UNITED SECURITY BANCSHARES, INC.
131 West Front Street
P.O. Box 249
Thomasville, Alabama 36784
334-636-5424
March 23, 1998
FILED VIA EDGAR
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Gentlemen:
Management of United Security Bancshares, Inc. hereby informs
the Securities and Exchange Commission that the financial
statements in its Annual Report to Shareholders for the year ended
December 31, 1997, transmitted herewith, do not reflect a change
from the preceding year in any accounting principles or practices
or in the method of applying any such principles or practices.
UNITED SECURITY BANCSHARES, INC.
/s/ Jack M. Wainwright, III
_____________________________
By: Jack M. Wainwright, III
Its: President & CEO
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number 0-14549
UNITED SECURITY BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
Alabama 63-0843362
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
131 West Front Street
Post Office Box 249
Thomasville, Alabama 36784
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (334) 636-5424
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $0.01 per share (Title of class)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports) and (2) has been subject to such filing requirements
for the past 90 days. Yes [X]. No [ ].
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Shares of common stock ($0.01 par value) outstanding as of
December 31, 1997: 3,537,685.
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 February 17, 1998, is
$141,507,400. (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
1998 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, 1997
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 11
7A Quantitative and Qualitative Disclosures
About Market Risk 36
8 Financial Statements and Supplementary Data 37
9 Changes in and Disagreements on Accounting
and Financial Disclosure 65
III 10 Directors and Executive Officers of the
Registrant 66
11 Executive Compensation 66
12 Security Ownership of Certain Beneficial Owners
and Management 66
13 Certain Relationships and Related Transactions 66
IV 14 Exhibits, Financial Statement Schedules
and Reports on Form 8-K 67
Signatures 68
Exhibits 70
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, First United Security Bank
(the "Bank"). The Bank's name was changed from United Security Bank
to First United Security Bank on July 9, 1997. The Bank owns all of
the stock of Acceptance Loan Company, Inc. ("ALC"), a finance
company organized for the purpose of making consumer loans and
purchasing consumer loans from vendors. The Bank also owns 50% of
the stock of First Banking Services, Inc., a Florida corporation
headquartered in Fort Walton Beach, Florida; however it is
anticipated that the Bank will sell its holdings in First Banking
Services, Inc. during the first quarter of 1998. Bancshares owns
all the stock of First Security Courier Corporation ("First
Security"), an Alabama corporation organized for the purpose of
providing certain bank courier services.
The Bank has fifteen banking offices which are located in
Thomasville, Coffeeville, Fulton, Gilbertown, Grove Hill, Butler,
Jackson, Brent, Centreville and Woodstock, Alabama, and its market
area includes portions of Bibb, Clarke, Choctaw, Marengo, Sumter,
Tuscaloosa, Washington, and Wilcox Counties in Alabama, as well as
Clarke, Lauderdale and Wayne Counties in Mississippi.
The Bank conducts a general commercial banking business and
offers banking services such as the receipt of demand, savings and
time deposits, personal and commercial loans, credit card and safe
deposit box services, and the purchase and sale of government
securities.
The Bank encounters vigorous competition from 10 banks 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, 1997, the Bank had 199 full-time equivalent
employees, ALC had 67 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
The Riegle-Neal Interstate Banking and Branching Efficiency
Act of 1994 (the "IBBEA") authorized bank holding companies to
acquire banks and other bank holding companies without geographic
limitations beginning September 30, 1995. The arrival of interstate
banking is expected to increase further the competitiveness of the
banking industry.
In addition, beginning on June 1, 1997, the IBBEA authorized
interstate mergers and consolidations of existing banks, provided
that neither bank's home state has opted out of interstate
branching by May 31, 1997. The State of Alabama has opted in to
interstate branching effective on or before June 1, 1997. Once a
bank has established branches in a state through an interstate
merger, the bank generally may establish and acquire additional
branches at any location in the state where any bank involved in
the interstate merger could have established or acquired branches
under applicable federal or state law.
Alabama banks may also establish branches or offices in any
other state, any territory of the United States, or any foreign
country, provided that the branch or office is established in
compliance with federal law and the law of the proposed location
and is approved by the Alabama Superintendent of Banks. Under
former law, Alabama banks could not establish a branch in any
location other than its principal place of business, except as
authorized by local laws or general laws of local application.
These more liberal branching laws are likely to increase
competition within the State of Alabama among banking institutions
located in Alabama and from banking institutions outside of
Alabama, many of which are larger than Bancshares. Size gives the
larger banks certain advantages in competing for business from
large corporations. These advantages include higher lending limits
and the ability to offer services in other areas of Alabama and the
southeast region.
Supervision, 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 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 Alabama State Banking Department and the
Federal Deposit Insurance Corporation ("FDIC") are the primary
regulators for the Bank. These regulatory authorities regulate or
monitor all areas of the Bank's operations, including security
devices and procedures, adequacy of capital loan reserves, loans,
investments, borrowings, deposits, mergers, issuances of
securities, payment of dividends, interest rates payable
on deposits, interest rates or fees chargeable on loans,
establishment of branches, corporate reorganizations, maintenance
of books and records and adequacy of staff training to carry on
safe lending and deposit gathering practices. The Bank must
maintain certain capital ratios and is subject to limitations on
aggregate investments in real estate, bank premises and furniture
and fixtures.
The Bank's deposits are insured by the 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 Alabama law,
a bank must transfer to surplus each year at least 10% of its net
earnings until the surplus of the bank is equal to at least 20% of
its capital. During this accumulation period, a bank may not pay a
dividend in excess of 90% of its net earnings. After this
accumulation period, banks must obtain prior written approval of
the Superintendent of the Alabama State Banking Department if the
total of all dividends declared by the bank in any calendar year
will exceed the total of the bank's net earnings (as defined by
statute) for that year combined with its retained net earnings for
the preceding two years, less any required transfers to surplus. In
addition, no dividends may be paid from surplus without the prior
written approval of the Superintendent.
In accordance with regulatory restrictions, the Bank had at
December 31, 1997, $12,100,000 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
the Federal Deposit Insurance Corporation Improvement Act of 1991
("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.
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.
FDICIA authorizes the BIF to borrow up to $30 billion from the
United States Treasury to be repaid by the banking industry through
deposit insurance assessments. FDICIA required the federal banking
agencies and the FDIC, as insurer, to take prompt action to resolve
the problems of insured depository institutions. All depository
institutions will be classified into one of five categories ranging
from well-capitalized to critically undercapitalized. As an
institution's capital level declines, it would become subject to
increasing regulatory scrutiny and tighter restrictions. FDICIA
further requires an increase in the frequency of "fullscope,
on-site" examinations and expands the current audit requirements.
In addition, federal banking agencies are mandated to review and
prescribe uniform accounting standards that are at least as
stringent as Generally Accepted Accounting Principles. FDICIA
permits the merger or acquisition of any depository institutions
with any other, provided that the transaction is approved by the
resulting entity's appropriate federal banking agency. This would
permit, for the first time, direct mergers between banks and thrift
institutions.
Among other things, FDICIA requires the federal banking
agencies to take "prompt corrective action" in respect of banks
that do not meet minimum capital requirements, as defined by the
regulations implementing FDICIA. If a depository institution fails
to meet regulatory capital requirements, regulatory agencies can
require submission and funding of a capital restoration plan by the
institution to limit growth, require the raising of additional
capital and, ultimately, require the appointment of a conservator
or receiver for the institution. Under FDICIA, a bank holding
company must guarantee that an undercapitalized subsidiary bank
meets its capital restoration plan, subject to certain limitations.
Because of concerns relating to the 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 alter
the statutory separation of commercial and investment banking and
to further expand the powers of banks, bank holding companies and
competitors of banks.
In September 1996, legislation was enacted to recapitalize the
SAIF and ensure against default on Financing Corp. ("FICO") bonds.
The legislation provided for a one-time payment into the BIF in an
amount approximating $.68 per $100 of SAIF insured deposits.
Thereafter and through December 31, 1999, the former assessment
rate of between $-0- and $.31 per $100 of insured deposits is
reduced to between $.0130 and $.2830 per $100, including a FICO
rate of $.0130 per $100, for bank deposits and a rate of between
$.0650 and $.3350 per $100, including a FICO rate of $.0650 per
$100, for previously SAIF insured deposits. After December 31,
1999, the BIF rate will be approximately $.0243 per $100 for all
deposits.
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.
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. The federal bank regulatory
authorities have adopted risk-based capital guidelines for banks
and bank holding companies that are designed to account for
off-balance sheet exposure, minimize disincentives for holding
liquid assets and make regulatory capital requirements more
sensitive to differences in risk profiles among banks and bank
holding companies. The resulting capital ratios represent
qualifying capital as a percentage of total risk-weighted assets
and off-balance sheet items. The guidelines are minimums, and the
federal regulators have noted that banks and bank holding companies
contemplating significant expansion programs should not allow
expansion to diminish their capital ratios and should maintain
ratios well in excess of the minimums. The current guidelines
require all bank holding companies and federally-regulated banks to
maintain a minimum risk-based total capital ratio equal to 8%, of
which at least 4% must be Tier 1 capital. Tier 1 capital includes
common stockholders' equity, qualifying perpetual preferred stock
and minority interests in equity accounts of consolidated
subsidiaries, but excludes goodwill and most other intangibles and
excludes the allowance for loan and lease losses. Tier 2 capital
includes the excess of any preferred stock not included in Tier 1
capital, mandatory convertible securities, hybrid capital
instruments, subordinated debt and intermediate term-preferred
stock and general reserves for loan and lease losses up to 1.25% of
risk-weighted assets.
Under these guidelines, banks' and bank holding companies'
assets are given risk-weights of 0%, 20%, 50% or 100%. In addition,
certain off-balance sheet items are given credit conversion factors
to convert them to asset equivalent amounts to which an appropriate
risk-weight will apply. These computations result in the total
risk-weighted assets. Most loans are assigned to the 100% risk
category, except for first mortgage loans fully secured by
residential property and, under certain circumstances, residential
construction loans, both of which carry a 50% rating. Most
investment securities are assigned to the 20% category, except for
municipal or state revenue bonds, which have a 50% rating, and
direct obligations of or obligations guaranteed by the United
States Treasury or United States Government agencies, which have a
0% rating.
The federal bank regulatory authorities have also implemented
a leverage ratio, which is Tier 1 capital as a percentage of
average total assets less intangibles, to be used as a supplement
to the risk-based guidelines. The principal objective of the
leverage ratio is to place a constraint on the maximum degree to
which a bank holding company may leverage its equity capital base.
The minimum required leverage ratio for top-rated institutions is
3%, but most institutions are required to maintain an additional
cushion of at least 100 to 200 basis points.
FDICIA established a new capital-based regulatory scheme
designed to promote early intervention for troubled banks and
requires the FDIC to choose the least expensive resolution for bank
failures. The new capital-based regulatory framework contains five
categories of compliance with regulatory capital requirements,
including "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" and
"critically undercapitalized." To qualify as a "well capitalized"
institution, a bank must have a leverage ratio of no less than 5%,
a Tier 1 risk-based ratio of no less than 6% and a total risk-based
capital ratio of no less than 10%, and the bank must not be under
any order or directive from the appropriate regulatory agency to
meet and maintain a specific capital level. As of December 31,
1997, Bancshares and the Bank qualified as "well-capitalized."
Under FDICIA, the applicable agency can treat an institution
as if it were in the next lower category if the agency determines
(after notice and an opportunity for hearing) that the institution
is in an unsafe or unsound condition or is engaging in an unsafe or
unsound practice. The degree of regulatory scrutiny of a financial
institution will increase, and the permissible activities of the
institution will decrease, as it moves downward through the capital
categories. Institutions that fall into one of the three
undercapitalized categories may be required to (i) submit a capital
restoration plan; (ii) raise additional capital; (iii) restrict
their growth, deposit interest rates and other activities; (iv)
improve their management; (v) eliminate management fees; or (vi)
divest themselves of all or a part of their operations. Bank
holding companies controlling financial institutions can be called
upon to boost the institutions' capital and to partially guarantee
the institutions' performance under their capital restoration
plans.
FDICIA requires the federal banking regulators to revise the
risk-based capital standards to provide for explicit consideration
of interest-rate risk, concentration of credit risk and the risks
of non-traditional activities. It is uncertain what effect these
regulations, when implemented, will have on Bancshares and the
Bank.
Recent Legislative Developments. From time to time, various
bills are introduced in the United States Congress with respect to
the regulation of financial institutions. Certain of these
proposals, if adopted, could significantly change the regulation of
banks and the financial services industry. Bancshares cannot
predict whether any of these proposals will be adopted or, if
adopted, how these proposals would affect Bancshares.
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. ALC leases office space throughout Alabama but owns no
property. The aggregate annual rental payments for office space for
ALC total approximately $120,000.
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 fourteen 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
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. The following
branches were acquired as a result of the merger of First
Bancshares, Inc. with and into Bancshares in 1997: The Centreville
branch is located at the corner of Davidson Street and Court Square
in Centreville, Alabama. That building, a two-story brick building
of approximately 9,000 square feet with two drive-in facilities,
has been sold. The Bank is currently renting the building while a
new building is constructed. The Grove Hill branch is located at
the corner of Main Street and Court in Grove Hill, Alabama. This
branch is in a one-story brick building with approximately 10,500
square feet and three drive-in facilities. The two new Jackson
branches are located on (1) Commerce Street in a two-story brick
building with approximately 9,000 square feet and three drive-in
facilities and (2) College Street in a one-story brick building
with approximately 7,800 square feet and four drive-in facilities.
The branch in Thomasville is located in a one-story brick building
with approximately 3,800 square feet and three drive-in facilities.
Finally, the branch in North Bibb County is located on Highway 11
in a one-story brick building with two drive-in facilities. Except
as noted, 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 3,603,335 shares of Bancshares common
stock issued and 3,539,235 shares outstanding. As of December 31,
1997, there were approximately 850 shareholders of Bancshares.
The Bank is authorized by its Articles of Incorporation to
issue 25,000 shares of common stock, par value $1.00 per share, all
of which are outstanding. Bancshares is the only shareholder of the
Bank.
There is no established public trading market for Bancshares
common stock. Management of Bancshares is aware that from time to
time Bancshares common stock is bought or sold in private
transactions or in transactions directly with a securities
broker-dealer making a limited market in Bancshares' common stock.
Management of Bancshares is aware of approximately 27 sales of
Bancshares common stock since January 1, 1997 at prices ranging
from $13.20 to $40.00 per share.
Bancshares has paid dividends on its common stock on a
quarterly basis in the past three years as follows:
Dividend paid
on Common Stock
Fiscal Year (per share)
1995 $.33
1996 $.40
1997 $.53
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 are governed by the Alabama Banking Code. Under the
Alabama Banking Code, a bank may not declare or pay a dividend
in excess of 90 percent of the net earnings of the bank until the
surplus of the bank equals at least 20 percent of capital.
Thereafter, the prior written approval of the Superintendent of
the Alabama State Banking Department is required 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 its retained
net earnings of the preceding two years, less any required
transfers to surplus. No dividends, withdrawals or transfers may
be made from the bank's surplus without the prior written
approval of the Superintendent. As of December 31, 1997, the
surplus of the Bank was equal to at least 20 percent of the
capital of the Bank.
Item 6. Selected Financial Information.
UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES
SELECTED FINANCIAL INFORMATION
Year Ended December 31,
1997 1996 1995 1994 1993
(In Thousands of Dollars, Except Per Share Amounts)
RESULTS OF OPERATIONS
Interest Revenue $ 37,648 $ 34,551 $ 30,571 $ 23,340 $ 21,001
Interest Expense 15,376 15,081 13,298 9,095 8,363
Net Interest Revenue $ 22,272 $ 19,470 $ 17,273 $ 14,245 $ 12,638
Provision for Loan Losses 1,710 800 255 224 386
Non-Interest Revenue $ 4,361 $ 2,725 $ 2,555 $ 2,250 $ 3,180
Non-Interest Expense 15,229 11,765 10,898 10,351 8,389
Income Before Income Taxes $ 9,694 $ 9,630 $ 8,675 $ 5,920 $ 7,043
Income Taxes 2,713 2,659 2,225 1,367 2,064
Net Income $ 6,981 $ 6,971 $ 6,450 $ 4,553 $ 4,979
Net Income Per Share:
Basic $ 1.97 $ 1.97 $ 1.83 $ 1.30 $ 1.42
Diluted $ 1.96 $ 1.97 $ 1.83 $ 1.30 $ 1.42
Average Number of Shares
Outstanding (000) 3,537 3,537 3,520 3,497 3,495
PERIOD END STATEMENT OF CONDITION
Total Assets $425,941 $430,383 $377,120 $308,569 $291,781
Loans 215,897 204,886 182,000 129,603 128,420
Deposits 322,418 346,306 304,381 247,534 234,301
Shareholders' Equity 52,711 47,616 41,795 31,597 31,798
AVERAGE BALANCES
Total Assets $434,010 $410,541 $364,330 $301,112 $279,191
Average Earning Assets 402,271 382,458 337,921 280,096 260,050
Loans 212,570 198,327 172,146 135,450 117,590
Deposits 345,442 327,531 294,063 244,788 231,443
Shareholder's Equity 50,164 44,044 37,588 32,175 30,266
PERFORMANCE RATIOS
Net Income to:
Average Total Assets 1.61% 1.70% 1.77% 1.51% 1.78%
Average Shareholders' Equity 13.92% 15.83% 17.16% 14.15% 16.45%
Average Shareholders' Equity to
Average Total Assets 11.55% 10.73% 10.32% 10.69% 10.84%
Dividend Payout Ratio 26.79% 20.21% 18.12% 24.07% 19.58%
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Introduction
The following discussion and financial information are
presented to aid in an understanding of the current financial
position and results of operations of United Security Bancshares,
Inc. ("United Security"), and should be read in conjunction with
the Audited Financial Statements and Notes thereto included herein.
The emphasis of this discussion will be on the years 1997, 1996,
and 1995. All yields presented and discussed herein are based on
the cash basis and not on the tax-equivalent basis.
On June 30, 1997, First Bancshares, Inc., the parent holding
company of First Bank and Trust, merged with and into United
Security. The merger was accounted for as a pooling of interests
and, accordingly, financial information for all prior periods has
been restated to present the combined financial condition and
results of operations of both companies as if the merger had been
in effect for all periods presented.
United Security is the parent holding company of First United
Security Bank (the "Bank"). The Bank operates a finance company,
Acceptance Loan Company, that currently has twenty offices in
Alabama and Northwest Florida.
United Security also began a courier company as a subsidiary,
First Security Courier Corporation, in 1997 mainly for the purpose
of delivering checks and documents to the Federal Reserve to aid in
check clearing. This courier company performs courier services for
First United Security Bank as well as other financial institutions
in our market area.
At December 31, 1997, United Security had consolidated assets
of approximately $425.9 million and operated fifteen banking
locations in three counties. These fifteen locations contributed
approximately $7.0 million to consolidated net income in 1997.
First United Security Bank's sole business is banking; therefore,
loans and investments are its principal sources of income.
This discussion contains certain forward looking statements
with respect to the financial condition, results of operations and
business of United Security and the Bank related to, among other
things:
(A) trends or uncertainties which will impact future
operating results, liquidity and capital resources, and
the relationship between those trends or uncertainties
and nonperforming loans and other loans;
(B) the diversification of product production among timber
related entities and the effect of that diversification
on the Bank's concentration of loans to timber related
entities;
(C) the composition of United Security's derivative
securities portfolio and its interest rate hedging
strategies and volatility caused by uncertainty over the
economy, inflation and future interest rate trends;
(D) the effect of the market's perception of future inflation
and real returns and the monetary policies of the Federal
Reserve Board on short and long term interest rates;
(E) the effect of interest rate changes on liquidity and
interest rate sensitivity management;
(F) the amount of anticipated (i) net loan charge offs; (ii)
loans on a non-accrual basis; and (iii) options income
and other off-balance-sheet income; and
(G) the expectations, beliefs, and plans of Management as set
forth in the letter to shareholders contained in this
Annual Report.
These forward looking statements involve certain risks and
uncertainties. Factors that may cause actual results to differ
materially from those contemplated by such forward looking
statements include, among 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 Bank and
Trust;
(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.
Financial Condition
United Security's financial condition depends primarily on the
quality and nature of the Bank's assets, liabilities, capital
structure, the quality of its personnel, and prevailing market and
economic conditions.
The majority of the assets and liabilities of a financial
institution are monetary and, therefore, differ greatly from most
commercial and industrial companies that have significant
investments in fixed assets and inventories. Inflation has an
important impact on the growth of total assets in the banking
industry, resulting in the need to increase equity capital at rates
greater than the applicable inflation rate in order to maintain an
appropriate equity to asset ratio. Also, the category of other
expenses tends to rise during periods of general inflation.
The acquisition of Brent Banking Company contributed
significantly to United Security's growth during 1996. It added
approximately $34 million in assets. In conjunction with the merger
on June 30, 1997, First United Security Bank sold the deposits,
branch facility and associated assets of its branch office in Grove
Hill effective November 1, 1997 as directed by the United States
Department of Justice as a requirement for the merger approval.
This divestiture reduced deposits by approximately $9.8 million.
Management believes the most significant factor in producing
quality financial results is the Bank's ability to react properly
and timely to changes in interest rates. Management is therefore,
attempting to maintain a 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, 1997,
1996, and 1995.
Distribution of Assets, Liabilities, and Shareholders' Equity, with
Interest Rates and Interest Differentials
December 31,
1997 1996 1995
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate % Balance Interest Rate % Balance Interest Rate %
(In Thousands of Dollars, Except Percentages)
ASSETS
Interest-Earning Assets:
Loans (Note A) $212,570 $22,964 10.80% $198,327 $20,219 10.19% $172,146 $17,277 10.04%
Taxable Investments
(Note B) 161,125 12,854 7.98% 149,337 12,311 8.24% 132,643 11,253 8.48%
Non-Taxable Investments 26,704 1,736 6.50% 31,971 1,873 5.86% 27,011 1,734 6.42%
Federal Funds Sold 1,872 95 5.07% 2,823 148 5.24% 6,121 308 5.00%
Total Interest-Earning
Assets $402,271 $37,649 9.36% $382,458 $34,551 9.03% $337,921 $30,572 9.05%
Non-Interest Earning Assets:
Other Assets 31,739 28,083 26,409
Total $434,010 $410,541 $364,330
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest-Bearing Liabilities:
Demand Deposits $ 64,607 $ 1,644 2.54% $ 69,461 $ 1,905 2.74% $ 61,538 $ 1,696 2.76%
Savings Deposits 43,797 1,218 2.78% 30,939 887 2.87% 28,792 857 2.98%
Time Deposits 193,738 10,413 5.37% 185,588 10,230 5.51% 162,622 8,878 5.46%
Other Liabilities 34,605 2,101 6.07% 35,383 2,059 5.82% 30,118 1,868 6.20%
Total Interest-Bearing
Liabilities $336,747 $15,376 4.57% $321,371 $15,081 4.69% $283,070 $13,299 4.70%
Non-Interest Bearing Liabilities:
Demand Deposits 43,300 41,543 41,111
Other Liabilities 3,799 3,583 2,561
Shareholders' Equity 50,164 44,044 37,588
Total $434,010 $410,541 $364,330
Net Liabilities $22,273 $19,470 $17,273
Net Yield on Interest-
Earning Assets 5.54% 5.09% 5.11%
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 Allowance for Loan Losses
Total loans outstanding increased by $11.5 million in 1997
with $223.7 million outstanding at year end. Real estate loans
remained flat with $126.8 million outstanding at December 31, 1997,
and $126.7 million outstanding at December 31, 1996. Real estate
loans make up 59.7% of the total gross loans at year end 1997.
Construction activity in the trade area continues to be
predominately commercial. With the merger of United Security Bank
and First Bank and Trust in 1997, the Company now offers a home
equity loan and a long-term fixed-rate mortgage loan program.
Real estate loans consist of construction loans to both
businesses and individuals. These loans relate to residential and
commercial development, commercial buildings and apartment
complexes. Real estate loans also consist of other loans secured by
real estate such as one-to-four family dwellings including mobile
homes, loans on land only, multi-family dwellings, non farm
non-residential real estate and home equity loans. Acceptance Loan
Company had a total of $5.6 million in real estate loans or 4.4% of
total real estate loans at year end 1997.
Commercial loans totaled $35.0 million at December 31, 1997.
These loans decreased $1.4 million or 3.7% from December 31, 1996.
Some of the decrease was seasonal due to large line paydowns. A
portion of the decline was related to the sale of assets in one of
the Grove Hill offices in November 1997.
Consumer installment loans totaled $61.8 million at December
31, 1997. This increase of $12.7 million or 25.8% is almost all
attributed to growth in Acceptance Loan Company. These loans
include loans to individuals for household, family and other
personal expenditures including credit cards and related plans.
Loans by ALC represent $33.8 million or 54.7% of total consumer
installment loans.
Acceptance Loan Company is a wholly-owned subsidiary of First
United Security Bank. ALC was organized in 1995 primarily to make
consumer loans. At December 31, 1995, three offices were in
operation with $1.9 million in total loans outstanding. At December
31, 1996, six offices were open with $11.3 million in total loans
outstanding. At December 31, 1997, twenty offices were open with
$39.4 million in total loans. Seventeen offices are located in
Alabama and three in Northwest Florida. Combined loans from these
offices make up 17.6% of total loans of First United Security Bank.
An allowance for loan losses is maintained by the Bank to
provide for the coverage of losses inherent 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, 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 frequent training dedicated to improving the credit quality
as well as the yield of the loan portfolio. First United Security
Bank operates under a written loan policy which attempts to guide
lending personnel in maintaining a consistent lending function.
This policy is intended to aid loan officers and lending personnel
in making sound credit decisions and to assure compliance with
state and federal regulations. In addition, the intent of the loan
policy is to provide lending officers with a guide to making loans
which will provide an adequate return while providing services to
the communities and trade areas in which we are located.
The balance in the allowance for loan loss as of December 31,
1997, was $4.0 million. This increase of approximately $912,000
over year end 1996 reflects the reevaluation of the portfolio
pertaining to the merger of United Security Bank and First Bank and
Trust and the growth in Acceptance Loan Company. Management
considers this reserve adequate for coverage of future loan losses.
This allowance is 1.81% of total loans.
The following table shows the Bank's loan distribution as of
December 31, 1997, 1996, 1995, 1994 and 1993.
December 31,
1997 1996 1995 1994 1993
(In Thousands of Dollars)
Commercial, Financial and Agricultural $ 35,036 $ 36,387 $ 33,696 $ 33,106 $ 26,669
Real Estate 126,824 126,666 114,985 83,530 80,811
Installment 61,822 49,119 36,301 24,814 23,064
Total $223,682 $212,172 $184,982 $141,450 $130,544
The amounts of total loans (excluding installment loans)
outstanding at December 31, 1997, 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 $ 28,310 $ 5,147 $ 1,579 $ 35,036
Real Estate -- Mortgage 74,174 39,721 12,929 126,824
Total $102,484 $ 44,868 $ 14,508 $161,860
Variable rate loans totaled approximately $36.8 million and
are included in the one-year category.
United Security Bank, First Bank and Trust, and Acceptance
Loan Company (a wholly owned subsidiary of First Bank and Trust)
began the year with a combined balance in the allowance for loan
losses of $3.1 million. The two banks were merged on June 30, 1997,
and ALC became a subsidiary of First United Security Bank, the
surviving bank. Total loans charged off in 1997 totaled $1.0
million. Recoveries on loans previously charged off totaled
$241,000, resulting in net loan losses of $798,000. Net loan losses
for 1996 totaled $556,000. Management allocated and charged to
operations $1.7 million in 1997 as an addition to the allowance for
loan losses. This compares to $800,000 charged to operations for
1996. The balance of $4.0 million at year end 1997 represented 1.8%
of total loans outstanding and is considered adequate for these
losses inherent in the portfolio.
Total loans outstanding on December 31, 1997 were $223.7
million. Of this total, loans by ALC amounted to $39.4 million.
This represents 17.7% of total loans outstanding. Of the $4.0
million balance in the reserve for loan loss account at December
31, 1997, $965,000 (23.9%) is represented by reserves maintained
for ALC loans.
Non-Performing Assets
The following table presents information on non-performing
loans and real estate acquired in settlement of loans.
December 31,
1997 1996 1995 1994 1993
(In Thousands of Dollars)
Non-Performing Assets:
Loans Accounted for on a Non-Accrual Basis $1,488 $1,797 $ 169 $ 571 $1,239
Accruing Loans Past Due 90 Days or More 1,285(1) 1,122 1,390 612 22
Real Estate Acquired in Settlement of Loans 506 18 63 429 145
Total $3,279 $2,937 $1,622 $1,612 $1,406
Percent of Net Loans and Other Real Estate 1.52% 1.44% 0.90% 1.16% 1.10%
(1) Acceptance Loan Company represents 11.4% of accruing loans past due 90 days or more.
Accruing loans past due 90 days or more at December 31, 1997,
totaled $1.3 million. One loan accounted for $.8 million or 60% of
this total. This loan is well secured and periodic payments are
being made on the account. Taking into consideration the collateral
value and the financial strength of the borrowers, management
believed there would be no loss in this account and allowed the
loan to continue accruing. This loan, as well as other loans 90
days and more past due, whether on accrual or non-accrual, are
reviewed by the Board of Directors each month. Loans past due 90
days and more on Acceptance Loan Company totaled $147,000 at
December 31, 1997, or 11.4% of all loans past due 90 days and more
and still accruing.
At December 31, 1997, the Company had one loan considered to
be impaired. The amount of this loan, which is on non-accrual, is
$538,677 and the related allowance is $270,000. The average
recorded investment in impaired loans during the year ended
December 31, 1997 was approximately $548,011. For the year ended
December 31, 1997, the Company did not recognize interest income on
the impaired loan during the period the loan was considered
impaired. The Company had approximately $1.5 million considered to
be impaired at December 31, 1996.
In the opinion of management, non-performing loans and any
other loans which have been classified for regulatory purposes do
not represent or result from trends or uncertainties which will
materially impact future operating results, liquidity, or capital
resources. Management is not aware of information which would cause
serious doubts as to the ability of borrowers to comply with
present repayment terms. Non-performing assets as a percentage of
net loans and other real estate was 1.52% at December, 1997. Loans
past due 90 days or more and still accruing are reviewed closely by
management and are 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 down graded. Through frequent
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.
First United Security Bank discontinues the accrual of
interest on a loan when management has reason to believe the
financial condition of the borrower has deteriorated so that the
collection of interest is in doubt. When a loan is placed on
non-accrual, all unpaid accrued interest is reversed against
current income unless the collateral securing the loan is
sufficient to cover the accrued interest. Interest received on
non-accrual loans is generally either applied against the principal
or reported as interest income, according to management's judgement
as to whether the borrower can ultimately repay the loan. A loan
may be restored to accrual status if the obligation is brought
current, performs in accordance with the contract for a reasonable
period, and if management determines that the repayment of the
total debt is no longer in doubt.
It is the policy of First United Security Bank to charge-off
immediately as loss all amounts judged to be uncollectible.
Management is aware that certain losses may exist in the loan
portfolio which have not been specifically identified. The
allowance for loan losses is established for this reason. This
allowance was $4.0 million at year-end and represented 1.8% of
total loans outstanding. Management believes this allowance is
adequate to absorb any future loan losses.
Allocation of Allowance for Loan Losses
The following table shows an allocation of the allowance for
loan losses for each of the five years indicated.
December 31,
1997 1996 1995 1994 1993
Percent Percent Percent Percent Percent
Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total
(In Thousands of Dollars)
Commercial,
Financial, and
Agricultural $1,416 16% $1,097 17% $ 370 18% $ 286 23% $ 269 20%
Real Estate 405 57 313 60 493 62 190 59 179 62
Installment 2,225 27 1,724 23 1,604 20 1,428 18 1,344 18
Totals $4,046 100% $3,134 100% $2,467 100% $1,904 100% $1,792 100%
Note: First Bank & Trust did not allocate Allowance for Loan Losses
by category. Percentages for United Security Bank were used
1993-1996.
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 1998 to exceed the
three year average of $735,000. Net loan charge-offs as a
percentage of average loans increased from .28% in 1996 to .38% in
1997. The goal for the Company for 1998 is to maintain a ratio of
net charge-offs to average loans below .25%.
Summary of Loan Loss Experience
This table summarizes the Bank's loan loss experience for each
of the five years indicated.
December 31,
1997 1996 1995 1994 1993
(In Thousands of Dollars)
Balance at Beginning of Period $ 3,134 $ 2,467 $ 1,904 $ 1,792 $ 1,536
Charge-Offs:
Commercial, Financial, and Agricultural (299) (246) (201) (41) (91)
Real Estate -- Mortgage (20) (21) (6) (10) (52)
Installment (694) (497) (179) (144) (143)
Credit Cards (26) (9) (8) (9) (6)
$(1,039) $ (773) $ (394) $ (204) $ (292)
Recoveries:
Commercial, Financial and Agricultural $ 110 $ 96 $ 52 $ 38 $ 71
Real Estate -- Mortgage 18 0 5 0 1
Installment 107 117 62 51 86
Credit Cards 6 4 8 3 4
$ 241 $ 217 $ 127 $ 92 $ 162
Net Charge-Offs (Deduction) $ (798) $ (556) $ (267) $ (112) $ (130)
Additions Charged to Operations 1,710 800 255 224 386
Acquired Allowances 0 423** 575* 0 0
Balance at End of Period $ 4,046 $ 3,134 $ 2,467 $ 1,904 $ 1,792
Ratio of Net Charge-Offs During Period to
Average Loans Outstanding 0.38% 0.28% 0.16% 0.08% 0.11%
*Acquisition of Bibb County Branches by First Bank and Trust in 1995.
**Acquisition of Brent Banking Company by United Security Bank in 1996.
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,
1997 1996 1995
(In Thousands of Dollars)
Total Loans Accounted for on a Non-Accrual Basis $1,488 $1,798 $ 169
Interest Income that Would Have Been Recorded
under Original Terms 154 91 30
Interest Income Reported and Recorded During
the Year 108 37 10
Total loans on non-accrual decreased by $310,000 from December
31, 1996 to December 31, 1997. Some of the decrease resulted from
the $1.0 million charged off during the year. Management continues
to emphasize asset quality and expects a significant reduction in
1998 of the $1.5 million still on non-accrual at year-end 1997. The
Company has adequate reserves for any potential losses which may
occur. Lending officers and other personnel involved in the lending
process receive ongoing training in compliance as well as asset
quality. The Company has no foreign loans. The Company does not
make loans on commercial property outside our market area without
prior approval of the Board of Directors or the Directors' Loan
Committee. The Company is conservative in its lending directives.
Timber Industry Concentration
The First 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 the Alabama River Companies, Boise
Cascade, Fort James 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 as of December 31, 1997. The merger of
United Security Bank and First Bank and Trust greatly increased
both the amount of loans outstanding and the amount of timber
related loans. Although the amount of timber related loans
increased by $30.5 million, the percentage of timber related loans
to total loans outstanding actually decreased from approximately
28% in 1996 to 22.0% at December 31, 1997. The numbers in the table
below represent both direct and indirect timber related loans in
the former United Security Bank portfolio. However, only direct
loans to timber and timber related companies are included in the
former First Bank and Trust portfolio at year end 1997.
The Company's market area for Bibb County, Alabama, and
surrounding counties gives us an opportunity to diversify. With the
opening of the Mercedes Benz manufacturing plant in Vance, Alabama,
in 1997, we now have three offices within 25 miles of the plant
site. One office is located only 7 miles from the plant. This area
is one of the fastest growing corridors in the state and the
Company plans to open another new office in the area in late summer
or fall of this year.
Timber Total Percentage of
Related Loans Gross Loans Total Loans
$49.2 million $223.7 million 22.0%
Management understands the concern about concentration of
loans in timber and timber-related industries. However, we continue
to feel these risks are reduced by the diversification of product
production within these industries. Some of the mills and
industries specialize in paper and pulp, some in lumber and
plywood, some in poles and pilings, and others in wood and veneer.
We do not believe that this concentration is excessive or that it
represents a trend which might materially impact future earnings,
liquidity, or capital resources of the Bank. Management does
realize the Company is heavily dependent on the economic health of
the timber-related industries. The Company continues to benefit
from the area industries engaged in the growing, harvesting,
processing and marketing of timber and timber-related products. The
majority of the land in our trade area is used to grow pine and
hardwood timber. Agricultural production loans make up less than 1
% of the Company's total loan portfolio.
Investments in Limited Partnerships
First United Security Bank invests in limited partnerships
that operate qualified affordable housing projects to receive tax
benefits in the form of tax deductions from operating losses and
tax credits. The Bank accounts for the investments under either the
equity or the cost method based on the percentage ownership and
influence over operations. The Company's interest in these
partnerships was $4,272,547 and $3,651,503 for 1997 and 1996,
respectively. Costs associated with the partnerships carried under
the equity method amounted to approximately $122,000 and $137,000
for 1997 and 1996, respectively. Management analyzes these
investments annually for potential impairment. The assets and
liabilities of these partnerships consist primarily of apartment
complexes and related mortgages. United Security's carrying value
approximates cost or its underlying equity in the net assets of the
partnerships. The Company has remaining cash commitments to these
partnerships at December 31, 1997 in the amount of $720,593.
Although these investments are considered non-earning assets they
do contribute to the bottom line in the form of Federal income tax
credits. These credits amounted to $325,000 in 1996 and are
estimated to be approximately $480,000 for 1997. Also, operating
losses related to these partnerships are available as deductions
for taxes on the Company's books. These losses were $130,000 in
1996 and are estimated to be $150,000 in 1997.
Deposits
Average total deposits have grown 17.5% during the last three
years, with a 5.5% increase in 1997. This growth was affected by
the interest rate environment, product expansion, continued
emphasis on service quality, the Brent Banking Company acquisition
and the sale of one branch facility. In June, 1996, Brent Banking
Company was acquired and this acquisition contributed approximately
$33 million to the total deposits; however, the average total
calculation for 1996 was limited to a partial year. Effective
November 1997, approximately $10 million in deposits were sold as
directed by the United States Department of Justice to facilitate
the merger between First Bank and Trust and United Security Bank.
While the sale reduced the 1997 total deposits by approximately $10
million, the impact on 1997 average deposits is less dramatic.
Average non-interest bearing demand deposits have increased
5.3% over the last three years, while the growth for 1997 was 4.2%.
The ratio of average non-interest bearing deposits to average total
deposits remained relatively steady in 1997 at 12.5% from 12.7% in
1996 and 14% in 1995.
Average interest-bearing transaction accounts increased 12.9%
in 1996. During 1997, the Bank reclassified a portion of
interest-bearing transaction accounts to money market savings
accounts, resulting in a 7.0% decline. Nevertheless,
interest-bearing transaction accounts continue to be an important
source of funds for the Bank, accounting for 18.7% of average total
deposits in 1997. This represents a decline from 21.2% in 1996 and
20.9% in 1995, therefore the interest bearing transaction accounts
are considered a stable funding source.
During the last three years, average time deposits increased
19.1%. This represents an increase of over $31 million. Average
time deposits increased by 4.4% in 1997, compared to an increase of
14.1% in 1996. Time deposits represented 56.1% of the total average
deposits in 1997 compared to 56.7% in 1996 and 55.3% in 1995. This
growth can be attributed to the interest rate, market environment
and the Brent Banking Company acquisition. In addition, First
United Security Bank has successfully marketed a special
certificate of deposit product that provides customers with an
attractive interest rate.
Average savings deposits have grown 52.1% since 1995. Average
savings grew 41.6% in 1997, partially due to reclassification of
money market savings accounts. The ratio of average savings to
average total deposits increased to 12.7% in 1997 compared to 9.4%
in 1996 and 9.8% in 1995.
First United Security Bank's deposit base remains the primary
source of funding for the Bank. These deposits represented 85.6% of
the average earning assets in 1996 and 85.9% of the average earning
assets in 1997. As seen in the following table, overall rates on
the deposits decreased to 3.84% in 1997, compared to 3.98% in 1996
and 3.89% in 1995. This rate decrease reflects a lower interest
rate environment. Emphasis continues to be placed on attracting
consumer deposits. It is First United Security Bank's intent to
expand its consumer deposit base in order to continue to fund asset
growth through growth in 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,
1997 1996 1995
Amount Rate Amount Rate Amount Rate
(In Thousands of Dollars, Except Percentages)
Non-Interest Bearing DDA $ 43,300 $ 41,543 $ 41,111
Interest-Bearing DDA 64,607 2.54% 69,461 2.74% 61,538 2.76%
Savings Deposits 43,797 2.78 30,939 2.87 28,792 2.98
Time Deposits 193,738 5.37 185,588 5.51 162,622 5.46
Total $345,442 3.84% $327,531 3.98% $294,063 3.89%
Maturities of Time Certificates of Deposits and Other Time
Deposits of $100,000 or more outstanding at December 31, 1997, are
summarized as follows:
Time Other
Certificates Time
Maturities of Deposits Deposits Total
(In Thousands of Dollars)
3 Months or Less $11,855,015 $10,129,623 $21,984,638
Over 3 Through 6 Months 5,137,439 0 5,137,439
Over 6 Through 12 Months 6,200,459 0 6,200,459
Over 12 Months 10,906,259 0 10,906,259
Total $34,099,172 $10,129,623 $44,228,795
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. 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.
Securities available for sale include Collateralized Mortgage
Obligations (CMOs) of $109.9 million, other mortgage backed
securities of $34.4 million, state, county and municipal securities
of $23.9 million, and other securities of $4.3 million. The total
securities portfolio decreased $14.7 million or 7.9% from December
1996 to December 1997. This decrease is a result of increased loan
demand and the sale of a branch discussed elsewhere in this report.
At December 1997, approximately $107.8 million in CMO's had
floating interest rates which reprice monthly and $2.1 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
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 1997, 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. The three tests that are
required are as follows:
#1 -- Average Life Test --
The expected average life of the security must be less than
or equal to 10 years.
#2 -- Average Life Sensitivity Test --
The average life of the security will not extend by more than
4 years or shorten by more than 6 years for immediate
Treasury curve shifts of +/- 300 basis points (3%).
#3 -- Price Sensitivity Test --
The estimated price of the security will not change by more
than 17% for immediate Treasury curve shifts of +/- 300 basis
points.
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 $38.6 million in securities which, at
December 31, 1997, were designated high risk. $16.1 million of
these securities were floating rate, and $22.5 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, 1997 of $1.6 million.
Despite these unrealized losses, the securities in this segment of
the portfolio produced $3.6 million in interest income and positive
total return for 1997.
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 no
unrealized gains (net of taxes) of $998,496 in the securities
portfolio on December 31, 1997 versus net unrealized gains (net of
taxes) of $1.1 million 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 19 in the "Notes to
Consolidated Financial Statements".
Investment Securities Available-for-Sale
The following table sets forth the carrying value of
investment securities at the dates indicated.
December 31,
1997 1996 1995
(In Thousands of Dollars)
Investment Securities Available for Sale:
U.S. Treasury and Agencies Securities $ 2,096 $ 4,987 $ 6,183
Obligations of States, Counties, and
Political Subdivisions 22,228 32,113 24,174
Mortgage-Backed Securities 144,310 145,098 126,831
Other Securities 2,245 3,336 2,255
Unrealized Gains (Losses) 1,620 1,672 1,300
Total $172,499 $187,206 $160,743
Investment Securities Available-for-Sale Maturity Schedule
Maturing
After One After Five
Within But Within But Within After
One Year Five Years 10 Years 10 Years
Amount Yield Amount Yield Amount Yield Amount Yield
(In Thousands of Dollars, Except Yields)
Investment Securities Available for Sale:
U.S. Treasury and Agency
Securities $ 500 7.81% $ 0 0.00% $ 0 0.00% $ 1,565 7.80%
State, County and Municipal
Obligations 1,132 7.08% 5,364 6.77% 2,492 6.74% 14,933 6.56%
Mortgage-Backed
Securities 1,001 0.36% 442 7.22% 2,841 5.97% 139,965 8.37%
Other 2,185 6.60% 79 7.79% 0 0.00% 0 0.00%
Total $4,818 5.54% $5,885 6.82% $5,333 6.33% $156,463 8.19%
TOTAL $172,499 8.01%
*Available for Sale Securities are stated at Market Value and Market Yield
The maturities and weighted average yields of investment
securities available-for-sale at the end of 1997 are presented in
the preceding table based on stated maturity. While the average
stated maturity of the Mortgage Backed Securities (excluding CMO's)
was 24.68 years, the average life expected is 9.79 years. The
average stated maturity of the CMO portion of portfolio was 24.46
years, and the average expected life was 13.36 years. The average
expected life of investment securities available-for-sale was 8.84
years with an average yield of 8.01 percent.
Condensed Portfolio Maturity Schedule
Dollar Portfolio
Maturity Summary Amount Percentage
Maturing in 3 months or less $ 1,138,122 0.67%
Maturing in 3 months to 1 year 1,769,636 1.04
Maturing in 1 to 3 years 3,385,329 1.99
Maturing in 3 to 5 years 2,287,217 1.34
Maturing in 5 to 15 years 25,122,494 14.75
Maturing in over 15 years 136,674,763 80.21
Total $170,377,561 100.00%
The following Marketable Equity Securities have been excluded from
the above Maturity Summary due to no stated maturity date.
Federal Home Loan Bank Stock $2,048,700
Mutual Funds $ 9,964
Other Marketable Equity Securities $ 63,000
Condensed Portfolio Repricing Schedule
Dollar Portfolio
Repricing Summary Amount Percentage
Repricing in 30 days or less $105,830,386 62.12%
Repricing in 31 to 1 year 1,557,542 0.91
Repricing in 1 year to 3 years 3,385,329 1.99
Repricing in 3 to 5 years 2,287,217 1.34
Repricing in 5 to 15 years 17,175,350 10.08
Repricing in over 15 years 40,141,737 23.56
Total $170,377,561 100.00%
Repricing in 30 days or less does not include:
Mutual Funds $ 9,964
Repricing in 31 to 1 year does not include:
Federal Home Loan Bank Stock $2,048,700
Other Marketable Equity Securities $ 63,000
The tables above reflect all securities at market value on December
31, 1997.
Securities Gains and Losses
Non-interest income from securities transactions, trading
account transactions, and associated option premium income
increased dramatically in 1997 compared to 1996, as can be seen in
the table below. The majority of the profits realized in 1997 were
generated in options and other related transactions. Gains 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
First Bank and Trust merger. Options income and other off-balance
sheet income declined 20.2% from $497,387 to $396,772. Although
this income should be considered non-recurring, it is expected that
$122,000 will be recognized in 1998. This income which will be
received in 1998 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 1997, 1996, and 1995:
1997 1996 1995
Investment Securities $ 105,254 $ (186,802) $ (74,600)
Trading Account 10,187 (2,031) 303,518
Options & Off-Balance Sheet Transactions 396,772 497,387 221,797
Total $ 512,213 $ 308,554 $ 450,715
Gains in 1997 from sales of investment securities and trading
account securities were net of losses of $407,589 and $8,924,
respectively. Volume of sales as well as other information on
securities is further discussed in Note 4 to the financial
statements.
Short-Term Borrowings
Purchased funds can be used to satisfy daily funding needs,
and when advantageous, for arbitrage. The following table shows
information for the last three years regarding the Bank's
short-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:
1997 $ 3,913
1996 22,443
1995 22,369
Weighted Average Interest Rate at Year-end:
1997 5.23%
1996 5.44%
1995 5.82%
Maximum Amount Outstanding at Any Month's End:
1997 $ 11,936
1996 43,310
1995 26,698
Average Amount Outstanding During the Year:
1997 $ 3,210
1996 26,669
1995 19,657
Weighted Average Interest Rate During the Year:
1997 5.80%
1996 5.49%
1995 6.11%
In January of 1997, United Security converted Federal Home
Loan Bank short-term borrowings to long-term borrowings.
Balances in these accounts fluctuate dramatically on a
day-to-day basis. Rates on these balances also fluctuate daily, but
as reflected in the chart above, they generally depicit the current
interest rate environment.
Shareholders' Equity
United Security has always placed great emphasis on
maintaining its strong capital base. At December 31, 1997,
shareholders' equity totaled $52.7 million, or 12.4% of total
assets compared to 11.1% and 9.7% for the same periods in 1996 and
1995, 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 $31.6
million at the beginning of 1995 to $52.7 million at the end of
1997. All of this growth was the result of internally generated
retained earnings, with the exception of the market value
adjustment of $4.7 million made for the available for sale
investments as required by Statement of Financial Accounting
Standards No. 115. The internal capital generation rate (net income
less cash dividends as a percentage of average shareholders'
equity) was 10.2% in 1997, down from 12.6% in 1996.
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 minimum standard for the ratio of total capital to
risk-weighted assets is 8%. At least 50% of that capital level must
consist of common equity, undivided profits, and non-cumulative
perpetual preferred stock, less goodwill and certain other
intangibles ("Tier I Capital"). The remainder ("Tier II Capital")
may consist of a limited amount of other preferred stock, mandatory
convertible securities, subordinated debt, and a limited amount of
the allowance for loan losses. The sum of Tier I Capital and Tier
II Capital is "total risk-based capital".
The banking regulatory agencies have also adopted regulations
which supplement the risk based guidelines to include a minimum
leverage ratio of 3% of Tier I Capital to total assets less
goodwill (the "leverage ratio"). Depending upon the risk profile of
the institution and other factors, the regulatory agencies may
require a leverage ratio of 1% or 2% higher than the minimum 3%
level.
The following chart summarizes the applicable bank regulatory
capital requirements. United Security's capital ratios at December
31, 1997, substantially exceeded all regulatory requirements.
Risk-Based Capital Requirements
Minimum United Security's
Regulatory Ratio at
Requirement December 31, 1997
Tier I Capital to Risk-Adjusted Assets 4.00% 14.97%
Total Capital to Risk-Adjusted Assets 8.00% 16.22%
Tier I Leverage Ratio 3.00% 11.08%
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 $1.9 million or $.53 per share compared to $.40
per share in 1996 and $.33 per share in 1995. The total cash
dividends represented a payout ratio of 26.8% in 1997 with a payout
ratio of 20.2% and 18.1% in 1996 and 1995 respectively. This is the
ninth 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,
1997 1996 1995
Return on Average Assets 1.61% 1.70% 1.77%
Return on Average Equity 13.92% 15.83% 17.16%
Cash Dividend Payout Ratio 26.79% 20.21% 18.12%
Average Equity to Average Assets Ratio 11.55% 10.73% 10.32%
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 $118.7 million at December 31, 1997.
Investment securities maturing or repricing in the same time
frame totaled $114.9 million or 66.6% of the investment portfolio
at year-end 1997. In addition, principal payments on mortgage
backed securities totaled $5.9 million in 1997. For repricing
purposes, $6.5 million 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, short-term, and long-term borrowings are additional
sources of liquidity. Liquidity management involves the continual
monitoring of the sources and uses of funds to maintain an
acceptable cash position. Long-term liquidity management focuses on
considerations related to the total balance sheet structure.
As shown in the Consolidated Statements of Cash Flows,
operating activities provided significant levels of funds in 1997,
1996 and 1995, due primarily to high levels of net income. In 1997,
other items providing cash from operating activities were
depreciation, provision for loan losses and amortization of
premiums and discounts. Cash flows from investing activities saw
most of the proceeds from maturities and prepayments on investment
securities being used to finance loan growth. Two other uses of
cash in this area were net cash paid in sale of branch of $6.5
million and purchase of premises and equipment of $970,342. Cash
flows from financing activities saw a decline in customer deposits
and $1.9 million in dividends paid. This was partially offset by
advances from the Federal Home Loan Bank and other borrowings. Net
cash and cash equivalents declined $1.5 million as a result of the
activities mentioned above.
Although the majority of the securities portfolio has stated
maturities in excess of ten years, the entire portfolio consists of
securities that are readily marketable and which are easily
convertible into cash. However, management does not necessarily
rely upon the investment portfolio to generate cash flows to fund
loans, capital expenditures, dividends, debt repayment, etc.
Instead, these activities are funded by cash flows from operating
activities and increases in deposits and short-term borrowings. The
proceeds from sales and maturities of investments have historically
been used to purchase additional investments, but can be used for
other cash needs including the funding of loan growth.
United Security, at December 31, 1997, had 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 $60 million in borrowing
capacity from the Federal Home Loan Bank and $17 million in
established Federal Funds Lines.
Interest rate sensitivity is a function of the repricing
characteristics of the portfolio of assets and liabilities. These
repricing characteristics are the time frames during which the
interest-bearing assets and liabilities are subject to changes in
interest rates, either at replacement or maturity, during the life
of the instruments. Sensitivity is measured as the difference
between the volume of assets and the volume of liabilities in the
current portfolio that are subject to repricing in future time
periods. These differences are known as interest sensitivity gaps
and are usually calculated for segments of time and on a cumulative
basis.
Changes in the mix of earning assets or supporting liabilities
can either increase or decrease the net interest margin without
affecting interest rate sensitivity. In addition, the interest rate
spread between an asset and its supporting liability can vary
significantly, while the timing of repricing for both the asset and
the liability remains the same, thus affecting net interest income.
It should be noted, therefore, that a matched interest-sensitive
position by itself will not ensure maximum net interest income.
Management continually evaluates the condition of the economy, the
pattern of market interest rates, and other economic data to
determine the types of investments that should be made and at what
maturities. Using this analysis, management from time to time
assumes calculated interest sensitivity gap positions to maximize
net interest income based upon anticipated movements in general
levels of interest rates.
Measuring Interest Rate Sensitivity: Gap analysis is a
technique used to measure interest rate sensitivity, an example of
which is presented below. Assets and liabilities are placed in gap
intervals based on their repricing dates. Assets and liabilities
for which no specific repricing dates exist are placed in gap
intervals based on management's judgment concerning their most
likely repricing behaviors. Derivatives used in interest rate
sensitivity management are also included in the applicable gap
intervals.
A net gap for each time period is calculated by subtracting
the liabilities repricing in that interval from the assets
repricing. A positive gap - more assets repricing than liabilities
- - will benefit net interest income if rates are rising and will
detract from net interest income in a falling rate environment.
Conversely, a negative gap (more liabilities repricing than assets)
will benefit net interest income in a declining interest rate
environment and will detract from net interest income in a rising
interest rate environment.
Gap analysis is the simplest representation of United
Security's interest rate sensitivity. However, it cannot reveal the
impact of factors such as 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, 1997, as measured by gap analysis. Over
the next 12 months approximately $9.5 million more interest bearing
liabilities than interest earning assets can be repriced to current
market rates at least once. This analysis indicates that United
Security has a negative gap within the next 12 month range and net
interest income should benefit from a falling rate environment
according to the table.
Interest Rate Sensitivity Analysis
December 31, 1997
(In Thousands of Dollars)
Total
0-3 4-12 1 Year 1-5 Over 5 Non-Rate
Months Months or Less Years Years Sensitive Total
Earning Assets:
Loans $ 67,533 $ 51,132 $118,665 $ 88,849 $12,429 $ 0 $219,943
Investment Securities 109,225 5,652 114,877 27,687 29,935 0 172,499
Interest Bearing
Deposit in Other Banks 226 0 226 0 0 0 226
Total Earning Assets $176,984 $ 56,784 $233,768 $116,536 $42,364 $ 0 $392,668
Percent of Total
Earning Assets 45.1% 14.5% 59.5% 29.7% 10.8% 100.0%
Interest-Bearing Liabilities:
Interest-Bearing Deposits
and Liabilities
Demand Deposits (1) $ 48,974 $ 0 $ 48,974 $ 12,244 $ 0 $ 0 $ 61,218
Savings Deposits (1) 20,676 0 20,676 20,676 0 0 41,352
Time Deposits 61,254 77,306 138,560 40,305 0 0 178,865
Other Liabilities 33,943 90 34,033 10,480 365 0 44,878
Non-Interest-Bearing
Liabilities
Demand Deposits 1,010 0 1,010 0 0 39,974 40,984
Equity 0 0 0 0 0 25,371 25,371
Total Funding Sources $165,857 $ 77,396 $243,253 $ 83,705 $ 365 $ 65,345 $392,668
Percent of Total
Funding Sources 42.2% 19.7% 61.9% 21.3% 0.1% 16.6% 100.0%
Interest Sensitivity Gap
(Balance Sheet) $ 11,127 $(20,612) $ (9,485) $ 32,831 $41,999 $ (65,345) $ 0
Off-Balance Sheet $ (4,740) $ (260) $ (5,000) $ 5,000 $ 0 $ 0 $ 0
Interest Sensitive Gap $ 6,387 $(20,872) $(14,485) $ 37,831 $41,999 $ (65,345) $ 0
Cumulative Interest-
Sensitive Gap $ 6,387 $(14,485) $ N/A $ 23,346 $65,345 $ 0 $ 0
Over 5
Total Years
0-3 4-12 1 Year 1-5 Non-Rate
Months Months or Less Years Sensitive Total
Ratio of Earning Assets
to Funding Sources and
Off-Balance Sheet 1.04% 0.73% 0.94% 1.48% 0.64% 1.00%
Cumulative Ratio 1.04% 0.94% N/A 1.07% 1.00% 1.00%
(1) Management adjustments reflects the Company's anticipated
repricing sensitivity of non-maturity deposit products.
Historically, balances on non-maturity deposit accounts
have remained relatively stable despite changes in market
interest rates. Management has classified certain of
these accounts as non-rate sensitive based on a
management's historical pricing practices and runoff
experience. Approximately 20% of the interest-bearing
demand deposit account balances and 50% of the savings
account balances are classified as over one year.
Certain interest-sensitive assets and liabilities are
included in the table based on historical repricing
experience and expected prepayments in the case of
Mortgage Backed Securities rather than contractual
maturities. Non-accruing loans are included in loans at
the contractual maturity.
United Security also uses additional tools to monitor and
manage interest rate risk sensitivity. These tools include gap
simulation analysis and duration analysis. Both analyses are
methods of estimating earnings at risk and capital at risk under
varying interest rate conditions. They are used to test the
sensitivity of net interest income and stockholders' equity to both
the level of interest rates and changes in the yield curve, and
include adjustments for the expected timing and the magnitude of
assets and liability cash flows. Also, they attempt to capture
adjustments for the lag between movements in market interest rates
and the movement of administered rates on prime rate loans,
interest bearing transaction accounts, regular savings, and money
market savings accounts. These adjustments and assumptions are made
to reflect more accurately possible future cash flows, repricing
behavior and ultimately net interest income. Gap simulation
analysis indicates that United Security is slightly liability
sensitive. United Security also utilizes a proprietary model that
provides an interest rate sensitivity analysis on the balance sheet
and income statement.
Condensed Balance Sheet Duration Analysis
Estimated
Book Modified Duration
Value Down 1% Up 1%
ASSETS
Cash and Due From Banks
Total Cash and Cash Equivalent $ 14,539 4.24 4.24
Investment Securities Available-for-Sale 172,499 2.23 4.58
Loans 215,897 1.59 0.95
Premises and Equipment 6,837 4.24 4.24
Accrued Interest Receivable 4,049 4.24 4.24
Investment in Limited Partnerships 4,273 4.24 4.24
Other Assets 7,847 4.24 4.24
Total Assets $425,941 2.08 2.71
LIABILITIES AND SHAREHOLDERS' EQUITY
Demand, Non-interest Bearing $ 41,848 4.24 4.24
Demand, Interest Bearing 60,354 1.02 1.85
Savings 41,352 2.17 4.26
Time, $100,000 and Over 34,099 1.13 2.32
Other Time 144,765 1.06 2.17
Total Deposits $322,418
Other Liabilities $ 5,933 4.24 4.24
Short-Term Borrowing 3,913 0.08 0.08
Long-Term Borrowing 40,966 0.55 0.55
Shareholders' Equity 52,711 4.24 4.24
Total Liabilities and Shareholders' Equity $425,941 1.86 2.65
Modified Duration Differential 0.22 0.06
*Suggested Change in Market Value
of Equity (Pre-tax) $944,219 $(259,886)
*The theoretical change in the market value of equity should
approximate the present value of the Company's future earnings
exposure to a 1% rise or fall in interest rates.
The analysis United Security uses is a five step process to
calculate the duration of each asset and liability category.
The first step is to assemble maturity distributions on loans,
investments, CD's and other financial instruments with contractual
maturities. The second step is to determine how bank management
would alter the interest rate for each category of assets and
liabilities assuming market interest rates rose or fell 1%. The
third step is to combine the maturity analysis and repricing
assumptions in order to formulate a modified duration estimate for
each category. The fourth step is to calculate a weighted average
for total assets and liabilities, and the fifth step is to multiply
the modified duration differential as calculated (for both up 1%
and down 1% interest rate scenarios) in step four by total assets.
Based on the current position of the balance sheet, management
believes these present value calculations approximate United
Security's aggregate pre-tax earnings exposure for the next 5
years.
In this methodology, all non-rate sensitive assets,
liabilities, and shareholders' equity are assigned a modified
duration based on a five year time horizon (4.24 years).
Additionally, estimates of modified duration incorporate the
likelihood that the investment portfolio would shorten maturity if
interest rates fell and lengthen maturity if interest rates rose.
The model incorporates the possibility that deposit and loan rates
would not rise or fall equally, either by category or by interest
rate scenario, if interest rates rise or fall 1%. Increases or
decreases in loan prepayments are not modeled as they are in the
investment portfolio, nor is there an allowance for growth or
runoff in deposit or loan balances.
The duration analysis presented above suggests long term (the
market value of equity) that the Company's earnings should improve
significantly if rates decline and should be relatively unaffected
for a 1% rise in interest rates.
United Security also employs duration methodology for
pro-forma income simulation to estimate and control interest rate
risk. The earnings simulation presented is based on a one year time
horizon and requires the same repricing assumptions and maturity
distribution analysis as the balance sheet analysis. The income
simulation below suggest pre-tax Company earnings would rise by
$1,600,473 if interest rates fell 1%. If interest rates rise 1%
immediately, earnings simulation also suggests pre-tax earnings
would rise by $30,881 over the next year.
Income Pro Forma Duration Analysis
(In Basis Points -- Up 1%) (In Basis Points -- Down 1%)
Book
Value Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4
ASSETS
Cash and Due From $ 14,539 0 0 0 0 0 0 0 0
Investment Securities $172,499 81 55 37 22 3 4 3 3
Loans $215,897 -38 -46 -52 -57 41 52 60 67
Premises & Equipment $ 6,837 0 0 0 0 0 0 0 0
Accrued Interest
Receivable $ 4,049 0 0 0 0 0 0 0 0
Investment in Limited
Partnerships $ 4,273 0 0 0 0 0 0 0 0
Other Assets $ 7,847 0 0 0 0 0 0 0 0
Total Assets $425,941 13.4 -1.3 -11.8 -20.5 22.2 28.2 32.2 36.0
LIABILITIES & EQUITY
DDA, Non-Interest
Bearing $ 41,848 0 0 0 0 0 0 0 0
DDA, Interest
Bearing $ 60,354 -60 -60 -80 -80 40 40 60 60
Savings $ 41,352 -50 -50 -50 -50 0 0 0 0
Time, $100M and Over $ 34,099 -11 -35 -54 -65 7 22 35 41
Other Time $144,764 -17 -40 -57 -67 13 28 39 45
Short Term Borrowing $ 3,913 -100 -100 -100 -100 100 100 100 100
Long Term Borrowing $ 40,967 -85 -85 -85 -85 85 85 85 85
Other Liabilities $ 5,933 0 0 0 0 0 0 0 0
Equity $ 52,711 0 0 0 0 0 0 0 0
Total Liabilities
& Equity $425,941 -29.0 -38.8 -49.2 -53.5 19.8 26.0 33.6 36.3
Basis Point
Differential 42.4 37.5 37.4 33.0 2.4 2.2 -1.4 -0.3
Dollar Differential $451,497 $399,320 $ 398,255 $ 351,401 $25,556 $23,427 $(14,908) $(3,195)
Cumulative Dollar
Differential $451,497 $850,817 $1,249,072 $1,600,473 $25,556 $48,983 $ 34,075 $30,881
Off balance sheet activity, which is discussed below, is not
captured in this analysis. This activity is a hedge against changes
in interest rates and the slope of the yield curve, and is not
currently considered when estimating the market value of equity.
Although this information is not captured or included above, it is
estimated that for a 1% decline in interest rates, United
Security's interest income would be increased as a result of off
balance sheet activity by $249,100 over the next twelve months. For
a similar rise in rates, interest income would increase by $99,132
over the same period.
As part of the ongoing monitoring of interest-sensitive assets
and liabilities, United Security enters into various interest rate
contracts ("interest rate protection contracts") to help manage
United Security's interest sensitivity. Such contracts generally
have a fixed notional principal amount and include (i) interest
rate swaps where United Security typically receives or pays a fixed
rate and a counterparty pays or receives a floating rate based on
a specified index, (ii) interest rate caps and floors purchased
where United Security receives interest if the specified index
falls below the floor rate or rises above 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 19 of the "Notes to Consolidated Financial
Statement".
Commitments
The Bank maintains financial instruments with risk exposure
not reflected in the Consolidated Financial Statements. These
financial instruments are executed in the normal course of business
to meet the financing needs of its customers and in connection with
its investing and trading activities. These financial instruments
include commitments to make loans, options written, standby letters
of credit, and commitments to purchase securities for forward
delivery.
The Bank's exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for
commitments to make loans and standby letters of credit is
represented by the contractual amount of those instruments. The
Bank applies the same credit policy in making these commitments
that it uses for on-balance sheet items.
Collateral obtained upon exercise of the commitment is
determined based on management's credit evaluation of the borrower
and may include accounts receivable, inventory, property, land, and
other items. The Bank does not normally require collateral for
standby letters of credit. As of December 31, 1997, the Bank had
outstanding standby letters of credit and commitments to make loans
of $5.3 million and $47.2 million, respectively.
For options written and commitments to purchase securities for
forward delivery, the contractual amounts reflect the extent of the
Bank's involvement in various classes of financial instruments and
does not represent exposure to credit loss. The Bank controls the
credit risk of these instruments through credit approvals, limits,
and monitoring procedures.
Options are contracts that allow the buyer of the option to
purchase or sell a financial instrument at a specified price and
within a specified period of time from or to the seller or writer
of the option. As a writer of options, the Bank is paid a premium
at the outset and then bears the risk of an unfavorable change in
the price of the financial instrument underlying the option. As of
December 31, 1997, the Bank had no outstanding options.
Commitments to buy and sell securities for delayed delivery
require the Bank to buy and sell a specified security at a
specified price for delivery on a specified date. Market risk
arises from potential movements in securities values and interest
rates between the commitment and delivery dates. There were $4
million in commitments to sell securities for delayed delivery and
$3 million in commitments to purchase securities as of December 31,
1997.
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 $2.8 million or 14.4% in 1997
compared to 12.7% and 21.3% increases in 1996 and 1995
respectively. Volume, rate, and yield changes contributed to the
growth in net interest income. Average interest-earning assets
increased by $19.8 million or 5.2% in 1997. This increase in
interest-earning assets is partly offset by the volume increase of
$15.4 million or 4.8% in average interest-bearing liabilities.
Volume changes of equal amounts in interest-earning assets and
interest-bearing liabilities generally increase net interest income
because of the spread between the yield on loans and investments
and the rates paid on interest-bearing liabilities. In 1997,
average interest-earning assets outgained average interest-bearing
liabilities by $4.4 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 5.5% in 1997 compared to 5.1% in 1996 and 1995.
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 4.8% in 1997, while the average rate of
interest paid decreased from 4.7% in 1996 to 4.6% in 1997, a
decrease of 10 basis points. Average interest-earning assets
increased 5.2% in 1997, while the average yield increased from 9.0%
in 1996 to 9.4% in 1997, an increase of 40 basis points. Net yield
on average interest earning assets increased 40 basis points from
1996 to 1997. This increase is the result of the higher loan yields
associated with loans made by Acceptance Loan Company.
The percentage of earning assets funded by interest-bearing
liabilities also affects the Bank's interest margin. United
Security's earning assets are funded by interest-bearing
liabilities, non-interest bearing demand deposits, and
shareholders' equity. The net return on earning assets funded by
non interest-bearing demand deposits and shareholders' equity
exceeds the net return on earning assets funded by interest-bearing
liabilities. United Security maintains a relatively consistent
percentage of earning assets funded by interest-bearing
liabilities. In 1997 and 1996, 84% of the Bank's average earning
assets were funded by interest-bearing liabilities as opposed to
82% in 1995. 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,
1997 1996 1995
(In Thousands of Dollars)
Total Interest Income $37,648 $34,551 $30,571
Total Interest Expense 15,376 15,081 13,298
Net Interest Income $22,272 $19,470 $17,273
Provision for Loan Losses 1,710 800 255
Net Interest Income After Provision for
Loan Losses $20,562 $18,670 $17,018
Non-Interest Income 4,361 2,725 2,555
Non-Interest Expense (15,229) (11,765) (10,898)
Income Before Income Taxes $ 9,694 $ 9,630 $ 8,675
Applicable Income Taxes 2,713 2,659 2,225
Net Income $ 6,981 $ 6,971 $ 6,450
Changes in Interest Earned and Interest Expense Resulting from
Changes in Volume and Changes in Rates
1997 Compared to 1996 1996 Compared to 1995 1995 Compared to 1994
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 $1,499 $1,246 $2,745 $2,665 $ 276 $2,941 $3,556 $1,626 $5,182
Taxable Investments 919 (376) 543 1,365 (308) 1,057 1,634 223 1,857
Non-Taxable Investments (410) 273 (137) 265 (126) 139 225 (111) 114
Federal Funds (48) (5) (53) (174) 16 (158) 48 31 79
Total Interest-
Earning Assets $1,960 $1,138 $3,098 $4,121 $(142) $3,979 $5,463 $1,769 $7,232
Interest Expense On:
Demand Deposits $ (128) $ (133) $ (261) $ 217 $ (8) $ 209 $ 260 $ 24 $ 284
Savings Deposits 357 (26) 331 59 (29) 30 (63) (4) (67)
Time Deposits 423 (240) 183 1,265 87 1,352 1,704 1,457 3,161
Other Liabilities (43) 85 42 295 (104) 191 434 392 826
Total Interest-
Bearing Liabilities $ 609 $ (314) $ 295 $1,836 $ (54) $1,782 $2,335 $1,869 $4,204
Increase in Net
Interest Income $1,351 $1,452 $2,803 $2,285 $ (88) $2,197 $3,128 $ (100) $3,028
Provision for Loan Losses
The provision for loan losses is an expense used to establish
the allowance for loan losses. Actual loan losses, net of
recoveries, are charged directly to the allowance. The expense
recorded each year is a reflection of actual losses experienced
during the year and management's judgment as to the adequacy of the
allowance to absorb future losses. Net charge-offs exceeded
recoveries by $798,000 during the year. Management transferred $1.7
million from earnings to the allowance for loan losses in 1997.
This increased the provision to 1.81% of total loans outstanding at
December 31, 1997. For additional information and discussion of the
allowance for loan losses, refer to the section entitled "Loans and
Allowances for Loan Losses".
Non-Interest Income
Non-interest income consists of revenues generated by a broad
range of financial services and activities including fee-based
services and commissions earned through insurance sales and trading
activities. In addition, gains and losses from the sale of
investment portfolio securities and option transactions are
included in non-interest income. Occasionally a non-recurring
transaction will significantly impact non-interest income. Such was
the case in 1997.
The United States Department of Justice required the
divestiture of approximately $9.8 million in deposits, branch
facility and associated assets in order to approve the merger of
United Security Bank and First Bank and Trust. The sale of these
deposits and assets resulted in a non recurring net gain of
$592,000. The Bank also sold the building currently housing the
Centreville Office in order to move to a new facility that will be
constructed in 1998. This sale along with other less significant
asset sales resulted in a gain of $310,224. In addition, Acceptance
Loan Company started operation in 1995 with two offices, and in
1996 and 1997 added four and fourteen offices respectively for a
total of twenty offices in operation at year-end 1997. These events
coupled with one full year of non-interest income generated by the
former Brent Banking Company purchased in June of 1996 and the Bank
Bond Division formed in 1996 contributed to a $1,636,171 or 60%
increase in 1997 compared to a $168,806 or 6.6% increase in 1996.
Fee income from service charges increased $456,564 or 26% from
1995 to 1997, and credit life commission increased $189,953 or 155%
during the same period. This significant growth is attributed to
the Brent Bank acquisition, the growth of the ALC operation, and
changes in products and pricing of certain deposit accounts and
related services.
Non-recurring items of non-interest income include all the
securities gains (losses) discussed in a previous section.
Investment securities had a net gain of $105,254 in 1997 compared
to a $186,802 loss in 1996 and a $74,600 loss in 1995. Trading
securities had a net gain of $10,187 in 1997 over a net loss of
$2,031 in 1996 and a net gain of $303,518 in 1995. The combination
of these accounts yielded a net income of $115,441 in securities
related non-interest income in 1997 compared to a loss of $188,833
in 1996, and gain of $228,918 in 1995. Income generated in the area
of securities gains and losses (which is also discussed under a
separate category "Securities Gains and Losses") is dependent on
many factors including investment portfolio strategies, interest
rate changes, and the short, intermediate, and long-term outlook
for the economy.
Other income increased dramatically in 1997 to $1,737,674
which is a $990,926 or 133% increase over 1996 and a $1,271,937 or
273% increase over 1995. This extraordinary increase was
significantly influenced by the gains realized on the sale of the
Bank's assets, as was mentioned above, and should be considered
non-recurring.
United Security continues to search for new sources of
non-interest income. These sources will come from innovative ways
of performing banking services now as well as providing new
services in the future. This philosophy can be seen in the Bond
Division organized in 1996. This division of the Bank was formed to
offer bond services to community banks and contributed $266,476 to
non-interest income in 1997 compared to $16,233 in 1996. The newly
formed courier company, First Security Courier Corporation,
established to help banks transport documents to the Federal
Reserve, should also contribute to non-interest income in 1998.
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 in 1996, the start up of twenty finance company
offices of Acceptance Loan Company since 1995, and the merger of
United Security Bank and First Bank and Trust. The costs of
approximately $650,000 associated with the merger is a
non-recurring expense.
The ratio of non-interest expenses to average assets increased
to 3.5% in 1997 compared to 2.9% and 3.0% in 1996 and 1995
respectively. This ratio was significantly impacted by the events
noted above.
Salaries and employee benefits increased $1.4 million or 22.6%
in 1997. Approximately $400,000 of the increase is a result of
realizing a full year of salary and benefit expenses for Brent Bank
and the Bond Division. Additionally, Acceptance Loan Company added
52 employees in 1997 to staff the fourteen new offices for an
increase of approximately $820,000 in salary and benefits expense.
At December 31, 1997, United Security had 266 full-time equivalent
employees compared to 226 in 1996 and 197 in 1995. The increase is
attributable to Acceptance Loan Company's growth.
United Security sponsors an Employee Stock Ownership Plan with
401(k) provisions. The Company made matching contributions totaling
$238,190, $216,686 and $247,155 in 1997, 1996 and 1995,
respectively.
Furniture and equipment expense increased 37% in 1997, 9.6% in
1996, and 7.8% in 1995. Most of the 1997 increase of $375,497 is a
direct result of the computer and check processing equipment lease
and depreciation expenses associated with the merger as well as the
expenses associated with the new Acceptance Loan Company offices.
Occupancy expense includes rents, depreciation, utilities,
maintenance, insurance, taxes, and other expenses associated with
maintaining fifteen banking offices and twenty finance company
offices. All, but one, banking offices are owned by the Company.
The Bank's Centreville Office and all Acceptance Loan Company
offices are leased. Net occupancy expense increased 26.3% in 1997,
22.7% in 1996, and 2.1% in 1995. The increases reflect the new
offices of Acceptance Loan Company opened in 1996 and 1997.
Other expenses consists of stationery, printing supplies,
advertising, postage, telephone, legal and other professional fees,
other non-credit losses, and other insurance including deposit
insurance, and other miscellaneous expenses. Other expenses
increased 39.7% in 1997, decreased 6.8% in 1996 and increased 26.9%
in 1995. The 1995 increase was impacted by approximately $315,000
in legal expenses associated with attorney's fees and related legal
matters and the amortization of goodwill associated with the
acquisition of two Bibb County offices which amounted to $158,960
in 1995. The 1997 increase of $1,461,491 was due to approximately
$650,000 in non-recurring expenses associated with the merger and
$497,410 in out-sourced computer processing expenses. All computer
processing is now in-house; therefore, the out-sourcing expense
will be negligible in 1998. The economies of scale, due to the
merger, will allow other expenses to be reduced in the future
through elimination of duplicated operations.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The information required by this item is contained in Item 7
herein under the heading "Liquidity and Interest Rate Sensitivity
Management."
INDEPENDENT AUDITOR'S REPORT
To United Security Bancshares, Inc.:
We have audited the accompanying consolidated statement of
condition of United Security Bancshares, Inc. (an Alabama
corporation) and subsidiaries as of December 31, 1997 and the
related consolidated statements of income, shareholders' equity,
and cash flows for the year then ended. These consolidated
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audit. We did not audit the
accompanying consolidated statement of financial condition of
United Security Bancshares, Inc. as of December 31, 1996 and the
related statements of income, shareholders' equity, and cash flows
for the years ended December 31, 1996 and 1995. United Security
Bancshares, Inc. and First Bancshares, Inc. merged during 1997 in
a transaction accounted for as a pooling of interests, as discussed
in Note 3. The consolidated statements of condition of United
Security Bancshares, Inc. and First Bancshares, Inc. as of December
31, 1996 and the related statements of income, shareholders'
equity, and cash flows for the years December 31, 1996 and 1995
were audited by other auditors whose reports dated January 17, 1997
and January 24, 1997, respectively, expressed unqualified opinions
on those separate financial statements.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of United Security Bancshares, Inc. and subsidiaries as of
December 31, 1997 and the results of their operations and their
cash flows for year ended December 31, 1997, in conformity with
generally accepted accounting principles.
/s/ Arthur Andersen LLP
Birmingham, Alabama
January 23, 1998
UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
December 31, 1997 and 1996
ASSETS
1997 1996
Cash and due from banks $ 14,312,127 $ 15,961,197
Interest bearing deposits in other banks 226,451 44,506
Total cash and cash equivalents 14,538,578 16,005,703
Investment securities available for sale 172,499,227 187,205,620
Loans, net of allowance for loan losses of
$4,045,844 and $3,133,768, respectively 215,897,434 204,885,619
Premises and equipment, net of accumulated
depreciation of $7,559,857 and $7,301,216 6,837,080 6,746,806
Accrued interest receivable 4,048,668 3,667,644
Investment in limited partnerships 4,272,547 3,651,503
Other assets 7,847,183 8,219,817
$425,940,717 $430,382,712
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand, noninterest bearing $ 40,983,995 $ 45,594,533
Demand, interest bearing 61,217,614 77,034,506
Savings 41,352,245 30,445,492
Time, $100,000 and over 34,099,172 42,233,690
Other time 144,765,347 150,997,814
Total deposits 322,418,373 346,306,035
OTHER LIABILITIES 5,933,331 4,929,594
SHORT-TERM BORROWINGS 3,912,821 22,443,235
LONG-TERM DEBT 40,965,644 9,088,065
Total liabilities 373,230,169 382,766,929
COMMITMENTS AND CONTINGENCIES (Note 18)
Shareholders' equity:
Common stock, par value $.01 per share;
10,000,000 shares authorized; 3,601,785
and 3,601,604 shares issued, respectively 36,018 36,016
Surplus 8,057,792 8,046,542
Net unrealized gain on securities
available for sale 1,012,620 1,045,178
Retained earnings 43,858,538 38,747,595
Less treasury stock, 64,100 shares and
65,015 shares, respectively, at cost (254,420) (259,548)
Total shareholders' equity 52,710,548 47,615,783
Total liabilities and shareholders' equity $425,940,717 $430,382,712
The accompanying notes are an integral part of these consolidated statements.
UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31, 1997, 1996, and 1995
1997 1996 1995
INTEREST INCOME
Interest and fees on loans $22,964,581 $20,219,182 $17,278,035
Interest on investment securities
available for sale:
Taxable 12,702,142 12,136,212 10,675,618
Tax-exempt 1,735,501 1,872,279 1,259,315
Other interest and dividends 132,802 166,321 211,835
14,570,445 14,174,812 12,146,768
Interest on investment securities
held to maturity:
Taxable 0 0 352,649
Tax-exempt 0 0 475,504
Dividends 0 0 0
0 0 828,153
Interest on trading account securities 18,323 8,844 13,177
Interest on federal funds sold 95,023 148,030 305,535
Total interest income 37,648,372 34,550,868 30,571,668
INTEREST EXPENSE
Interest on deposits 13,274,760 13,021,430 11,431,312
Interest on short-term borrowings 335,505 1,732,150 1,335,615
Interest on long-term debt 1,765,440 327,164 531,626
15,375,705 15,080,744 13,298,553
NET INTEREST INCOME 22,272,667 19,470,124 17,273,115
PROVISION FOR LOAN LOSSES 1,710,128 799,527 255,290
Net interest income after provision
for loan losses 20,562,539 18,670,597 17,017,825
NONINTEREST INCOME
Service and other charges on deposit
accounts 2,194,963 1,961,220 1,738,399
Credit life insurance commissions 312,757 205,529 122,804
Investment securities gains (losses), net 105,254 (186,802) (74,600)
Trading securities gains (losses), net 10,187 (2,031) 303,518
Other income 1,737,674 746,748 465,737
Total noninterest income 4,360,835 2,724,664 2,555,858
NONINTEREST EXPENSE
Salaries and employee benefits 7,823,601 6,379,413 5,459,767
Furniture and equipment expense 1,387,580 1,012,083 923,242
Occupancy expense 875,523 693,188 564,748
Other expense 5,142,485 3,680,994 3,950,360
Total noninterest expense 15,229,189 11,765,678 10,898,117
INCOME BEFORE INCOME TAXES 9,694,185 9,629,583 8,675,566
PROVISION FOR INCOME TAXES 2,712,727 2,658,593 2,225,364
NET INCOME $ 6,981,458 $ 6,970,990 $ 6,450,202
AVERAGE NUMBER OF SHARES OUTSTANDING 3,536,642 3,536,585 3,520,485
NET INCOME PER SHARE:
Basic $ 1.97 $ 1.97 $ 1.83
Diluted $ 1.96 $ 1.97 $ 1.83
DIVIDENDS PER SHARE $ .53 $ .40 $ .33
The accompanying notes are an integral part of these consolidated statements.
UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERES' EQUITY
For the Years Ended December 31, 1997, 1996 and 1995
Net Unrealized
Gain (Loss)
on Securities Total
Common Available Retained Treasury Shareholders'
Stock Surplus for Sale Earnings Stock at Cost Equity
BALANCE AT JANUARY 1, 1995 $ 225,100 $7,618,473 $(3,694,453) $27,904,101 $(455,563) $31,597,658
Net income 0 0 0 6,450,202 0 6,450,202
Dividends declared 0 0 0 (1,168,554) 0 (1,168,554)
Sale of shares of treasury stock 0 238,985 0 0 196,015 435,000
Reduction of par value and stock split (189,084) 189,084 0 0 0 0
Net change in unrealized loss on
securities available for sale 0 0 4,481,353 0 0 4,481,353
BALANCE AT DECEMBER 31, 1995 36,016 8,046,542 786,900 33,185,749 (259,548) 41,795,659
Net income 0 0 0 6,970,990 0 6,970,990
Dividends declared 0 0 0 (1,409,144) 0 (1,409,144)
Net change in unrealized gain on
securities available for sale,
net of taxes 0 0 258,278 0 0 258,278
BALANCE AT DECEMBER 31, 1996 36,016 8,046,542 1,045,178 38,747,595 (259,548) 47,615,783
Net income 0 0 0 6,981,458 0 6,981,458
Dividends declared 0 0 0 (1,870,515) 0 (1,870,515)
Retirement of treasury stock (9) (5,119) 0 0 5,128 0
Exercise of stock options 11 16,369 0 0 0 16,380
Net change in unrealized gain on
securities available for sale,
net of taxes 0 0 (32,558) 0 0 (32,558)
BALANCE AT DECEMBER 31, 1997 $ 36,018 $8,057,792 $ 1,012,620 $43,858,538 $(254,420) $52,710,548
The accompanying notes are an integral part of these consolidated statements.
UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1997, 1996 and 1995
1997 1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 6,981,458 $ 6,970,990 $ 6,450,202
Adjustments:
Depreciation 894,702 969,983 888,328
Provision for loan losses 1,710,128 799,527 255,290
Deferred income taxes (335,835) (118,683) 382,457
Amortization of intangibles 604,811 338,689 262,137
(Gain) loss on sale of securities, net (105,254) 186,802 74,600
(Gain) on sale of branch (592,012) 0 0
(Gain) loss on sale of fixed assets (364,378) 1,004 (4,425)
Equity in loss of unconsolidated investee 150,000 6,029 12,000
Amortization of premium and discounts, net 1,297,363 1,285,411 859,025
Net decrease in trading account securities 0 0 405,775
Changes in assets and liabilities:
(Increase) decrease in accrued interest
receivable (381,024) 143,129 (151,638)
(Increase) decrease in other assets (515,295) (410,413) (616,893)
Increase (decrease) in interest payable 48,849 (2,643) 263,939
Increase (decrease) in other liabilities 900,534 932,434 5,269
Net cash provided by operating activities 10,294,047 11,102,259 9,086,066
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investment securities
available for sale (49,711,539) (68,311,896) (74,486,254)
Proceeds from sales of investment securities
available for sale 47,507,930 39,166,424 60,560,451
Proceeds from maturities and prepayments of
investment securities available for sale 15,948,700 8,851,014 8,538,325
Proceeds from redemptions of Federal
Home Loan Bank stock 0 503,000 102,100
Purchases of Federal Home Loan Bank stock (211,260) (398,900) (434,800)
Net cash received in acquisition of bank 0 8,605,941 1,566,943
Net cash paid in sale of branch (6,518,424) 0 0
Loan (originations) and principal
repayments, net (15,555,151) (9,372,493) (11,224,651)
(Purchase of) proceeds from sale of
premises and equipment, net (970,598) (820,777) (567,228)
Net cash used in investing activities (9,510,342) (21,777,687) (15,945,114)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in customer deposits (14,008,721) 8,361,670 9,877,943
Net increase (decrease) in short-term borrowings (79,260) 34,398 3,364,222
Proceeds from FHLB advances and other borrowings 37,281,088 4,964,913 3,755,000
Repayment of FHLB advances and other borrowings (23,854,663) (673,833) (6,748,921)
Proceeds from issuance of common stock 16,380 0 0
Dividends paid (1,605,654) (1,366,386) (1,157,865)
Sale of treasury stock 0 0 435,000
Net cash (used in) provided by
financing activities (2,250,830) 11,320,762 9,525,379
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (1,467,125) 645,334 2,666,331
CASH AND CASH EQUIVALENTS, beginning of year 16,005,703 15,360,369 12,694,038
CASH AND CASH EQUIVALENTS, end of year $14,538,578 $16,005,703 $15,360,369
The accompanying notes are an integral part of these consolidated statements.
UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
1. DESCRIPTION OF BUSINESS
United Security Bancshares, Inc. (the "Company" or "USB") and
its subsidiary, First United Security Bank (the "Bank") provide
commercial banking services to customers located primarily in
Clarke, Choctaw, Bibb and surrounding counties in Alabama and
Mississippi. The Company also owns all the stock of First
Security Courier Corporation, ("FSCC") an Alabama corporation.
FSCC is a courier service organized to transport items for
processing to the Federal Reserve for financial institutions
located in Southwest Alabama.
The Bank owns all of the stock of Acceptance Loan Company, Inc.
("Acceptance"), an Alabama corporation. Acceptance is a finance
company organized for the purpose of making consumer loans and
purchasing consumer loans from vendors. Acceptance has offices
located within the communities served by the Bank as well as
offices outside the Bank's market area in north and southeast
Alabama, and northwest Florida. The Bank also owns 50% of the
stock of First Banking Services, Inc. ("FBS"), a Florida
corporation headquartered in Ft. Walton Beach, Florida. FBS
performs data processing services for banks, including the Bank
and FBS' other shareholder, First National Bank and Trust of
Fort Walton Beach. The Bank invests in limited partnerships
that operate qualified affordable housing projects to receive
tax benefits.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of
the Company, FSCC, the Bank and its wholly owned subsidiary.
All significant intercompany balances and transactions have
been eliminated. The Bank's investment in FBS is carried on an
unconsolidated basis, at cost, adjusted for distributions and
the Bank's proportionate share of undistributed earnings or
losses. Total assets and results of operations of FBS are not
material. The Bank's investment in limited partnerships are
carried on an unconsolidated basis under either the equity or
cost method based on the percentage of ownership and influence
over operations.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents
include cash on hand, amounts due from banks, and federal funds
sold. Federal funds are generally purchased and sold for
one-day periods.
Supplemental disclosures of cash flow information and noncash
transactions related to cash flows for the years ended December
31, 1997, 1996, and 1995 are as follows:
1997 1996 1995
Cash paid during the period for:
Interest $15,326,856 $15,083,387 $13,034,614
Income taxes 2,351,304 2,605,267 2,074,360
Supplemental schedule of noncash investment
and financing activities:
Dividends declared but unpaid 542,796 277,935 235,176
Sales of other real estate financed
by the Bank 0 0 35,500
Transfer of securities from held to maturity
to available for sale 0 0 23,073,766
Details of acquisition:
Fair value of assets acquired 0 25,095,174 47,005,426
Liabilities assumed 0 (33,701,115) (48,572,369)
Details of branch sale:
Fair value of assets sold 3,433,740 0 0
Liabilities transferred 9,952,164 0 0
Securities
Securities are held in three portfolios: trading account
securities, held to maturity securities, and securities
available for sale. Trading account securities are carried at
market value, with unrealized gains and losses included
immediately in other income. Investment securities held to
maturity are carried at cost, adjusted for amortization of
premiums and accretion of discounts. With regard to investment
securities held to maturity, management has the intent and the
Bank has the ability to hold such securities until maturity.
Investment securities available for sale are carried at market
value, with any unrealized gains or losses excluded from
earnings and reflected, net of tax, as a separate component of
shareholders' equity. Investment securities available for sale
are so classified because management may decide to sell certain
securities prior to maturity for liquidity, tax planning, or
other valid business purposes.
Included in investment securities available for sale is stock
in the Federal Home Loan Bank (FHLB) of Atlanta. FHLB stock is
carried at cost, has no contractual maturity, has no quoted
fair value, and no ready market exists; therefore, the fair
value of such stock is assumed to approximate cost. The
investment in the stock is required of every member of the FHLB
system.
Interest earned on investment securities held to maturity,
investment securities available for sale, and trading account
securities is included in interest income. Amortization of
premiums and discounts on investment securities is by the
interest method. Net gains and losses on the sale of investment
securities held to maturity and investment securities available
for sale, computed principally on the specific identification
method, are shown separately in noninterest income in the
consolidated statements of income.
Derivative Financial Instruments
To hedge interest rate exposure, the Company uses derivative
financial instruments consisting of interest rate swaps, caps,
and floors which are accounted for using the accrual method.
Net interest income or expense related to interest rate swaps,
caps, and floors is recorded over the life of the agreement as
an adjustment to net interest income. The premiums paid for the
caps and floors are amortized straight-line over the life of
the agreement. Changes in the estimated fair values of
derivative financial instruments used as hedges are not
reflected in the financial statements until realized. Gains or
losses realized on the sales or terminations of interest rate
swaps are deferred and amortized into interest income over the
maturity period of the contract.
The Company's criteria for use of derivatives as hedges include
reduction of the risk associated with the exposure being hedged
and such derivatives must be designated as a hedge at the
inception of the derivative contract. Derivatives that do not
meet these criteria are carried at fair value with changes in
value recognized currently in earnings.
Loans and Interest Income
Loans are reported at the principal amounts outstanding less
unearned income and the allowance for loan losses. Loan
origination fees, net of certain deferred origination costs,
are capitalized and recognized as an adjustment to yield of the
related loan.
Interest on commercial and real estate loans is accrued and
credited to income based on the principal amount outstanding.
Interest on installment loans is recognized using the interest
method and according to the rule of 78's which approximates the
interest method.
The accrual of interest on loans is discontinued when, in the
opinion of management, there is an indication that the borrower
may be unable to meet payments as they become due. Upon such
discontinuance, all unpaid accrued interest is reversed against
current income unless the collateral for the loan is sufficient
to cover the accrued interest. Interest received on nonaccrual
loans generally is either applied against principal or reported
as interest income, according to management's judgment as to
the collectibility of principal. Generally, loans are restored
to accrual status when the obligation is brought current and
has performed in accordance with the contractual terms for a
reasonable period of time and the ultimate collectibility of
the total contractual principal and interest is no longer in
doubt.
Allowance for Loan Losses
The allowance for loan losses is increased by a provision for
loan losses, which is charged to expense, and reduced by
charge-offs, net of recoveries. The allowance for loan losses
is maintained at a level which, in management's judgment, is
adequate to absorb credit losses inherent in the loan
portfolio. The amount of the allowance is based on management's
evaluation of the collectibility of the loan portfolio,
including the nature of the portfolio, credit concentrations,
historical trends, specific impaired loans, and economic
conditions. Though management believes the allowance for loan
losses to be adequate, ultimate losses may vary from their
estimates. However, estimates are reviewed periodically, and as
adjustments become necessary, they are reported in earnings
during periods they become known.
Losses on individually identified impaired loans are measured
based on the present value of expected future cash flows
discounted at each loan's original effective market interest
rate. As a practical expedient, impairment may be measured
based on the loan's observable market price or the fair value
of the collateral if the loan is collateral dependent. When the
measure of the impaired loan is less than the recorded
investment in the loan, the impairment is recorded through the
provision added to the allowance for loan losses. One-to-four
family residential mortgages and consumer installment loans are
evaluated collectively for impairment.
Long-Lived Assets
Premises and equipment are stated at cost less accumulated
depreciation. The provision for depreciation is computed using
the straight-line and accelerated methods over the estimated
useful lives of the assets. Goodwill, organization cost, and
core deposit intangibles are included in other assets and are
amortized using the straight-line method. Goodwill is being
amortized over 20 years, organization cost over five years, and
core deposits from six to ten years. Impairment of long-lived
assets is evaluated by management based upon an event or
changes in circumstances surrounding the underlying assets.
Other Real Estate
Real estate properties acquired through, or in lieu of, loan
foreclosures are to be sold and are initially recorded at fair
value at the date of foreclosure, establishing a new cost
basis. Costs to maintain or hold the property are expensed and
amounts incurred to improve the property, to the extent that
fair value is not exceeded, are capitalized. Valuations are
periodically performed by management, and a valuation allowance
is established by a charge to income if the carrying value of
a property exceeds its fair value less the estimated costs to
sell. Other real estate aggregated $506,000 and $18,000 at
December 31, 1997 and 1996, respectively, and is included in
other assets.
Income Taxes
The Company accounts for income taxes through the use of the
asset and liability method. Under the asset and liability
method, deferred taxes are recognized for the tax-consequences
of temporary differences by applying enacted statutory tax
rates applicable to future years to differences between the
financial statement carrying amounts and the bases of existing
assets and liabilities. The effect on deferred taxes of a
change in tax rates would be recognized in income in the period
that includes the enactment date.
Treasury Stock
Treasury stock repurchases and sales are accounted for using
the cost method.
Earnings Per Share
In February 1997, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 128, Earnings Per Share. SFAS No. 128 revises the
methodology to be used in computing earnings per share ("EPS")
such that the computations required for primary and fully
diluted EPS are to be replaced with "basic" and "diluted" EPS.
Basic EPS is computed by dividing net income by the weighted
average number of shares outstanding during the period. Diluted
EPS is computed in the same manner as fully diluted EPS, except
that, among other changes, the average share price for the
period is used in all cases when applying the treasury stock
method to potentially dilutive securities. All share and per
share information included in these financial statements have
been restated to give effect to the adoption of SFAS No. 128.
The following table represents the earnings per share
calculations for the years ended December 31, 1997, 1996, and
1995:
Per Share
For the Years Ended Income Shares Amount
December 31, 1997:
Net income $6,981,458
Basic earnings per share 6,981,458 3,536,642 $ 1.97
Dilutive securities 0 17,205 0.00
Diluted earnings per share $6,981,458 3,553,847 $ 1.96
December 31, 1996:
Net income $6,970,990
Basic earnings per share 6,970,990 3,536,585 $ 1.97
Dilutive securities 0 0 0.00
Diluted earnings per share $6,970,990 3,536,585 $ 1.97
December 31, 1995:
Net income $6,450,202
Basic earnings per share 6,450,202 3,520,485 $ 1.83
Dilutive securities 0 0 0.00
Diluted earnings per share $6,450,202 3,520,485 $ 1.83
Both basic and diluted earnings per share were the same
restated, for adoption of SFAS No. 128, as previously reported
earnings per share for the years ended December 31, 1996 and
1995.
Use of Estimates
The accounting principles and reporting policies of the
Company, and the methods of applying these principles, conform
with generally accepted accounting principles ("GAAP") and with
general practices within the financial services industry. In
preparing the financial statements, management is required to
make estimates and assumptions that affect the reported amounts
of assets and liabilities as of the date of the statement of
condition and revenues and expenses for the period. Actual
results could differ significantly from those estimates.
Material estimates that are particularly susceptible to
significant changes in the near-term relate to the
determination of the allowance for loan losses and the
valuation of real estate acquired in connection with
foreclosures or in satisfaction of loans. In connection with
the determination of the allowances for loan losses and real
estate owned, management obtains independent appraisals for
significant properties, evaluates the overall portfolio
characteristics and delinquencies and monitors economic
conditions.
A substantial portion of the Company's loans are secured by
real estate in its primary market area. Accordingly, the
ultimate collectibility of a substantial portion of the
Company's loan portfolio and the recovery of a portion of the
carrying amount of foreclosed real estate are susceptible to
changes in economic conditions in the Company's primary market.
Pending Accounting Pronouncements
In February 1997, the FASB issued SFAS No. 129, Disclosure of
Information About Capital Structure. This statement establishes
standards for disclosing information about an entity's capital
structure and is effective for financial statement periods
ending after December 15, 1997. In June 1997, the FASB issued
SFAS No. 130, Reporting of Comprehensive Income. This statement
established standards for reporting and display of
comprehensive income and its components (revenues, expenses,
gains, and losses) in a full set of financial statements and is
effective for fiscal years beginning after December 15, 1997.
In June 1997, the FASB also issued SFAS No. 131, Disclosures
About Segments of an Enterprise and Related Information. This
statement establishes standards for reporting financial and
descriptive information about operating segments in annual
financial statements and requires that those enterprises report
selected information about operating segments in interim
financial reports issued to stockholders and is effective for
financial statements for periods beginning after December 15,
1997.
The Company will adopt these new standards governing disclosure
and presentation in 1998 as required.
Reclassifications
Certain amounts in the 1996 and 1995 consolidated financial
statements have been reclassified to conform to the 1997
presentation.
3. BUSINESS COMBINATIONS
On August 19, 1996, the Company signed a definitive agreement
to merge with First Bancshares, Inc. ("FBI") of Grove Hill,
Alabama effective June 30, 1997. The agreement called for the
exchange of 1,398,788 shares of the Company's common stock
(5.8321 shares of the Company's common stock for each share of
FBI's common stock) for 100% of FBI's common stock in a
transaction accounted for as a pooling-of-interests.
Accordingly, the Company's financial statements have been
restated to include the results of FBI for all periods
presented. Merger costs of approximately $650,000 have been
expensed in the accompanying 1997 consolidated statement of
income.
Combined and separate results of the Company and FBI during the
periods preceding the merger were as follows (in thousands):
USB FBI Combined
Six months ended June 30, 1997 (unaudited):
Net interest income $ 5,352,810 $5,265,778 $10,618,588
Net income $ 2,272,489 $1,201,565 $ 3,474,054
Year ended December 31, 1996:
Net interest income $10,082,957 $9,387,167 $19,470,124
Net income $ 4,262,719 $2,708,271 $ 6,970,990
Year ended December 31, 1995:
Net interest income $ 9,165,034 $8,108,081 $17,273,115
Net income $ 3,615,091 $2,835,111 $ 6,450,202
In conjunction with the merger, the U.S. Justice Department
required the divestiture of a branch in Grove Hill, Alabama. On
October 31, 1997, USB sold the branch and related assets and
liabilities with carrying values of $2.9 million and $10.0
million, respectively, for a net cash payment from USB of $6.5
million. The resulting gain of $592,000 is included in other
income.
On May 31, 1996, USB completed the acquisition of Brent Banking
Company of Brent, Alabama, in a cash transaction. At the date
of acquisition, Brent had assets of $34 million and equity of
$4.5 million. The cash purchase price of $7 million exceeded
the fair value of net assets acquired by approximately $2.3
million, which has been recorded as goodwill.
Pro forma 1996 and 1995 net income, basic and diluted earnings
per share had the purchase business combination been completed
as of the first days of 1996 and 1995 were as follows:
1996 1995
Net income (in thousands) $6,728 $7,456
Basic net income per share $ 1.92 $ 2.11
Diluted net income per share $ 1.92 $ 2.11
On February 17, 1995, FBI acquired certain branches in
Centreville and Woodstock, Alabama by assumption of the
branches' liabilities and payment of a premium of $2.7 million.
The deposit premium has been recorded as goodwill.
4. INVESTMENT SECURITIES
Details of investment securities available for sale at December
31, 1997 and 1996 are as follows:
December 31, 1997
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Obligations of states, counties, and
political subdivisions $ 22,227,824 $1,693,229 $ 0 $ 23,921,053
U.S. treasury securities and obligations
of U.S. government agencies 2,096,057 0 30,769 2,065,288
Mortgage-backed securities 144,310,042 1,576,435 1,637,079 144,249,398
Equity securities 50,019 22,947 0 72,966
Corporate notes 146,569 0 4,747 141,822
Other--FHLB stock 2,048,700 0 0 2,048,700
Total $170,879,211 $3,292,611 $1,672,595 $172,499,227
December 31, 1996
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Obligations of states, counties and
political subdivisions $ 32,112,583 $1,557,034 $ 166,693 $ 33,502,924
U.S. treasury securities and obligations
of U.S. government agencies 4,987,633 51,327 0 5,038,960
Mortgage-backed securities 145,098,482 3,127,803 2,891,054 145,335,231
Equity securities 250,822 0 0 250,822
Corporate notes 149,580 0 7,758 141,822
Other 2,935,374 487 0 2,935,861
Total $185,534,474 $4,736,651 $3,065,505 $187,205,620
The scheduled maturities of investment securities available for
sale at December 31, 1997 are presented in the following table:
Amortized Market
Cost Value
Maturing within one year $ 4,810,402 $ 4,818,358
Maturing after one but before five years 5,615,147 5,884,756
Maturing after five but before fifteen years 23,898,180 25,122,494
Maturing after fifteen years 136,555,482 136,673,619
Total $170,879,211 $172,499,227
For purposes of the maturity table, mortgage-backed securities,
which are not due at a single maturity date, have been
allocated over maturity groupings based on the weighted-average
contractual maturities of underlying collateral. The
mortgage-backed securities may mature earlier than their
weighted-average contractual maturities because of principal
prepayments.
Investment securities with a carrying value of $86,328,794 and
$73,462,114 at December 31, 1997 and 1996, respectively, were
pledged to secure public deposits and for other purposes.
Gross gains realized on sales of securities available for sale
were $512,843 in 1997, $42,026 in 1996, and $213,830 in 1995.
Gross realized losses on those sales were $407,589 in 1997,
$228,828 in 1996, and $288,430 in 1995. Gross realized gains on
trading account securities sales were $19,111 in 1997, $36,250
in 1996, and $364,428 in 1995. Gross realized losses on those
sales were $8,924 in 1997, $38,281 in 1996, and $60,910 in
1995.
Securities Transfers
During 1995, the Bank transferred securities from the held to
maturity portfolio to the available for sale portfolio. This
transfer was made at market value and was made due to a
business combination that necessitated the transfer to maintain
the Company's interest rate risk protection in accordance with
SFAS 115.
5. LOANS
At December 31, 1997 and 1996, the composition of the loan
portfolio was as follows:
1997 1996
Commercial, financial, and agricultural $ 35,036,350 $ 36,386,826
Real estate mortgage 126,823,581 126,666,470
Installment 61,821,754 49,118,781
Less:
Allowance for loan losses (4,045,844) (3,133,768)
Unearned interest (3,738,407) (4,152,690)
Total $215,897,434 $204,885,619
The Bank grants commercial, real estate, and installment loans
to customers primarily in Clarke, Choctaw, Bibb, and
surrounding counties in southwest Alabama and southeast
Mississippi. Although the Bank has a diversified loan
portfolio, the ability of a substantial number of the Bank's
loan customers to honor their obligations is dependent upon the
timber and timber-related industries. At December 31, 1997,
approximately $49.2 million of the Bank's loan portfolio
consisted of loans to customers in the timber and
timber-related industries.
In the ordinary course of business, the Bank makes loans to
certain officers and directors of the Company and Bank,
including companies with which they are associated. These loans
are made on substantially the same terms as those prevailing
for comparable transactions with others. Such loans do not
represent more than normal risk of collectibility nor do they
present other unfavorable features. The amounts of such related
party loans and commitments at December 31, 1997 and 1996 were
$1,801,356 and $1,655,730, respectively. During the year ended
December 31, 1997, new loans to these parties totaled
$1,522,893 and repayments were $1,377,267.
A summary of the transactions in the allowance for loan losses
follows:
1997 1996 1995
Balance at beginning of year $3,133,768 $2,466,979 $1,903,515
Acquired in branch acquisitions 0 423,251 575,223
Provision for loan losses 1,710,128 799,527 255,290
Loans charged off (1,038,585) (773,423) (394,547)
Recoveries of loans previously charged off 240,533 217,434 127,498
Balance at end of year $4,045,844 $3,133,768 $2,466,979
At December 31, 1997, the Company had one loan considered to be
impaired. The amount of this loan, which is on nonaccrual, is
$538,677 and the related allowance is $270,000. The average
recorded investment in impaired loans during the year ended
December 31, 1997 was approximately $548,011. For the year
ended December 31, 1997, the Company did not recognize interest
income on the impaired loan during the period the loan was
considered impaired. The Company had approximately $1,502,000
considered to be impaired at December 31, 1996.
Loans on which the accrual of interest has been discontinued
amounted to $1,487,514 and $1,797,814 at December 31, 1997 and
1996, respectively. If interest on those loans had been
accrued, such income would have approximated $153,870, $90,740,
and $29,767 for 1997, 1996, and 1995, respectively. Interest
income actually recorded on those loans amounted to $108,060,
$36,719, and $10,407 for 1997, 1996, and 1995, respectively.
6. PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
1997 1996
Land $ 920,041 $ 986,452
Premises 6,436,849 6,721,865
Furniture, fixtures, and equipment 7,040,047 6,339,705
14,396,937 14,048,022
Less accumulated depreciation 7,559,857 7,301,216
Total $ 6,837,080 $ 6,746,806
Depreciation expense of $894,702, $969,983, and $888,328 was
recorded in 1997, 1996, and 1995, respectively, on premises and
equipment.
7. INVESTMENT IN LIMITED PARTNERSHIPS
The Bank invests in limited partnerships that operate qualified
affordable housing projects to receive tax benefits in the form
of tax deductions from operating losses and tax credits. The
Bank accounts for the investments under either the equity or
cost method based on the percentage ownership and influence
over operations. The Bank's interest in these partnerships was
$4,272,547 and $3,651,503 at December 31, 1997 and 1996,
respectively. Losses related to these partnerships amounted to
approximately $122,000, $137,000, and $0 for 1997, 1996, and
1995, respectively. Management analyzes these investments
annually for potential impairment.
The assets and liabilities of these partnerships consist
primarily of apartment complexes and related mortgages. The
Bank's carrying value approximates cost or 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, 1997 in the amount of $720,593.
8. DEPOSITS
At December 31, 1997, the scheduled maturities of the Bank's
time deposits greater than $100,000 are as follows:
1998 $23,192,913
1999 5,394,132
2000 3,681,551
2001 842,398
2002 and thereafter 988,178
$34,099,172
9. SHORT-TERM BORROWINGS
Short-term borrowings consist of federal funds purchased and
securities sold under agreements to repurchase which generally
mature within one to four days from the transaction date,
treasury tax and loan deposits which are on demand, and FHLB
advances with an original maturity of less than one year.
Information concerning short-term borrowings is as follows:
1997
Federal Treasury
Federal Home Loan Tax and
Funds Bank Repurchase Loan
Purchased Advances Agreements Deposits
Average balance during the year $2,450,151 $ 0 $ 6,671 $ 753,181
Average interest rate during the year 5.96% -- 4.15% 5.28%
Maximum month-end balance during
the year $9,350,000 $ 0 $ 49,445 $2,536,321
1996
Federal Treasury
Federal Home Loan Tax and
Funds Bank Repurchase Loan
Purchased Advances Agreements Deposits
Average balance during the year $2,363,724 $23,702,186 $195,521 $ 408,216
Average interest rate during the year 5.43% 5.50% 4.30% 5.77%
Maximum month-end balance during
the year $8,900,000 $32,000,000 $926,760 $1,483,255
At December 31, 1997, the Bank has $17 million in available
federal fund lines from correspondent banks.
10. LONG-TERM DEBT
The Company uses Federal Home Loan Bank advances as an
alternative to funding sources with similar maturities such as
certificates of deposit or other deposit programs. These
advances generally offer more attractive rates when compared to
other midterm financing options. They are also flexible,
allowing the Company to quickly obtain the necessary maturities
and rates that best suit its overall asset/liability strategy.
Investment securities secure these borrowings.
The following summarizes information concerning Federal Home
Loan Bank advances and other borrowings:
1997 1996
Average balance $30,296,430 $9,129,732
Maximum month-end balance during year $40,972,587 $9,164,454
Average rate paid 5.83% 7.50%
Weighted average remaining maturity 2.20 years 8.04 years
Scheduled maturities of Federal Home Loan Bank advances in 1998
are approximately $83,333. Maturities during 1999, 2000, 2001
and 2002 are approximately $10 million, $30 million, $83,333,
and $83,333, respectively.
At December 31, 1997, the Bank has $60 million in available
credit from the Federal Home Loan Bank.
At December 31, 1996, FBI had a note payable to another
institution with principal due annually through December 31,
2004 and interest payable quarterly at New York Prime less 10
basis points. This debt was secured by all the capital stock of
First Bank, a wholly owned subsidiary of FBI. The loan
agreement underlying the note included numerous covenants that
related to FBI and its subsidiary bank's operations, financial
condition, and capital structure. During 1997, this loan was
repaid prior to the merger.
11. CHANGE IN PAR VALUE AND SPLIT IN STOCK
At the Company's annual meeting on April 25, 1995, the
shareholders ratified a change in par value of the Company's
common stock from $.25 to $.01 per share. Additionally, the
shareholders also approved a four-for-one split of its stock
payable to shareholders of record on that date.
12. INCOME TAXES
The consolidated provisions (benefits) for income taxes for the
years ended December 31 were as follows:
1997 1996 1995
Federal
Current $2,714,017 $2,366,681 $1,585,332
Deferred (298,811) (106,190) 349,255
2,415,206 2,260,491 1,934,587
State
Current 334,545 410,595 257,575
Deferred (37,024) (12,493) 33,202
297,521 398,102 290,777
Total $2,712,727 $2,658,593 $2,225,364
The consolidated tax provision differed from the amount
computed by applying the federal statutory income tax rate to
pre-tax earnings for the following reasons:
1997 1996 1995
Income tax expense at federal statutory rate $3,294,833 $3,274,058 $2,949,693
Increase (decrease) resulting from:
Tax-exempt interest (600,744) (661,223) (611,960)
State income tax expense net of federal income
tax benefit 196,364 275,026 170,537
Tax credits (low income housing) (480,000) (325,000) (165,000)
Other 302,274 95,732 (117,906)
Total $2,712,727 $2,658,593 $2,225,364
Effective tax rate 28% 28% 26%
The tax effects of temporary differences that give rise to
significant portion of the deferred tax assets and deferred tax
liabilities at December 31, 1997 and 1996, are presented below:
1997 1996
Deferred tax assets:
Allowance for loan losses $ 929,297 $ 591,829
Accrued vacation 22,200 22,200
Capital loss carryover 80,443 85,305
Deferred commissions and fees 242,385 130,112
Other 233,936 359,501
Total gross deferred tax asset 1,508,261 1,188,947
Valuation allowance (75,903) (75,903)
Net deferred tax assets 1,432,358 1,113,044
Deferred tax liabilities:
Premises and equipment 501,825 548,007
Limited partnerships 267,589 262,290
Unrealized gain on securities available for sale 607,396 650,948
Other deferred tax liabilities 123,568 99,206
Total gross deferred tax liabilities 1,500,378 1,560,451
Net deferred tax liability $ 68,020 $ 447,407
13. EMPLOYEE BENEFIT PLANS
The Company sponsors an Employee Stock Ownership Plan with
401(k) provisions. This plan covers substantially all employees
and allows employees to contribute up to 15% of their
compensation on a before-tax basis. The Company may make
discretionary contributions to match employee contributions
dollar for dollar up to 6% of an employee's compensation.
Employees have the option to allocate some or all of their
contributions towards the purchase of Company stock. The
Company made matching contributions totaling $238,190 and
$216,686 in 1997 and 1996, respectively.
14. LONG-TERM INCENTIVE COMPENSATION PLAN
During 1997, the Company's shareholders' approved the adoption
of the United Security Bancshares, Inc. Long Term Incentive
Compensation Plan ("LTICP"). This plan provides for a number of
forms of stock based compensation for key employees of USB and
its subsidiaries. Under the plan, eligible employees may be
awarded incentive and non-qualified stock options, stock
appreciation rights, and restricted stock. The LTICP provides
for the issuance of up to 60,000 shares of USB common stock
with a par value of $.01 per share. In addition, each option
expires no later than five years after the grant date. The
exercise price of each option is determined by the compensation
committee, but in the case of incentive stock options, the
price shall not be less than the fair market value on the grant
date. At December 31, 1997, options for 56,250 shares were
outstanding at $17.50 per share, all of which were exercisable.
SFAS No. 123, Accounting for Stock Based Compensation, is
effective for the Company's December 31, 1997 financial
statements. SFAS No. 123 allows companies to continue to record
compensation cost under Accounting Principles Board Opinion
("APB") No. 25; and as a result, adoption of SFAS No. 123 did
not affect the financial condition or results of operations of
the Company. SFAS No. 123 does, however, require certain pro
forma disclosures reflecting what compensation cost would have
been if the fair value based method of recording compensation
expense for stock-based compensation had been adopted. Had
compensation cost been determined, consistent with SFAS No.
123, the Company's net income would have been decreased to the
following pro forma amounts:
Fiscal Year
Ended
December 31,
1997
Net income--as reported $6,981,458
Net income--pro forma $6,805,635
Basic net income per share--as reported $ 1.97
Basic net income per share--pro forma $ 1.92
Diluted net income per share--as reported $ 1.96
Diluted net income per share--pro forma $ 1.91
A summary of the status of the Company's stock option plan at
December 31, 1997 and the changes during the year then ended is
as follows:
1997
Exercise
Shares Price
Outstanding at beginning of year 0 $ 0.00
Granted 57,350 17.50
Exercised 1,100 17.50
Outstanding at end of year 56,250 $17.50
Exercisable at end of year 56,250 $17.50
Fair value of options granted $4.22
The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option pricing model with the
following weighted average assumptions: a risk free interest
rate based on zero coupon governmental issues at grant date
with the maturity equal to the expected term of the options
(6.27% for 1997), no expected forfeiture rate as options are
immediately vested at date of grant, an expected stock
volatility of 26% and an expected annual dividend yield of $.60
per share.
15. 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. As of December 31, 1997, approximately
$12,100,000 of the Bank's retained earnings was available for
distribution without prior regulatory approval.
The Company is subject to various regulatory capital
requirements that prescribe quantitative measures of the
Company's assets, liabilities, and certain off-balance sheet
items. The Company's regulators have also imposed qualitative
guidelines for capital amounts and classifications such as risk
weightings, capital components, and other details. The
quantitative measures to ensure capital adequacy require that
the Company maintain amounts and ratios, as set forth in the
schedule below, of total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined) and of Tier
I capital to average total assets (as defined). Failure to meet
minimum capital requirements can initiate certain actions by
regulators that, if undertaken, could have a direct material
effect on the Company's financial statements. Management
believes, as of December 31, 1997, that the Company meets all
capital adequacy requirements imposed by its regulators.
As of December 31, 1997, the most recent notification from the
Federal Deposit Insurance Corporation categorized the Bank as
well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized the
Bank must maintain minimum total risk-based, Tier I risk-based,
and Tier I leverage ratios as set forth in the table. There have
been no conditions or events since that notification that
Management believes have changed the institutions' category.
Actual capital amounts as well as required and well capitalized
Tier I, total, and Tier I leverage ratios as of December 31 for
the Company and the Bank are as follows:
1997
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
(Dollars in thousands)
Total Capital (to Risk Weighted Assets):
United Security Bancshares, Inc. $50,323 16.22% $24,827 8.00% N/A N/A
First United Security Bank 49,542 16.07 24,656 8.00 $30,820 10.00%
Tier I Capital (to Risk Weighted Assets):
United Security Bancshares, Inc. 46,443 14.97 12,414 4.00% N/A N/A
First United Security Bank 45,689 14.82 12,248 4.00 18,492 6.00
Tier I Leverage (to Average Assets):
United Security Bancshares, Inc. 46,443 11.08 12,574 3.00% N/A N/A
First United Security Bank 45,689 11.05 12,409 3.00 20,681 5.00
1996
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
(Dollars in thousands)
Total Capital (to Risk Weighted Assets):
United Security Bancshares, Inc. $43,645 16.45% $21,229 8.00% N/A N/A
First United Security Bank 46,316 17.31 21,409 8.00 $26,762 10.00%
Tier I Capital (to Risk Weighted Assets):
United Security Bancshares, Inc. 40,692 15.33 10,614 4.00% N/A N/A
First United Security Bank 43,358 16.20 10,705 4.00 16,057 6.00
Tier I Leverage (to Average Assets):
United Security Bancshares, Inc. 40,692 9.99 12,221 3.00% N/A N/A
First United Security Bank 43,358 10.61 12,259 3.00 20,432 5.00
16. OTHER OPERATING EXPENSES
Other operating expenses for the years 1997, 1996, and 1995
consist of the following:
1997 1996 1995
Postage, stationery, and supplies $ 680,248 $ 501,810 $ 432,762
Merger expense 650,330 0 0
Amortization of intangibles 604,811 338,689 262,137
Telephone expense 478,060 340,354 251,615
Other 2,729,036 2,500,141 3,003,846
Total $5,142,485 $3,680,994 $3,950,360
17. OPERATING LEASES
The Company leases office space, data processing, and other
equipment under operating leases.
The following is a schedule by years of future minimum rental
payments required under operating leases having initial or
remaining noncancellable terms in excess of one year as of
December 31, 1997:
Year ending December 31,
1998 $364,351
1999 271,799
2000 188,496
2001 86,127
2002 12,475
Total rental expense under all operating leases was $347,377,
$176,846, and $133,165 in 1997, 1996, and 1995, respectively.
18. COMMITMENTS AND CONTINGENCIES
The Company is a defendant in certain claims and legal action
arising in the normal course of business. In the opinion of
management the ultimate disposition of these matters is not
expected to have a material adverse effect on the financial
position or results of operations of the Company.
19. DERIVATIVE FINANCIAL INSTRUMENTS
The Bank is a party to financial instruments with off-balance
sheet risk in the normal course of business to meet the
financing needs of its customers and in connection with its
interest rate risk management, investing, and trading
activities. These financial instruments include commitments to
make loans, options written, standby letters of credit,
commitments to purchase or sell securities for forward
delivery, interest rate caps and floors purchased, caps sold,
and interest rate swaps.
The Bank's exposure to credit loss in the event of
nonperformance by the other party for commitments to make loans
and standby letters of credit is represented by the contractual
amount of those instruments. The Bank uses the same credit
policies in making these commitments as it does for on-balance
sheet instruments. For interest rate caps, floors, and swap
transactions, options written, and commitments to purchase or
sell securities for forward delivery, the contract or notional
amounts do not represent exposure to credit loss. The Bank
controls the credit risk of these instruments through credit
approvals, limits, and monitoring procedures. The Bank has
credit risk on caps and floors for the carrying value plus the
amount to replace such contracts in the event of counterparty
default. The Bank is fully cross collateralized with
counterparties on all interest rate swap agreements. At
December 31, 1997, the Bank estimates its credit risk on
purchased caps and floors in the event of total counterparty
default to be $423,013. All of the Bank's financial instruments
are held for risk management and not for trading purposes.
In the normal course of business there are outstanding
commitments and contingent liabilities, such as commitments to
extend credit, letters of credit, and others, which are not
included in the consolidated financial statements. The
financial instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of amounts recognized
in the financial statements. A summary of these commitments and
contingent liabilities is presented below.
December 31,
1997 1996
(In thousands)
Standby letters of credit $ 5,310 $ 7,016
Commitments to extend credit 47,187 50,449
Commitments to extend credit are agreements to lend to a
customer as long as there is no violation of any condition
established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require
payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts
do not necessarily represent future cash requirements. The
Company evaluates each customer's creditworthiness on a
case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Company upon extension of credit, is
based on management's credit evaluation of the counterparty.
Collateral held varies but may include accounts receivable,
inventory, property, plant, and equipment, and income-producing
commercial properties.
At December 31, 1997 and 1996, commitments to purchase and sell
securities for delayed delivery are summarized as follows:
December 31,
1997 1996
(In thousands)
Commitments to purchase securities for delayed delivery $ 3,000 $ 0
Commitments to sell securities for delayed delivery 4,000 0
Commitments to purchase securities for delayed delivery require
the Bank to purchase a specified security at a specified price
for delivery on a specified date. Similarly, commitments to
sell securities for delayed delivery require the Bank to sell
a specified security at a specified price for delivery on a
specified date. Market risk arises from potential movements in
security values and interest rates between the commitment and
delivery dates.
The Bank's principal objective in holding derivative financial
instruments is asset-liability management. The operations of
the Bank are subject to a risk of interest rate fluctuations to
the extent that there is a difference between the amount of the
Bank's interest-earning assets and the amount of
interest-bearing liabilities that mature or reprice in
specified periods. The principal objective of the Bank's
asset-liability management activities is to provide maximum
levels of net interest income while maintaining acceptable
levels of interest rate and liquidity risk and facilitating the
funding needs of the Bank. To achieve that objective, the Bank
uses a combination of derivative financial instruments,
including interest rate swaps, caps, and floors.
An interest rate swap is an agreement in which two parties
agree to exchange, at specified intervals, interest payment
streams calculate 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 uncap a portion of their floating
rate CMO portfolio. They also use caps purchased matched with
sold caps to raise by 100 basis points the cap on certain CMO
floaters. These matches are also referred to as "corridors."
The cost of the caps and floors are amortized straight-line
over the life of these instruments. The income derived from
these instruments is recorded on the accrual basis. The income
and amortization from these instruments is recorded in net
interest income and resulted in a reduction in net interest
income of $208,316, $238,900, and $42,985 in 1997, 1996, and
1995, respectively.
The following table details various information regarding
swaps, caps, and floors used for purposes other than trading as
of December 31, 1997:
Weighted
Weighted Average
Weighted Average Repricing
Notional Carrying Estimated Average Rate Years to Frequency
Amount Value Fair Value Received Paid Expiration (Days)
(Dollars in Thousands)
Swaps:
Pay fixed versus prime $ 260 $ 0 $ 2 8.50% 6.80% .71 90
Receive fixed pay floating 5,000 0 80 6.23 5.58 2.02 30
Deferred swaps:
Pay floating receive 5 year CMT 1 month
floating 20,000 0 (108) LIBOR 4.02 30
Caps:
Purchased 30,000 161 26 0.00% N/A 1.13 30-90
Sold 20,000 (48) (6) N/A 0.00% 1.44 30
Deferred Caps:
Purchased 30,000 292 204 0.00% N/A 3.19 30
Floors purchased 25,000 70 153 .21% N/A 1.25 30-90
$130,260 $475 $351
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, 1997, such swaps, caps, and floors were associated
with the following asset or liability categories:
Notional Principal Associated With
Notional Fixed Floating Rate Floating Rate
Amount Rate Loans Securities Borrowings
(In Thousands)
Swaps:
Pay fixed $ 260 $ 260 $ 0 $ 0
Receive fixed 5,000 0 5,000 0
Caps:
Purchased 30,000 0 10,000 20,000
Sold 20,000 0 10,000 10,000
Floors purchased 25,000 0 25,000 0
Deferred swaps 20,000 0 20,000 0
Deferred caps 30,000 0 20,000 10,000
$130,260 $ 260 $90,000 $40,000
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 $229,221 as of December 31,
1997 with related amortization into income of $396,771 for the
year ended December 31, 1997. Those amounts are scheduled to be
amortized into income in the following periods: $122,137 gain
in 1998, $97,265 gain in 1999, and $9,819 in 2000.
All of the Bank's derivative financial instruments are
over-the-counter instruments and are not exchange traded.
Market values are obtained from the counterparties to each
instrument. The Bank only uses other commercial Banks as a
counterparty to their derivative activity. The Bank performs
stress tests and other models to assess risk exposure.
20. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107,
Disclosures About Fair Value of Financial Instruments (SFAS No.
107) 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.
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. As a matter of policy, the Company generally makes
commitments for fixed rate loans for relatively short
periods of time. Because of this policy and the absence of
any known credit exposure, the estimated value of the
Company's loan commitments is nominal.
Demand and savings deposits: The fair values of demand
deposits are equal to the carrying value of such deposits.
Demand deposits include noninterest bearing demand deposits,
savings accounts, NOW accounts, and money market demand
accounts.
Time deposits: The fair value of relatively shortterm 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.
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, 1997 At December 31, 1996
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
(In Thousands)
Assets:
Cash and cash equivalents $ 14,538 $ 14,538 $ 16,006 $ 16,006
Investment securities available for sale 172,499 172,499 187,206 187,206
Accrued interest receivable 4,049 4,049 3,668 3,668
Loans, net 215,897 216,127 204,886 207,801
Off-balance-sheet instruments 475 498 316 122
Liabilities:
Deposits 322,418 323,889 346,306 346,997
Short-term borrowing 3,913 3,913 27,847 27,847
Long-term debt 40,965 40,984 3,685 3,665
21. UNITED SECURITY BANCSHARES, INC. (PARENT COMPANY ONLY)
FINANCIAL INFORMATION
Statements of Condition
December 31,
1997 1996
ASSETS:
Cash on deposit $ 1,022,289 $ 129,736
Investment in subsidiaries 51,026,597 48,995,278
Investments available for sale 63,000 45,579
Other assets 1,226,749 1,775,290
$53,338,635 $50,945,883
LIABILITIES:
Note payable $ 0 $ 3,004,000
Other liabilities 628,087 326,100
SHAREHOLDER'S EQUITY 52,710,548 47,615,783
$53,338,635 $50,945,883
Statements of Income
Year Ended December 31,
1997 1996 1995
INCOME
Dividend income, First United Security Bank $5,526,531 $2,095,403 $1,805,272
Interest income 496 4,621 583
Total income 5,527,027 2,100,024 1,805,855
EXPENSES 573,588 246,763 315,478
INCOME BEFORE EQUITY IN UNDISTRIBUTED
INCOME OF SUBSIDIARIES 4,953,439 1,853,261 1,490,377
EQUITY IN UNDISTRIBUTED INCOME
OF SUBSIDIARIES 2,028,019 5,117,729 4,959,825
Net income $6,981,458 $6,970,990 $6,450,202
Statements of Cash Flows
Year Ended December 31,
1997 1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $6,981,458 $6,970,990 $6,450,202
Adjustments to reconcile net income to net
cash provided by operating activities:
Undistributed income of subsidiaries (2,028,019) (5,117,729) (4,959,825)
(Increase) decrease in other assets 548,541 (10,595) (54,700)
Increase (decrease) in other liabilities 248,708 (30,138) 45,389
Net cash provided by operating
activities 5,750,688 1,812,528 1,481,066
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital contribution to subsidiary 0 0 (3,076,000)
Purchase of investment securities available
for sale 0 (33,926) (6,653)
Net cash used in investing activities 0 (33,926) (3,082,653)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on other borrowings (3,004,000) (375,500) (1,405,500)
Proceeds from other borrowings 0 0 3,755,000
Proceeds from sale of treasury stock 0 0 435,000
Proceeds from issuance of common stock 16,380 0 0
Cash dividends paid (1,870,515) (1,366,385) (1,157,863)
Net cash (used in) provided by
financing activities (4,858,135) (1,741,885) 1,626,637
INCREASE IN CASH 892,553 36,717 25,050
CASH AT BEGINNING OF YEAR 129,736 93,019 67,969
CASH AT END OF YEAR $1,022,289 $ 129,736 $ 93,019
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, 1997.
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,
1997.
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, 1997.
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, 1997.
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,
1997 and 1996.
Consolidated Statements of Shareholders' Equity,
December 31, 1997, 1996, and 1995.
Consolidated Statements of Income, December 31,
1997, 1996, and 1995.
Consolidated Statements of Cash Flows, December 31,
1997, 1996, and 1995.
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.
(3)(e) Articles of Amendment to the 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, 1997.
(3)(f) Amendments to the Bylaws of Bancshares
incorporated herein by reference to the
Exhibits to Form 10-Q for the Quarter ended
June 30, 1997.
(10)(a) The United Security Bancshares, Inc.
Employee Stock Ownership Plan, as amended
dated January 1, 1992, incorporated herein
by reference to the Exhibits to Form 10-K
for the year ended December 31, 1992.
(10)(b) Amendments to the United Security
Bancshares, Inc. Employee Stock Ownership
Plan.
(10)(c) Employment Agreement dated March 18, 1997,
between Bancshares and Jack M. Wainwright,
III.
(10)(d) 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)(e) United Security Bancshares, Inc. Long Term
Incentive Compensation Plan, incorporated
herein by reference to the Exhibits to Form
S-4 dated April 16, 1997 (No. 333-21241).
(13) Bancshares' definitive proxy statement for
1998 annual meeting of shareholders, to be
filed within 120 days after the end of the
fiscal year ended December 31, 1997,
furnished for the information of the
Commission.
(21) List of Subsidiaries of Bancshares.
(27) Financial Data Schedule
(b) Reports on Form 8-K
No report on Form 8-K was filed during the last
quarter of the year ended December 31, 1997.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
UNITED SECURITY BANCSHARES, INC.
By: /s/ Jack M. Wainwright, III March 19, 1998
----------------------------
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 Date
/s/ Jack M. Wainwright, III President, Chief Executive March 19, 1998
- ---------------------------- Officer, and Director
Jack M. Wainwright, III (Principal Executive Officer)
/s/ Larry M. Sellers Treasurer (Principal March 19, 1998
- ---------------------------- Financial Officer, Principal
Larry M. Sellers Accounting Officer)
/s/ Dan Barlow Director March 19, 1998
- ----------------------------
Dan Barlow
/s/ John Becton Director March 19, 1998
- ----------------------------
John Becton
/s/ Linda Breedlove Director March 19, 1998
- ----------------------------
Linda Breedlove
/s/ Gerald P. Corgill Director March 19, 1998
- ----------------------------
Gerald P. Corgill
/s/ Roy G. Cowan Director March 19, 1998
- ----------------------------
Roy G. Cowan
/s/ John C. Gordon Director March 19, 1998
- ----------------------------
John C. Gordon
/s/ William G. Harrison Director March 19, 1998
- ----------------------------
William G. Harrison
/s/ Fred L. Huggins Director March 19, 1998
- ----------------------------
Fred L. Huggins
/s/ Hardie B. Kimbrough Director March 19, 1998
- ----------------------------
Hardie B. Kimbrough
/s/ Jack W. Meigs Director March 19, 1998
- ----------------------------
Jack W. Meigs
/s/ James L. Miller Director March 19, 1998
- ----------------------------
James L. Miller
/s/ D. C. Nichols Director March 19, 1998
- ----------------------------
D. C. Nichols
/s/ Ray Sheffield Director March 19, 1998
- ----------------------------
Ray Sheffield
/s/ Harold H. Spinks Director March 19, 1998
- ----------------------------
Harold H. Spinks
/s/ James C. Stanley Director March 19, 1998
- ----------------------------
James C. Stanley
/s/ Clarence Watters Director March 19, 1998
- ----------------------------
Clarence Watters
/s/ Howard M. Whitted Director March 19, 1998
- ----------------------------
Howard M. Whitted
Director
- ----------------------------
Bruce N. Wilson
/s/ Ernest F. Woodson, Sr. Director March 19, 1998
- ----------------------------
Ernest F. Woodson, Sr.
EXHIBIT 21
List of Subsidiaries
Name Where Organized
First United Security Bank Alabama
Acceptance Loan Company, Inc. Alabama
First Security Courier Corporation Alabama
First Banking Services, Inc. Florida
EXHIBIT (10)(b)
Amendments to USB Employee Stock Ownership Plan
[EXECUTION COPY]
FOURTH AMENDMENT
UNITED SECURITY BANCSHARES, INC.
EMPLOYEE STOCK OWNERSHIP PLAN
(WITH 401(K) PROVISIONS)
This Amendment is hereby made as of this 30th day of June,
1997, by United Security Bank and United Security Bancshares, Inc.
(collectively referred to as "USB").
WITNESSETH:
WHEREAS, First Bank and Trust ("First Bank"); First
Bancshares, Inc. ("FBI"); and USB have executed an Agreement and
Plan of Merger (the "Agreement"), pursuant to which Agreement (and
subject to the receipt of necessary shareholder and regulatory
approvals), FBI will be merged with and into United Security
Bancshares, Inc. and First Bank will merge with and into United
Security Bank at the Effective Time (as that term is defined in the
Agreement), with USB as the resultant entity (the "Merger");
WHEREAS, First Bank has or will cause the First Bank and Trust
Profit Sharing Retirement Plan to be terminated effective one day
prior to the date on which the Effective Time shall occur;
WHEREAS, USB hereto established an employee stock ownership
plan containing Internal Revenue Code 401(k) provisions effective
January 1, 1989, known as the United Security Bancshares, Inc.
Employee Stock Ownership Plan (With 401(k) Provisions) (herein
referred to as the "Plan");
WHEREAS, under the terms of the Plan, USB has the ability to
amend the Plan;
WHEREAS, USB wishes to grant, effective as of the Effective
Time, to present employees of First Bank who become employees of
USB pursuant to the Merger credit for their service with First Bank
under the United Securities Bancshares, Inc. Employee Stock
Ownership Plan (with 401(k) Provisions) (the "Plan");
NOW, THEREFORE, USB, in accordance with the provisions of the
Plan pertaining to amendments thereof, hereby amends the Plan,
effective as of June 30, 1997, as follows:
FIRST: Amend Section 1.69 by adding as the last paragraph
thereof the following:
Years of Service with First Bank and Trust shall be
recognized for all purposes under this Plan for all
former employees of First Bank and Trust who became
employees of United Security Bank pursuant to the
merger of First Bank and Trust with and into United
Security Bank.
SECOND: All other terms and provisions of the Plan remain in
full force and effect.
IN WITNESS WHEREOF, USB has caused this Fourth Amendment to be
executed by its duly authorized officer.
UNITED SECURITY BANK
By: /s/ Larry M. Sellers
--------------------
Larry M. Sellers
Its: Senior Executive
Vice President
UNITED SECURITY BANCSHARES, INC.
By: /s/ Larry M. Sellers
--------------------
Larry M. Sellers
Its: Secretary
[EXECUTION COPY]
FIFTH AMENDMENT
UNITED SECURITY BANCSHARES, INC.
EMPLOYEE STOCK OWNERSHIP PLAN
(WITH 401(K) PROVISIONS)
This Amendment is hereby made as of this 30th day of June,
1997, by United Security Bank and United Security Bancshares, Inc.
(collectively referred to as "USB").
WITNESSETH:
WHEREAS, First Bank and Trust ("First Bank"); United Security
Bank ("USB Bank"); First Bancshares, Inc. ("FBI"); and United
Security Bancshares, Inc. ("USB") have executed an Agreement and
Plan of Merger, dated as of August 19, 1996, as amended on March
18, 1997 (the "Merger Agreement"), pursuant to which Merger
Agreement FBI will merge with and into USB, and First Bank will
merge with and into USB Bank at the Effective Time (as that term is
defined in the Merger Agreement), with USB and USB Bank as the
resultant entities;
WHEREAS, USB hereto established an employee stock ownership
plan containing Internal Revenue Code 401(k) provisions effective
January 1, 1989, known as the United Security Bancshares, Inc.
Employee Stock Ownership Plan (With 401(k) Provisions) (herein
referred to as the "Plan");
WHEREAS, under the terms of the Plan, USB has the ability to
amend the Plan;
WHEREAS, USB desires to increase the maximum allowable
matching contribution percentage under the Plan, effective as of
the Effective Time, from five percent (5%) to six percent (6%);
NOW, THEREFORE, USB, in accordance with the provisions of the
Plan pertaining to amendments thereof, hereby amends the Plan,
effective as of June 30, 1997, as follows:
FIRST: Delete the second paragraph of Section 4.1(b) and
substitute in lieu thereof the following:
Except, however, in applying the matching percentage
specified above, only salary reductions up to 6% of
Compensation shall be considered.
SECOND: All other terms and provisions of the Plan remain in
full force and effect.
IN WITNESS WHEREOF, USB has caused this Fifth Amendment to be
executed by its duly authorized officer.
UNITED SECURITY BANK
By: /s/ Larry M. Sellers
--------------------
Larry M. Sellers
Its: Senior Executive
Vice President
UNITED SECURITY BANCSHARES, INC.
By: /s/ Larry M. Sellers
--------------------
Larry M. Sellers
Its: Secretary
EXHIBIT (10)(c)
Jack M. Wainwright Employment Agreement
[Execution Copy]
EMPLOYMENT AGREEMENT
THIS AGREEMENT made by and between UNITED SECURITY BANCSHARES,
INC., a corporation organized under the laws of Alabama
(hereinafter referred to as "USB"); UNITED SECURITY BANK, a banking
corporation organized under the laws of Alabama (hereinafter
referred to as "USB Bank") (USB and USB Bank are hereinafter
collectively referred to as the "Employer"); and JACK M.
WAINWRIGHT, III (hereinafter referred to as "Wainwright"),
W I T N E S S E T H, T H A T :
WHEREAS, USB and USB Bank have entered into that certain
Agreement and Plan of Merger by and between First Bancshares, Inc.,
First Bank and Trust, USB and USB Bank, dated as of August 19, 1996
(the "Merger Agreement");
WHEREAS, a condition precedent to the obligations set forth in
the Merger Agreement is that
Wainwright and USB shall have entered into an employment agreement
whereby Wainwright agrees, among
other things, to serve as the chief executive officer of USB (the
Surviving Corporation resulting from the
merger) for a period of not less than three years from the
Effective Time, as that term is defined in the Merger Agreement;
WHEREAS, USB owns all of the issued and outstanding shares of
common capital stock of USB Bank;
WHEREAS, the principal place of business of USB and USB Bank
is in Thomasville, Alabama; and
WHEREAS, USB desires to employ Wainwright as the president and
chief executive officer of USB; USB Bank desires to employ
Wainwright as the president and chief executive officer of USB
Bank; and Wainwright desires to become employed as such;
NOW, THEREFORE, in consideration of the promises and the
mutual agreements hereinafter contained, and for other good and
valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereby agree as follows:
1. Employment. Employer will employ Wainwright in the
capacity of president and chief executive officer of USB and
of USB Bank and Wainwright will serve USB and USB Bank in that
capacity for a term of three (3) years, commencing at the
Effective Time, as that term is defined in the Merger
Agreement.
2. Duties. As president and chief executive officer of USB
and of USB Bank, Wainwright will be the principal executive
officer of USB and of USB Bank, and as such he will be
responsible for the implementation of the policies promulgated
by the boards of directors of USB and USB Bank and for the
oversight and direction of all phases of the operations of USB
and USB Bank.
3. Time and Efforts. Wainwright shall devote his full time
and best efforts to the discharge of his duties as president
and chief executive officer of USB and USB Bank. However, it
is recognized that in so discharging his duties Wainwright may
be called upon to serve in various civic capacities and on the
boards of directors of various private and eleemosynary
organizations.
4. Compensation. As compensation for services to be rendered
to USB and to USB Bank hereunder, Employer will pay or provide
to Wainwright the following:
(a) A base salary of $200,000 with appropriate review
annually based on individual performance and on the
performance of USB and USB Bank, as determined by
the boards of directors of USB and USB Bank. Salary
will be payable in equal monthly or other
installments in accordance with the general payroll
practice of USB Bank.
(b) Incentive compensation calculated in accordance
with (i) the plan adopted by the board of directors
of USB Bank at the meeting held on April 19, 1994
and all subsequent modifications, regardless of
whether said plan may be terminated hereafter with
respect to all other employees of USB Bank (the
"1994 Plan") and (ii) any other plans subsequently
adopted by USB Bank or USB. For purposes of
Wainwright's participation in the 1994 Plan, he
will be treated as though he had been employed by
USB Bank on the first day of its current fiscal
year and as though he shall have remained employed
through the end of USB Bank's fiscal year following
that in which his termination occurred.
(c) Continuation of the "whole-life" insurance policy
issued by New England Mutual Life Insurance Company
(policy number 8591896) on Wainwright's life in the
face amount of One Hundred Thousand and no/100
Dollars ($100,000.00), of which Wainwright is the
owner. All of the premiums on such policy shall be
paid by the Employer during Wainwright's employment
hereunder.
(d) The use of a Chrysler LHS automobile, or its
equivalent, plus an amount equal to the costs of
maintenance, repairs, insurance, and all other
costs incident thereto.
(e) An amount equal to the dues incurred by Wainwright
for membership in all local private or civic clubs
of which he shall become a member.
5. Severance Compensation. Upon (a) the termination of
Wainwright's employment hereunder for any reason other
than (1) his death or disability, (2) his resignation, (3)
his conviction of a crime involving moral turpitude, or
(4) the termination of this agreement three years from the
Effective Time of the Merger Agreement, or upon (b) the
reduction in the level or a change in nature of
Wainwright's responsibilities as president and chief
executive officer of USB or as president and chief
executive officer of USB Bank, Wainwright will be entitled
to the following:
(i) the Employer shall pay to Wainwright an amount
equal to his annualized base salary then in effect
at that time, except in the case of a change in
ownership of USB or USB Bank occurring after the
Effective Time (as that term is defined in the
Merger Agreement), in which case the amount will be
equal to three (3) times his annualized base salary
in effect at that time, and
(ii) for a period of three (3) years from the date of
such termination or reduction, the Employer shall
at its expense continue on behalf of Wainwright the
medical coverages and benefits provided to
Wainwright at any time during the 90-day period
prior to the termination or reduction. The
coverages and benefits provided in this Section
5(ii) shall be no less favorable to Wainwright than
the most favorable of such coverages and benefits
provided to Wainwright by Employer during the
90-day period referred to above. Employer's
obligation hereunder with respect to the foregoing
coverages and benefits shall be limited to the
extent that Wainwright obtains any such coverages
or benefits pursuant to a subsequent employer's
benefit plans, in which case the Employer may
reduce the coverage of any benefits it is required
to provide Wainwright hereunder as long as the
aggregate coverages and benefits of the combined
benefit plans is no less favorable to Wainwright
than the coverages and benefits required to be
provided under this Section 5(ii).
6. Disability. In the event of any illness or accident
rendering Wainwright totally disabled, Employer's
obligations hereunder shall terminate twenty-six (26)
weeks after the determination of such total disability.
For purposes of this paragraph, "total disability" shall
mean Wainwright's inability to perform his duties. In the
case of any disagreement between the parties with respect
to Wainwright's alleged total disability, Wainwright shall
be examined by a board of three (3) doctors, one (1) of
whom is appointed by him, one (1) of whom is appointed by
Employer, and one (1) of whom is appointed by the two (2)
doctors previously so appointed. The determination of such
board of physicians shall be final, binding, and
conclusive on the parties hereto.
7. Notices. All notices required or permitted to be given
hereunder shall be deemed duly given if in writing and
delivered in person or deposited with the U.S. Postal
Service, in a postage paid envelope marked certified mail,
return receipt requested, to the parties at the following
addresses or to such other addresses as either may
designate in writing to the other:
If to USB: United Security Bancshares, Inc.
P. O. Box 249
Thomasville, AL 36784
If to USB Bank: United Security Bank
131 Front Street
Thomasville, AL 36784
If to Wainwright: Jack M. Wainwright, III
P. O. Box 377
Fulton, AL 36446
8. Attorney's Fees. If Employer shall fail to make any
payment due Wainwright hereunder, then Employer will pay
Wainwright's cost of collection, including his reasonable
attorney's fees, if the services of an attorney are
utilized, whether or not suit be filed.
9. Entire Agreement. This agreement constitutes the entire
understanding and agreement between Employer and
Wainwright with regard to all matters addressed herein.
There are no other agreements, conditions, or
representations, oral or written, express or implied, with
regard thereto. This agreement may be amended only by a
written instrument executed by the parties hereto.
10. Bank Employment Agreement. Upon the effectiveness of this
Agreement, the Employment Agreement between Wainwright and
USB executed on November 1, 1994, whereby Wainwright was
employed as the President and Chief Executive Officer of
United Security Bank (the "Bank Employment Agreement")
shall automatically terminate without further action on
the part of any party thereto. To the extent Wainwright
has any claim to compensation from USB or USB Bank
pursuant to Section 5 of the Bank Employment Agreement or
otherwise as a result of said termination of the Bank
Employment Agreement, Wainwright hereby expressly waives
such claims and releases USB and USB Bank from any and all
liability in connection therewith.
11. Governing Law. This agreement shall be construed and
enforced in accordance with the laws of the State of
Alabama.
12. Binding Effect. This agreement shall inure to the benefit
of and be binding upon USB and USB Bank, their successors
and assigns, including, without limitation, any person,
partnership, or corporation which may acquire
substantially all of USB's and/or USB Bank's assets or
business or with or into which USB and/or USB Bank may be
liquidated, consolidated, merged, or otherwise combined,
and shall inure to the benefit of and be binding upon
Wainwright, his heirs, distributees, and personal
representatives.
13. Waiver. The failure of any party to insist in any one or
more instances upon performance of any terms or conditions
of this agreement shall not be construed a waiver of
future performance of any such term, covenant, or
condition, but the obligations of either party with
respect thereto shall continue in full force and effect.
IN WITNESS WHEREOF, United Security Bancshares, Inc. and
United Security Bank have caused their corporate signatures and
seals to be hereunto affixed by their duly authorized officers and
Jack M. Wainwright has executed this agreement on this the 18 day
of MARCH, 1997.
UNITED SECURITY BANCSHARES, INC.
ATTEST:
BY: /s/ W. D. Morgan BY: /s/ Larry M. Sellers
---------------------- ----------------
W. D. Morgan Larry M. Sellers
ITS: Assistant Secretary ITS: Vice-President
[CORPORATE SEAL]
UNITED SECURITY BANK
ATTEST:
BY: /s/ Beverly Dozier BY: /s/ Larry M. Sellers
---------------------- ----------------
Beverly Dozier Larry M. Sellers
ITS: Administrative Officer ITS: Sr. Executive
Vice-President
[CORPORATE SEAL]
/s/ Jack M. Wainwright, III
-----------------------
Jack M. Wainwright, III