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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, 1998
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, 1998: 3,546,845.
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, 1999, is
$119,152,280. (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
1999 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, 1998
TABLE OF CONTENTS
Sequential
Part Item Caption Page No.
I 1 Business...............................................3
2 Properties.............................................7
3 Pending Legal Proceedings..............................8
4 Submission of Matters to a vote of Security Holders....8
II 5 Market for Registrant's Common Equity and
Related Stockholder Matters............................8
6 Selected Financial Data................................9
7 Management's Discussion and Analysis of Financial
Condition and Results of Operations....................9
7A Quantitative and Qualitative Disclosures About
Market Risk............................................
8 Financial Statements and Supplementary Data............
9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure....................
III 10 Directors and Executive Officers of the Registrant.....
11 Executive Compensation.................................
12 Security Ownership of Certain Beneficial Owners
and Management.........................................
13 Certain Relationships and Related Transactions.........
IV 14 Exhibits, Financial Statement Schedules
and Reports on Form 8-K................................
Signatures...............................................................
Exhibits.................................................................
PART I
Item 1. Business.
General
United Security Bancshares, Inc. ("Bancshares") is an Alabama
corporation organized in 1984. Bancshares is a bank holding company
registered under the Bank Holding Company Act of 1956, as amended,
and it operates one banking subsidiary, First United Security Bank
(the "Bank"). The Bank's name was changed from United Security Bank
to First United Security Bank on July 9, 1997. The Bank owns all of
the stock of Acceptance Loan Company, Inc. ("ALC"), a finance
company organized for the purpose of making consumer loans and
purchasing consumer loans from vendors. Bancshares owns all the
stock of First Security Courier Corporation ("First Security"), an
Alabama corporation organized for the purpose of providing certain
bank courier services.
The Bank has sixteen banking offices, which are located in
Thomasville, Coffeeville, Fulton, Gilbertown, Grove Hill, Butler,
Jackson, Brent, Centreville, North Bibb and Harpersville, Alabama,
and its market area includes portions of Bibb, Clarke, Choctaw,
Marengo, Shelby, Sumter, Tuscaloosa, Washington, and Wilcox
Counties in Alabama, as well as Clarke, Lauderdale and Wayne
Counties in Mississippi.
The Bank conducts a general commercial banking business and
offers banking services such as the receipt of demand, savings and
time deposits, making 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 accounts, and other banking and financial services.
As of December 31, 1998, the Bank had 197 full-time equivalent
employees, ALC had 89 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 into
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 (the "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, 1998, $4,531,000 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. 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, 1998, 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.
There have been a number of legislative and regulatory
proposals that would have an impact on the operation of bank
holding companies and their banks. It is impossible to predict
whether or in what form these proposals may be adopted in the
future and, if adopted, what their effect will be on Bancshares and
the Bank. For example, on May 13, 1998, the U.S. House of
Representatives passed H.R. 10, the "Financial Services Competition
Act of 1998," which calls for a sweeping modernization of the
banking system that would permit affiliations between commercial
banks, securities firms, insurance companies and, subject to
certain limitations, other commercial enterprises. The stated
purposes of H.R. 10 are to enhance consumer choice in the financial
services marketplace, level the playing field among providers of
financial services, and increase competition. H.R. 10 removes many
of the statutory restrictions contained in current laws regulating
the financial services industry and calls for a new regulatory
framework of financial institutions and their holding companies.
Although H.R. 10 failed to reach the voting stage in the United
States Senate before the adjournment of the 105th Congress in 1998,
H.R. 10 was reintroduced in the House of Representatives on January
6, 1999, and is currently under consideration. At this time, it is
unknown whether H.R. 10 will be enacted into law, or if enacted,
what form the final version of such legislation might take and how
such legislation may affect Bancshares' business and operations.
One consequence may be increased competition from large financial
services companies that, under the bill, would be permitted to
provide many types of financial service to customers.
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 totals approximately $268,000.
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 fifteen branches in addition to its main
office. The Highway 43 South 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
Coffeeville Road branch in Jackson 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
Avenue 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. The branch in North Bibb
County is located on Highway 11 in a one-story brick building with
two drive-in facilities. The Cobb Street branch has three drive-in
facilities and is located in a one-story brick building of
approximately 1,000 square feet. Finally, the Harpersville branch
has three drive-in facilities and is located in a 3,500 square foot
building. Except as noted, all of the Bank's offices are owned in
fee simple 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 3,610,945 shares of Bancshares common
stock issued and 3,546,845 shares outstanding. As of December 31,
1998, there were approximately 940 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 112 sales of
Bancshares common stock since January 1, 1998 at prices ranging
from $34.00 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)
1996 $.40
1997 $.53
1998 $.72
As a holding company, Bancshares, except under extraordinary
circumstances, will not generate earnings of its own, but will rely
solely on dividends paid to it by the Bank as the source of income
to meet its expenses and pay dividends. Under normal circumstances,
Bancshares' ability to pay dividends will depend entirely on the
ability of the Bank to pay dividends to Bancshares.
The Bank is a state banking corporation, and the payment of
dividends by the Bank is governed by the Alabama Banking Code. The
restrictions upon payment or dividends imposed by the Alabama
Banking Code are described in Part II, Item 5 of Bancshares' Annual
Report on Form 10-K for the year ended December 31, 1984 (filed
with the Commission in Washington, D.C., file no. 0-14549), and such
description is incorporated herein by reference.
Item 6. Selected Financial Information.
UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARY
SELECTED FINANCIAL INFORMATION
Year Ended December 31,
1998 1997 1996 1995 1994
(In Thousands of Dollars, Except Per Share Amounts)
RESULTS OF OPERATIONS
Interest Revenue $ 43,255 $ 37,648 $ 34,551 $ 30,571 $ 23,340
Interest Expense 15,518 15,376 15,081 13,298 9,095
Net Interest Revenue 27,737 22,272 19,470 17,273 14,245
Provision for Loan Losses 3,187 1,710 800 255 224
Non-Interest Revenue 4,558 4,361 2,725 2,555 2,250
Non-Interest Expense 17,008 15,229 11,765 10,898 10,351
Income Before Income Taxes 12,100 9,694 9,630 8,675 5,920
Income Taxes 3,521 2,713 2,659 2,225 1,367
Net Income $ 8,579 $ 6,981 $ 6,971 $ 6,450 $ 4,553
Net Income Per Share:
Basic $ 2.42 $ 1.97 $ 1.97 $ 1.83 $ 1.30
Diluted $ 2.40 $ 1.96 $ 1.97 $ 1.83 $ 1.30
Average Number of Shares
Outstanding (000) 3,543 3,537 3,537 3,520 3,497
PERIOD END STATEMENT OF CONDITION
Total Assets $450,073 $425,941 $430,383 $377,120 $308,569
Loans 235,060 215,897 204,886 182,000 129,603
Deposits 326,645 322,418 346,306 304,381 247,534
Shareholders' Equity 60,568 52,711 47,616 41,795 31,597
AVERAGE BALANCES
Total Assets $439,080 $434,010 $410,541 $364,330 $301,112
Average Earning Assets 408,506 402,271 382,458 337,921 280,096
Loans 231,792 212,570 198,327 172,146 135,450
Deposits 320,958 345,442 327,531 294,063 244,788
Shareholders' Equity 57,409 50,164 44,044 37,588 32,175
PERFORMANCE RATIOS
Net Income to:
Average Total Assets 1.95% 1.61% 1.70% 1.77% 1.51%
Average Shareholders' Equity 14.94% 13.92% 15.83% 17.16% 14.15%
Average Shareholders' Equity to
Average Total Assets 13.07% 11.55% 10.73% 10.32% 10.69%
Dividend Payout Ratio 31.40% 26.79% 20.21% 18.12% 24.07%
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 1998, 1997,
and 1996. All yields presented and discussed herein are based on an
accrual basis and not on the tax-equivalent basis.
On June 30, 1997, First Bancshares, the parent holding company
of First Bank and Trust, merged with and into United Security. The
merger was accounted for as a pooling of interests, and,
accordingly, financial information for all prior periods has been
restated to present the combined financial condition and results of
operations of both companies as if the merger had been in effect
for all periods presented.
United Security is the parent holding company of First United
Security Bank (the "Bank"). The Bank operates a finance company,
Acceptance Loan Company, that currently has twenty-five 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, 1998, United Security had consolidated assets
of approximately $450.1 million and operated sixteen banking
locations in four counties. These sixteen locations contributed
approximately $7.8 million to consolidated net income in 1998.
First United Security Bank's sole business is banking; therefore,
loans and investments are its principal source of income.
This discussion contains certain forward looking statements
with respect to the financial condition, results of operation and
business of United Security and the Bank related to, among other
things:
(A) trends or uncertainties which will impact future
operating results, liquidity and capital resources, and
the relationship between those trends or uncertainties
and nonperforming loans and other loans;
(B) the diversification of product production among timber
related entities and the effect of that diversification
on the Bank's concentration of loans to timber related
entities;
(C) the composition of United Security's derivative
securities portfolio and its interest rate hedging
strategies and volatility caused by uncertainty over the
economy, inflation and future interest rate trends;
(D) the effect of the market's perception of future inflation
and real returns and the monetary policies of the Federal
Reserve Board on short and long term interest rates;
(E) the effect of interest rate changes on liquidity and
interest rate sensitivity management;
(F) the amount of anticipated (i) net loan charge offs; (ii)
loans on a non-accrual basis; and (iii) options income
and other off-balance-sheet income;
(G) the success of the Company's prior and continuing efforts
to address issues stemming from potential automation
problems associated with the transition to the Year 2000;
and
(H) 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 continue to accelerate
the rate at which the underlying obligations of
mortgage-backed securities and collateralized mortgage
obligations are prepaid, thereby affecting the yield on
such securities held by the Bank;
(3) inflation grows at a greater-than-expected rate with a
material adverse effect on interest rate spreads and the
assumptions management of United Security has used in its
interest rate hedging strategies and interest rate
sensitivity gap strategies;
(4) rising interest rates adversely affect the demand for
consumer credit;
(5) unexpected problems arise from the transition to the Year
2000, including failure of third parties with whom the
Company does business, or governmental or regulatory
bodies, to address Year 2000 issues; and
(6) general economic conditions, either nationally or in
Alabama, are less favorable than expected.
Financial Condition
United Security's financial condition depends primarily on the
quality and nature of the Bank's assets, liabilities, and capital
structure, the quality of its personnel, and prevailing market and
economic conditions.
The majority of the assets and liabilities of a financial
institution are monetary and, therefore, differ greatly from most
commercial and industrial companies that have significant
investments in fixed assets and inventories. Inflation has an
important impact on the growth of total assets in the banking
industry, resulting in the need to increase equity capital at rates
greater than the applicable inflation rate in order to maintain an
appropriate equity to asset ratio. Also, the category of other
expenses tends to rise during periods of general inflation.
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.
The Bank owns all of the stock of Acceptance Loan Company,
Inc. ("ALC"), an Alabama corporation. ALC is a finance company
organized for the purpose of making consumer loans. The Bank is
ALC's only source of funds and ALC'S funding makes up approximately
$65 million of the Bank's loans.
Management believes the most significant factor in producing
quality financial results is the Bank's ability to react properly
and timely to changes in interest rates. Management is therefore
attempting to maintain a more balanced position between
interest-sensitive assets and liabilities in order to protect
against wide interest rate fluctuations. The following table
reflects the distribution of average assets, liabilities, and
shareholders' equity for each of the three years ended December 31,
1998, 1997, and 1996.
Distribution of Assets, Liabilities, and Shareholders' Equity, with
Interest Rates and Interest Differentials
December 31,
1998 1997 1996
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) $231,792 $ 29,397 12.68% $212,570 $22,964 10.80% $198,327 $20,219 10.19%
Taxable Investments
(Note B) 150,678 12,292 8.16% 161,125 12,854 7.98% 149,337 12,311 8.24%
Non-Taxable Investments 24,206 1,469 6.07% 26,704 1,736 6.50% 31,971 1,873 5.86%
Federal Funds Sold 1,830 97 5.30% 1,872 95 5.07% 2,823 148 5.24%
Total Interest-Earning
Assets 408,506 43,255 10.59% 402,271 37,649 9.36% 382,458 34,551 9.03%
Non-Interest Earning Assets:
Other Assets 30,574 31,739 28,083
Total $439,080 $434,010 $410,541
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest-Bearing Liabilities:
Demand Deposits $ 59,794 $ 1,387 2.32% $ 64,607 $ 1,644 2.54% $ 69,461 $ 1,905 2.74%
Savings Deposits 41,728 1,137 2.72% 43,797 1,218 2.78% 30,939 887 2.87%
Time Deposits 180,128 9,971 5.44% 193,738 10,413 5.37% 185,588 10,230 5.51%
Other Liabilities 54,383 3,023 5.56% 34,605 2,101 6.07% 35,383 2,059 5.82%
Total Interest-Bearing
Liabilities $336,033 $ 15,518 4.62% $336,747 $15,376 4.57% $321,371 $15,081 4.69%
Non-Interest Bearing
Liabilities:
Demand Deposits $ 39,308 $ 43,300 $ 41,543
Other Liabilities 6,330 3,799 3,583
Shareholders' Equity 57,409 50,164 44,044
Total $439,080 $434,010 $410,541
Net Interest Income
(Note C) $ 27,737 $ 22,273 $ 19,470
Net Yield on Interest-
Earning Assets 6.79% 5.54% 5.09%
Note A -- For the purpose of these computations, non-accruing loans
are included in the average loan amounts outstanding.
Note B -- Taxable investments include all held-to-maturity,
available-for-sale, and trading account securities.
Note C -- Loan fees of $1,099,758, $815,566, and $704,194 for 1998
1997 and 1996, respectively, are included in interest
income amounts above.
Loans and Allowance for Loan Losses
Total loans outstanding increased by $21.3 million in 1998
with $245.0 million outstanding at year end. Real estate loans
decreased by $3.6 million to $123.3 million outstanding at December
31, 1998. Real estate loans made up 50.3% of total gross loans at
year end 1998. Construction activity in the trade areas continue to
be predominately commercial. The Company continues to offer a home
equity loan and a long-term fixed-rate mortgage loan program.
Real estate loans consist of construction loans to both
businesses and individuals. These loans relate to residential and
commercial development, commercial buildings and apartment
complexes. Real estate loans also consist of other loans secured by
real estate such as one-to-four family dwellings including mobile
homes, loans on land only, multi-family dwellings, non farm
non-residential real estate and home equity loans. Acceptance Loan
Company had a total of $9.8 million in real estate loans or 8.0% of
total real estate loans at year end 1998.
Commercial loans totaled $35.4 million at December 31, 1998.
These loans increased $.4 million or 1.2% from December 31, 1997.
Consumer installment loans totaled $86.3 million at December
31, 1998. This increase of $24.5 million or 39.6% 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 $61.4 million or 71.1% 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. There were twenty-five offices open
on December 31, 1998, with $71.2 million in gross loans
outstanding. Twenty-two offices are located in Alabama and three in
Northwest Florida. Combined loans from these offices make up 29.1
% of total loans of First United Security Bank.
The allowance for loan losses is maintained at a level which,
in management's judgment, is adequate to absorb credit losses
inherent in the loan portfolio. The amount of the allowance is
based on management's evaluation of the collectibility of the loan
portfolio, including the nature of the portfolio and changes in its
risk profile, credit concentrations, historical trends, specific
impaired loans, and economic conditions. This evaluation also
considers the balance of impaired loans. Losses on individually
identified impaired loans are measured based on the present value
of expected future cash flows discounted at each loan's original
effective market interest rate. As a practical expedient,
impairment may be measured based on the loan's observable market
price or the fair value of the collateral if the loan is collateral
dependent. When the measure of the impaired loan is less than the
recorded investment in the loan, the impairment is recorded through
the provision added to the allowance for loan losses. One-to-four
family residential mortgages and consumer installment loans are
subjected to a collective evaluation for impairment, considers
delinquency and repossessive statistics, historical loss
experience, and other factors. Though management believes the
allowance for loan losses to be adequate, ultimate losses may vary
from their estimates. However, estimates are reviewed periodically,
and as adjustments become necessary, they are reported in earnings
during periods they become known.
The Bank's loan policy requires immediate recognition of a
loss if significant doubt exists as to the repayment of the
principal balance of a loan. Consumer installment loans at the Bank
and ALC are generally recognized as losses if they become 90 days
and 120 days or more delinquent, respectively. The only exception
to this policy occurs when the underlying value of the collateral
or the customer's financial position makes a loss unlikely.
A credit review of the Bank's individual loans is conducted
periodically by branch and by officer. A risk rating is assigned to
each loan and is reviewed at least annually. In assigning risk,
management takes into consideration the capacity of the borrower to
repay, collateral values, current economic conditions and other
factors.
Loan officers and other personnel handling loan transactions
undergo frequent training dedicated to improving the credit quality
as well as the yield of the loan portfolio. First United Security
Bank operates under a written loan policy which attempts to guide
lending personnel in maintaining a consistent lending function.
This policy is intended to aid loan officers and lending personnel
in making sound credit decisions and to assure compliance with
state and federal regulations. In addition, the intent of the loan
policy is to provide lending officers with a guide to making loans
which will provide an adequate return while providing services to
the communities and trade areas in which we are located.
The balance in the allowance for loan losses as of December
31, 1998, was $5.0 million. This increase of approximately
$1,000,000 over year end 1997 reflects the continuing evaluation of
the Bank's portfolio and the growth in Acceptance Loan Company.
Management considers this reserve adequate for coverage of losses
inherent in the loan portfolio. This allowance is 2% of total
loans.
The following table shows the Bank's loan distribution as of
December 31, 1998, 1997, 1996, 1995 and 1994.
December 31,
1998 1997 1996 1995 1994
(In Thousands of Dollars)
Commercial, Financial and
Agricultural $ 35,444 $ 35,036 $ 36,387 $ 33,696 $ 33,106
Real Estate 123,264 126,824 126,666 114,985 83,530
Installment 86,282 61,822 49,119 36,301 24,814
Total $244,990 $223,682 $212,172 $184,982 $141,450
The amounts of total loans (excluding installment loans)
outstanding at December 31, 1998, which, based on the remaining
scheduled repayments of principal, are due in (1) one year or less,
(2) more than one year but within five years, and (3) more than
five years, are shown in the following table.
Maturing
After One
Within But Within After
One Year Five Years Five Years Total
(In Thousands of Dollars)
Commercial, Financial, and Agricultural $ 25,571 $ 6,746 $ 3,127 $ 35,444
Real Estate -- Mortgage 59,526 43,109 20,629 123,264
Total $ 85,097 $ 49,855 $ 23,756 $158,708
Variable rate loans totaled approximately $36.8 million and
are included in the one-year category.
First United Security Bank and Acceptance Loan Company (a
wholly owned subsidiary of First United Security Bank) began the
year with a combined balance in the allowance for loan losses of
$4.0 million. Total loans charged off in 1998 totaled $2.6 million.
Recoveries on loans previously charged off totaled $345,000,
resulting in net loan losses of $2.2 million. Net loan losses for
1997 totaled $798,000. Management allocated and charged to
operations $3.2 million in 1998 as an addition to the allowance for
loan losses. This compares to $1.7 million charged to operations
for 1997. The balance of $5.0 million at year end 1998 represented
2.0% of total loans outstanding and is considered adequate for
losses inherent in the portfolio.
Total loans outstanding on December 31, 1998 were $245
million. Of this total, loans by ALC amounted to $71.2 million.
This represents 29.1% of total loans outstanding. Of the $5.0
million balance in the allowance for loan losses account at
December 31, 1998, $1.9 million or 38.0% 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,
1998 1997 1996 1995 1994
(In Thousands of Dollars)
Non-Performing Assets:
Loans Accounted for on a Non-Accrual Basis $3,460 $1,488 $1,797 $ 169 $ 571
Accruing Loans Past Due 90 Days or More 1,610(1) 1,285 1,122 1,390 612
Real Estate Acquired in Settlement of Loans 215 506 18 63 429
Total $5,285 $3,279 $2,937 $1,622 $1,612
Percent of Net Loans and Other Real Estate 2.25% 1.52% 1.44% 0.90% 1.16%
(1) Acceptance Loan Company represents 57.5% of accruing loans past
due 90 days or more.
Accruing loans past due 90 days or more at December 31, 1998,
totaled $1.6 million. These loans are well secured and taking into
consideration the collateral value and the financial strength of
the borrowers, management believed there would be no loss in these
accounts and allowed the loans to continue accruing. These 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 $925,370 at
December 31, 1998, or 57.5% of all loans past due 90 days and more
and still accruing.
At December 31, 1998, the Company had one loan considered to
be impaired. The amount of this loan, which is on non-accrual, is
$486,826 and the related allowance is $243,000. The average
recorded investment in impaired loans during the year ended
December 31, 1998 was approximately $512,750. For the year ended
December 31, 1998, the Company did not recognize interest income on
the impaired loan during the period the loan was considered
impaired. The Company had approximately $539,000 considered to be
impaired at December 31, 1997.
In the opinion of management, non-performing loans and any
other loans which have been classified for regulatory purposes do
not represent or result from trends or uncertainties which will
materially impact future operating results, liquidity, or capital
resources. Management is not aware of information which would cause
serious doubts as to the ability of borrowers to comply with
present repayment terms. Non-performing assets as a percentage of
net loans and other real estate was 2.25% at December 31, 1998.
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 downgraded. Through
frequent training, our lending officers are directed by the Bank's
written loan policy to make loans within our trade area, to obtain
adequate down payments on purchase-money transactions, and to lend
within policy guidelines on other transactions. In addition, the
Bank's loan review officer conducts an independent review of
individual loans by branch and officer.
First United Security Bank discontinues the accrual of
interest on a loan when management has reason to believe the
financial condition of the borrower has deteriorated so that the
collection of interest is in doubt. When a loan is placed on
non-accrual, all unpaid accrued interest is reversed against
current income unless the collateral securing the loan is
sufficient to cover the accrued interest. Interest received on
non-accrual loans is generally either applied against the principal
or 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 $5.0 million at year-end and represented 2% of total
loans outstanding. Management believes this allowance is adequate
to absorb loan losses inherent in the portfolio.
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,
1998 1997 1996 1995 1994
Percent Percent Percent Percent Percent
of Loans of Loans of Loans of Loans of Loans
in Each in Each in Each in Each in Each
Category Category Category Category Category
Allowance to Total Allowance to Total Allowance to Total Allowance to Total Allowance to Total
Allocation Loans Allocation Loans Allocation Loans Allocation Loans Allocation Loans
(In Thousands of Dollars)
Commercial,
Financial, and
Agricultural $ 748 15% $1,416 16% $1,097 17% $ 370 18% $ 286 23%
Real Estate 499 50 405 57 313 60 493 62 190 59
Installment 3,742 35 2,225 27 1,724 23 1,604 20 1,428 18
Totals $4,989 100% $4,046 100% $3,134 100% $2,467 100% $1,904 100%
Note: First Bank & Trust did not allocate Allowance for Loan Losses by category.
Percentages for United Security Bank were used 1994-1996.
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, non-accrual loans and management's
judgment. The reallocation of a larger percentage of the
consolidated allowance for loan losses to installment loans
resulted from growth in the ALC loan portfolio and the increase in
net charge-offs in the portfolio discussed below.
Net charge-offs as shown in the "Summary of Loan Loss
Experience" below indicates the trend for the last five years. Net
loan charge-offs as a percentage of average loans increased from
.38% in 1997 to .97% in 1998.
December 31,
1998 1997 1996 1995 1994
(In Thousands of Dollars)
Balance at Beginning of Period $ 4,046 $ 3,134 $2,467 $1,904 $1,792
Charge-Offs:
Commercial, Financial, and Agricultural (94) (299) (246) (201) (41)
Real Estate -- Mortgage (111) (20) (21) (6) (10)
Installment (2,373) (694) (497) (179) (144)
Credit Cards (11) (26) (9) (8) (9)
$(2,589) $(1,039) $ (773) $ (394) $ (204)
Recoveries:
Commercial, Financial and Agricultural $ 120 $ 110 $ 96 $ 52 $ 38
Real Estate -- Mortgage 15 18 0 5 0
Installment 305 107 117 62 51
Credit Cards 5 6 4 8 3
$ 345 $ 241 $ 217 $ 127 $ 92
Net Charge-Offs (Deduction) $(2,244) $ (798) $ (556) $ (267) $ (112)
Additions Charged to Operations 3,187 1,710 800 255 224
Allowances Acquired 0 0 423** 575* 0
Balance at End of Period $ 4,989 $ 4,046 $3,134 $2,467 $1,904
Ratio of Net Charge-Offs During Period to
Average Loans Outstanding 0.97% 0.38% 0.28% 0.16% 0.08%
* 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,
1998 1997 1996
(In Thousands of Dollars)
Total Loans Accounted for on a Non-Accrual Basis $3,460 $1,488 $1,798
Interest Income that Would Have Been Recorded
under Original Terms 340 154 91
Interest Income Reported and Recorded During
the Year 298 108 37
Total loans on non-accrual increased by $1,972,000 from
December 31, 1997 to December 31, 1998. The majority of the loans
in this category are in process of liquidation or management has
commitments from the principals involved for reduction during the
year. Underlying collateral values support those loans which are
not already in liquidation. Management continues to emphasize asset
quality and expects a significant reduction in 1999 of the $3.5
million still on non-accrual at year-end 1998. The Company believes
that it has adequate reserves for losses inherent in this portion
of the portfolio.
Lending officers and other personnel involved in the lending
process receive ongoing training in compliance as well as asset
quality. The Company has no foreign loans. The Company does not
make loans on commercial property outside our market area without
prior approval of the Board of Directors or the Directors' Loan
Committee. The Company is conservative in its lending directives.
Industry Concentration Factors
The First United Security Bank trade area includes Clarke,
Choctaw, 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, 1998. The amount of
timber related loans decreased from $49.2 million in 1997 to $41.5
million in 1998. The percentage of timber related loans to gross
loans decreased from 22.0% to 17.3%. The growth in ALC loans of
$27.3 million during 1998 helped to lower timber industry
concentration.
Timber Total Percentage of
Related Loans Gross Loans Total Loans
$41.5 million $245.0 million 16.94%
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.
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
continues to be one of the fastest growing corridors in the state.
The Company plans to open another new office in the area in the
spring of this year.
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 $4,234,447 and $4,272,547 for 1998 and 1997,
respectively. Costs associated with the partnerships carried under
the equity method amounted to approximately $128,000 and $122,000
for 1998 and 1997, respectively. Management analyzes these
investments annually for potential impairment. The assets and
liabilities of these partnerships consist primarily of apartment
complexes and related mortgages. United Security's carrying value
approximates cost or its underlying equity in the net assets of the
partnerships. The Company has remaining cash commitments to these
partnerships at December 31, 1998 in the amount of $360,000.
Although these investments are considered non-earning assets they
do contribute to the bottom line in the form of Federal income tax
credits. These credits amounted to $480,000 in 1997 and are
estimated to be approximately $490,000 for 1998. Also, operating
losses related to these partnerships are available as deductions
for taxes on the Company's books.
Deposits
Average total deposits have declined 2% during the last three
years, with a 7% decline in 1998. This lower deposit level was
affected by the competitive interest rate environment, the sale of
one branch facility and the availability of other low rate funding.
Average non-interest bearing demand deposits have decreased
5.4% over the last three years, while the decline for 1998 was
9.2%. The ratio of average non-interest bearing deposits to average
total deposits remained relatively steady in 1998 at 12.2% from
12.5% in 1997 and 12.7% in 1996.
Average interest-bearing transaction accounts have decreased
13% during the last three years partly because the Bank
reclassified a portion of interest-bearing transaction accounts to
money market savings accounts, resulting in a 7.0% decline in 1997.
Nevertheless, interest-bearing transaction accounts continue to be
an important source of funds for the Bank, accounting for 18.6 % of
average total deposits in 1998.
During the last three years, average time deposits declined
2.9%. This represents a decrease of over $5 million. Average time
deposits decreased by 7% in 1998, compared to an increase of 4.2%
in 1997. Time deposits represented 56.1% of the total average
deposits in 1998 and 1997 compared to 56.7% in 1996. This decline
was a result of a repricing strategy to reduce the dependency on
mostly high cost price sensitive certificates of deposit.
Average savings deposits have grown 34.9% since 1996. Average
savings declined 4.7% in 1998. The ratio of average savings to
average total deposits increased to 13.0% in 1998 compared to 12.7%
in 1997 and 9.4% in 1996.
First United Security Bank's deposit base remains the primary
source of funding for the Bank. These deposits represented 73.1% of
the average earning assets in 1998 and 85.9% of the average earning
assets in 1997. As seen in the following table, overall rates on
the deposits increased to 3.89% in 1998, compared to 3.84% in 1997
and 3.98% in 1996. This rate change reflects a somewhat stable
interest rate environment. Emphasis continues to be placed on
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.
In June, 1996, Brent Banking Company was acquired
ition contributed approximately $33 mile in the conrion to the total
deposits; however, the average total calculation for 1996 was
limited to a partial year. Effective November 1997, approximately
$9.8 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. The sale of deposits had a
significant impact on the reduced average deposits in 1998.
Management, as part of an overall program to emphasize the
growth of transaction accounts, will introduce "on-line" banking
and a bill paying program as well as enhance the existing "Loyalty"
banking program and telephone banking. In addition, an increased
effort will be placed on promotions, direct mail campaigns and
cross selling efforts. This will be accomplished by remaining safe
and sound, emphasizing our products and providing quality service.
Other Interest-Bearing Liabilities -- Other interest-bearing
liabilities include all interest-bearing liabilities except
deposits, such as: federal funds purchased, securities sold under
agreement to repurchase (repurchase agreements), and Federal Home
Loan Bank advances. This category continues to be used as an
alternative source of funds. The $19.8 million or 57.1% average
increase in 1998 is due to an increase in volume of long term
advances from the Federal Home Loan Bank (FHLB). While deposit
rates increased slightly in 1998, the average rates on the other
liabilities declined by 51 basis points in 1998.
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,
1998 1997 1996
Amount Rate Amount Rate Amount Rate
(In Thousands of Dollars, Except Percentages)
Non-Interest Bearing DDA $ 39,308 $ 43,300 $ 41,543
Interest-Bearing DDA 59,794 2.32% 64,607 2.54% 69,461 2.74%
Savings Deposits 41,728 2.72 43,797 2.78 30,939 2.87
Time Deposits 180,128 5.44 193,738 5.37 185,588 5.51
Total $320,958 3.89% $345,442 3.84% $327,531 3.98%
Maturities of Time Certificates of Deposits and Other Time
Deposits of $100,000 or more outstanding at December 31, 1998, are
summarized as follows:
Time Other
Certificates Time
Maturities of Deposits Deposits Total
(In Thousands of Dollars)
3 Months or Less $12,985,179 $16,840,928 $19,826,107
Over 3 Through 6 Months 6,708,330 0 6,708,330
Over 6 Through 12 Months 5,665,526 0 5,665,526
Over 12 Months 15,189,138 0 15,189,138
Total $40,548,173 $16,840,928 $47,389,101
Investment Securities and Securities Available for Sale
Securities available for sale include Collateralized Mortgage
Obligations ("CMOs") of $101.3 million, other mortgage backed
securities of $31.3 million, state, county and municipal securities
of $23.8 million, and other securities of $3.1 million. The total
securities portfolio decreased $8.5 million or 4.9% from December
1997 to December 1998. The decrease is a result of increased loan
demand and general market conditions.
At December 1998, approximately $90.5 million in CMOs had
floating interest rates which reprice monthly and $10.8 million had
fixed interest rates.
Because of their liquidity, credit quality and yield
characteristics, the majority of the purchases of taxable
securities have been purchases of agency guaranteed mortgage-backed
obligations and collateralized mortgage obligations. The
mortgage-backed obligations in which United Security invests
represent an undivided interest in a pool of residential mortgages
or may be collateralized by a pool of residential mortgages
("mortgage-backed securities"). Mortgage-backed securities have
yield and maturity characteristics corresponding to the underlying
mortgages and are subject to any prepayments of principal due to
prepayment, refinancing, or foreclosure of the underlying
mortgages. Although maturities of the underlying mortgage loans may
range up to 30 years, amortization and prepayments substantially
shorten the effective maturities of mortgage-backed securities.
Transactions in these securities have focused on the three to seven
year average maturity range. Principal and interest payments also
add significant liquidity to the balance sheet. In 1997, there was
a continuing emphasis in CMOs, all of which are collateralized by
U. S. Government and Agency Mortgage Pools. The CMO market in
existence since 1983 was created to add liquidity to the
mortgage-backed security ("MBS") market by furnishing better
distribution of risk/reward profiles. Since CMOs are derived from
MBS pools, they are labeled mortgage derivatives.
Although the Federal Financial Institution Examination Council
no longer requires that all MBS derivatives be tested for
suitability as an investment in the portfolio of financial
institutions, First United Security Bank continues to run these
tests at purchase and periodically thereafter. The three tests
being performed are as follows:
#1 -- Average Life Test --
The expected average life of the security must be less than
or equal to 10 years.
#2 -- Average Life Sensitivity Test --
The average life of the security will not extend by more than
4 years or shorten by more than 6 years for immediate
Treasury curve shifts of +/- 300 basis points (3%).
#3 -- Price Sensitivity Test --
The estimated price of the security will not change by more
than 17% for immediate Treasury curve shifts of +/- 300 basis
points.
Securities that do not pass all three tests are designated
"high risk".
United Security held $37.7 million in securities which, at
December 31, 1998, were designated high risk. $5 million of these
securities were floating rate, and $24.8 million were inverse
floating rate securities and $7.9 million were fixed rate
securities. These securities were purchased and/or are being held
to hedge certain areas of interest rate risk in the portfolio and
balance sheet. There were unrealized losses in this portion of the
portfolio at December 31, 1998 of $800,000.
The overall securities portfolio is formally monitored on a
monthly basis, and assessments are made continually relative to
United Security's exposure to fluctuations in interest rates.
Changes in the level of earnings and fair values of securities are
generally attributable to fluctuations in interest rates, as well
as volatility caused by general uncertainty over the economy,
inflation, and future interest rate trends. MBS and CMOs present
some degree of additional risk in that mortgages collateralizing
these securities can be prepaid, thereby affecting the yield and
market value of the portfolio.
The composition of United Security's investment portfolio
reflects United Security's investment strategy of maximizing
portfolio yields commensurate with risk and liquidity
considerations. The primary objectives of United Security's
investment strategy are to maintain an appropriate level of
liquidity and provide a tool to assist in controlling United
Security's interest rate position while at the same time producing
adequate levels of interest income.
Fair market 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.12,620 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,
1998 1997 1996
(In Thousands of Dollars)
Investment Securities Available for Sale:
U.S. Treasury and Agencies Securities $ 2,090 $ 2,096 $ 4,987
Obligations of States, Counties, and
Political Subdivisions 23,841 22,228 32,113
Mortgage-Backed Securities 132,588 144,310 145,098
Other Securities 3,076 2,245 3,336
Unrealized Gains (Losses) 4,514 1,620 1,672
Total $164,019 $172,499 $187,206
Investment Securities Available-for-Sale Maturity Schedule
Maturing
After One After Five
Within But Within But Within After
One Year Five Years 10 Years 10 Years
Amount Yield Amount Yield Amount Yield Amount Yield
(In Thousands of Dollars, Except Yields)
Investment Securities
Available for Sale:
U.S. Treasury and Agency
Securities $ 500 0.00% $ 0 0.00% $ 0 0.00% $ 1,560 0.00%
State, County and Municipal
Obligations 1,081 6.79% 3,994 6.88% 3,498 6.46% 16,955 5.53%
Mortgage-Backed
Securities 90 7.68% 35 3.97% 13,911 7.52% 121,350 6.67%
Other 3,094 7.18% 11 7.93% 0 0.00% 0 0.00%
Total $4,265 7.09% $4,040 6.85% $17,409 7.31% $138,305 6.53%
TOTAL $164,019 6.64%
*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 1998 are presented in
the preceding table based on stated maturity. While the average
stated maturity of the Mortgage Backed Securities (excluding CMO's)
was 25.40 years, the average life expected is 6.83 years. The
average stated maturity of the CMO portion of the portfolio was
23.02 years, and the average expected life was 4.06 years. The
average expected life of investment securities available-for-sale
was 5.02 years with an average yield of 6.64 percent.
Condensed Portfolio Maturity Schedule
Dollar Portfolio
Maturity Summary Amount Percentage
Maturing in 3 months or less $ 1,398,017 0.25%
Maturing in 3 months to 1 year 841,254 0.52
Maturing in 1 to 3 years 2,313,859 1.44
Maturing in 3 to 5 years 1,931,698 1.20
Maturing in 5 to 15 years 29,626,597 18.40
Maturing in over 15 years 125,880,884 78.19
Total $160,992,309 100.00%
The following Marketable Equity Securities have been excluded from
the above Maturity Summary due to no stated maturity date.
Federal Home Loan Bank Stock $2,795,400
Mutual Funds $2,710,014
Other Marketable Equity Securities $2,221,688
Condensed Portfolio Repricing Schedule
Dollar Portfolio
Repricing Summary Amount Percentage
Repricing in 30 days or less $192,105,929 57.21%
Repricing in 31 days to 1 year 841,254 0.52
Repricing in 1 to 3 years 2,313,859 1.44
Repricing in 3 to 5 years 1,726,891 1.07
Repricing in 5 to 15 years 17,801,650 11.06
Repricing in over 15 years 46,202,726 28.70
Total $160,992,309 100.00%
Repricing in 30 days or less does not include:
Mutual Funds $2,710,014
Repricing in 31 days to 1 year does not include:
Federal Home Loan Bank Stock $2,795,400
Other Marketable Equity Securities $ 221,688
The tables above reflect all securities at market value on December
31, 1998.
Securities Gains and Losses
Non-interest income from securities transactions, trading
account transactions, and associated option premium income
increased dramatically in 1998 compared to 1997, as can be seen in
the table below. The majority of the profits realized in 1998 were
generated through the sale of securities. Gains in the investment
securities area occurred in connection with United Security's asset
and liability management activities and strategies. Options income
and other off-balance sheet income declined 19.37% from $396,772 to
$319,918. Although this income should be considered non-recurring,
it is expected that $123,000 will be recognized in 1999. This
income which will be received in 1999 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 1998, 1997, and 1996:
1998 1997 1996
Investment Securities $ 410,987 $ 105,254 $ (186,802)
Trading Account 0 10,187 (2,031)
Total $ 410,987 $ 115,441 $ (188,833)
Gains in 1998 from sales of investment securities were net of
losses of $829,183. Volume of sales as well as other information on
securities is further discussed in Note 4 to the financial
statements.
Short-Term Borrowings
Purchased funds can be used to satisfy daily funding needs,
and when advantageous, for arbitrage. The following table shows
information for the last three years regarding the Bank's short-
and long-term borrowings consisting of U. S. Treasury demand notes
included in its Treasury, Tax, and Loan Account, securities sold
under repurchase agreements, Federal Fund purchases (one day
purchases), and other borrowings from the Federal Home Loan Bank.
Short-Term Long-Term
Borrowings Borrowings
Maturity Maturity
Less Than One Year
One Year or Greater
(In Thousands of Dollars)
Year Ended December 31,:
1998 $22,212 $55,847
1997 3,913 40,966
1996 22,443 9,088
Weighted Average Interest Rate at Year-end:
1998 4.41% 5.04%
1997 5.23% 5.83%
1996 5.44% 7.50%
Maximum Amount Outstanding at Any Month's End:
1998 $11,620 $55,906
1997 11,936 40,973
1996 43,310 9,164
Average Amount Outstanding During the Year:
1998 $3,929 $55,454
1997 3,210 30,296
1996 26,669 9,130
Weighted Average Interest Rate During the Year:
1998 5.87% 5.53%
1997 5.80% 5.83%
1996 5.49% 7.50%
During January of 1997, United Security converted Federal Home
Loan Bank short-term borrowings to long-term borrowings.
Balances in these accounts fluctuate dramatically on a
day-to-day basis. Rates on these balances also fluctuate daily, but
as reflected in the chart above, they generally depicit the current
interest rate environment.
Shareholders' Equity
United Security has always placed great emphasis on
maintaining its strong capital base. At December 31, 1998,
shareholders' equity totaled $60.5 million, or 13.5% of total
assets compared to 12.4% and 11.1% for the same periods in 1997
and 1996, 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 $41.8
million at the beginning of 1996 to $60.5 million at the end of
1998. All of this growth was the result of internally generated
retained earnings, with the exception of the market value
adjustment of $2.8 million made for the available for sale
investments as required by Statement of Financial Accounting
Standards No. 115 and $179,930 from treasury stock retirement and
stock options being exercised. The internal capital generation rate
(net income less cash dividends as a percentage of average
shareholders' equity) was 10.3% in 1998, 10.2% in 1997 and 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 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 l Capital"). The remainder ("Tier II Capital")
may consist of a limited amount of other preferred stock, mandatory
convertible securities, subordinated debt, and a limited amount of
the allowance for loan losses. The sum of Tier l Capital and Tier
II Capital is "total risk-based capital".
The banking regulatory agencies have also adopted regulations
which supplement the risk based guidelines to include a minimum
leverage ratio of 3% of Tier l Capital to total assets less
goodwill (the "leverage ratio"). Depending upon the risk profile of
the institution and other factors, the regulatory agencies may
require a leverage ratio of 1% or 2% higher than the minimum 3 %
level.
The following chart summarizes the applicable regulatory
capital requirements. United Security's capital ratios at December
31, 1998, substantially exceeded all regulatory requirements.
Risk-Based Capital Requirements
Minimum United Security's
Regulatory Ratio at
Requirement December 31, 1998
Tier I Capital to Risk-Adjusted Assets 4.00% 16.20%
Total Capital to Risk-Adjusted Assets 8.00% 17.37%
Tier I Leverage Ratio 3.00% 12.07%
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 $2.7 million or $.76 per share in 1998 compared
to $.53 per share in 1997 and $.40 per share in 1996. The total
cash dividends represented a payout ratio of 31.4% in 1998 with a
payout ratio of 26.8% and 20.2% in 1997 and 1996 respectively. This
is the tenth 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,
1998 1997 1996
Return on Average Assets 1.95% 1.61% 1.70%
Return on Average Equity 14.94% 13.92% 15.83%
Cash Dividend Payout Ratio 31.40% 26.79% 20.21%
Average Equity to Average Assets Ratio 13.07% 11.55% 10.73%
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 $116.5 million at December 31, 1998.
Investment securities maturing or repricing in the same time
frame totaled $96 million or 58.5% of the investment portfolio at
year-end 1998. In addition, principal payments on mortgage backed
securities totaled $9.3 million in 1998. For repricing purposes,
$13.6 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 1998,
1997 and 1996, due primarily to high levels of net income. In 1998,
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. Cash flows from
financing activities saw an increase in customer deposits and $2.7
million in dividends paid. Advances from the Federal Home Loan Bank
and other borrowings increased $11 million. Net cash and cash
equivalents increased $12.3 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 been used
either to purchase additional investments or to fund loan growth.
United Security, at December 31, 1998, had long-term debt and
short-term borrowings that on average represent 13.5 percent of
total liabilities and equity.
United Security currently has up to $75 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, 1998, as measured by gap analysis. Over
the next 12 months approximately $364,000 more interest earning
assets than interest bearing liabilities can be repriced to current
market rates at least once. This analysis indicates that United
Security has a positive gap within the next 12 month range and net
interest income should benefit slightly from a rising rate
environment according to the table.
Interest Rate Sensitivity Analysis
December 31, 1998
(In Thousands of Dollars)
Total
0-3 4-12 1 Year 1-5 Over 5 Non-Rate
Months Months or Less Years Years Sensitive Total
Earning Assets:
Loans (Net of
Unearned Income) $ 72,706 $ 43,794 $116,500 $102,150 $21,399 $ 0 $240,049
Investment Securities 98,322 10,931 109,253 22,637 32,129 0 164,019
Interest Bearing Deposits
in Other Banks 928 0 928 0 0 928
Total Earning Assets $171,956 $ 54,725 $226,681 $124,787 $53,528 $ 0 $404,996
Percent of Total Earning
Assets 42.5% 13.5% 56.0% 30.8% 13.2% 100.0%
Interest-Bearing Liabilities:
Interest-Bearing Deposits
and Liabilities
Demand Deposits (1) $ 51,669 $ 0 $ 51,669 $ 12,917 $ 0 $ 0 $ 64,586
Savings Deposits (1) 19,901 0 19,901 19,901 0 0 39,802
Time Deposits 58,930 77,192 136,122 46,529 0 0 182,651
Other Liabilities 10,041 7,587 17,628 37,964 267 0 55,859
Non-Interest-Bearing
Liabilities
Demand Deposits 997 0 997 0 0 38,789 39,786
Equity 0 0 0 0 0 22,312 22,312
Total Funding Sources $141,538 $ 84,779 $226,317 $117,311 $ 267 $ 61,101 $404,996
Percent of Total
Funding Sources 34.9% 20.9% 55.9% 29.0% 0.1% 15.1% 100.0%
Interest Sensitivity Gap
(Balance Sheet) $ 30,418 $(30,054) $ (9,364 $ 37,476 $53,261 $(61,101) $ 0
Off-Balance Sheet $ (5,000) $ 0 $ (5,000) $ 5,000 $ 0 $ 0 $ 0
Interest Sensitive Gap $ 25,418 $(30,054) $ (4,636) $ 12,476 $53,261 $(61,101) $ 0
Cumulative Interest-
Sensitive Gap $ 25,418 $ (4,636) $ N/A $ 27,840 $61,101 $ 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 1.17% 0.65% 0.98% 1.11% 0.87% 1.00%
Cumulative Ratio 1.17% 0.98% N/A 1.02% 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 management's historical pricing
practices and runoff experience. Approximately 20% of the
interest-bearing demand deposit account balances and 50% of the
savings account balances are classified as over one year.
Certain interest-sensitive assets and liabilities are included
in the table based on historical repricing experience and expected
prepayments in the case of Mortgage Backed Securities rather than
contractual maturities. Non-accruing loans are included in loans at
the contractual maturity.
United Security also uses additional tools to monitor and
manage interest rate risk sensitivity. These tools include income
simulation analysis and duration analysis. Both analyses are
methods of estimating earnings at risk and capital at risk under
varying interest rate conditions. They are used to test the
sensitivity of net interest income and stockholders' equity to the
level of interest and include adjustments for the expected timing
and the magnitude of assets and liability cash flows. Also, these
measures capture adjustments for the lag between movements in
market interest rates and the movement of administered rates on
prime rate loans, interest bearing transaction accounts, regular
savings, and money market savings accounts. Income simulation
analysis indicates that United Security is slightly asset
sensitive.
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 $ 12,103 4.36 4.36
Investment Securities Available-for-Sale 164,019 0.16 2.66
Fed Funds Sold & FHLB 14,728 0.01 0.01
Loans 235,060 1.95 1.50
Premises and Equipment 8,225 4.36 4.36
Accrued Interest Receivable 4,521 4.36 4.36
Investment in Limited Partnerships 4,234 4.36 4.36
Other Assets 7,183 4.36 4.36
Total Assets $450,073 1.43 2.10
LIABILITIES AND SHAREHOLDERS' EQUITY
Demand, Non-interest Bearing $ 39,786 4.36 4.36
Demand, Interest Bearing 64,586 0.04 0.14
Savings 39,802 0.04 3.10
Time 182,471 0.73 0.77
Total Deposits $326,645
Other Liabilities $ 7,001 4.36 4.36
Short-Term Borrowing 12 0.08 0.08
Long-Term Borrowing 55,847 1.82 1.82
Shareholders' Equity 60,568 4.36 4.36
Total Liabilities and Shareholders' Equity $450,073 1.57 1.87
Modified Duration Differential (0.14) 0.23
*Suggested Change in Market Value of
Equity (Pre-tax) ($000) $ (642) $(1,045)
* The change in the market value of equity should represent the
present value of the Company's future earnings exposure to a 1%
rise or fall in interest rates.
United Security uses a five step process to calculate the
duration of each asset and liability category. The first step is to
assemble maturity and repricing data on loans, investments, CD's
and other financial instruments with contractual maturities. The
second step is to determine how bank management would alter the
interest rate for each category of assets and liabilities assuming
market interest rates rose or fell 1%. The third step is to combine
the maturity analysis and repricing assumptions in order to
formulate a modified duration estimate for each category. The
fourth step is to calculate a weighted average for total assets and
liabilities, and the fifth step is to multiply the modified
duration differential as calculated (for both up 1% and down 1%
interest rate scenarios) in step four by total assets. Based on the
current position of the balance sheet, management believes these
present value calculations approximate United Security's aggregate
pre-tax earnings exposure for the next 5 years.
In this methodology, all non-rate sensitive assets,
liabilities, and shareholders' equity are assigned a modified
duration based on a five year time horizon (4.24 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 also incorporates management's belief that deposit and
loan rates would not rise or fall equally either by category or by
interest rate scenario. Increases 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
slightly if interest rates rise and should decline with a 1 % fall
in interest rates.
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, 1998, the Bank had
outstanding standby letters of credit and commitments to make loans
of $6.5 million and $23.5 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, 1998, 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 $12
million in commitments to sell securities for delayed delivery and
no commitments to purchase securities as of December 31, 1998.
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 $5.5 million or 24.5% in 1998
compared to 14.4% and 12.7% increases in 1997 and 1996
respectively. Volume, rate, and yield changes contributed to the
growth in net interest income. Average interest-earning assets
increased by $6.2 million or 1.5 % in 1998, while average
interest-bearing liabilities decreased $.7 million. Volume changes
of equal amounts in interest-earning assets and interest-bearing
liabilities generally increase net interest income because of the
spread between the yield on loans and investments and the rates
paid on interest bearing liabilities. In 1998, average
interest-earning assets outgained average interest-bearing
liabilities by $5.5 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 6.8% in 1998 compared to 5.5 % in 1997 and 5.1
% in 1996.
Interest margins are affected by several factors, one of which
is the relationship of rate-sensitive earning assets to
rate-sensitive interest-bearing liabilities. This factor determines
the effect that fluctuating interest rates will have on net
interest income. Rate-sensitive earning assets and interest bearing
liabilities are those which can be repriced to current market rates
within a relatively short time. United Security's objective in
managing interest rate sensitivity is to achieve reasonable
stability in the interest margin throughout interest rate cycles by
maintaining the proper balance of rate sensitive assets and
liabilities. For further analysis and discussion of interest rate
sensitivity, refer to the preceding section entitled "Liquidity and
Interest Rate Sensitivity Management."
Another factor that affects the interest margin is the interest
rate spread. The interest rate spread measures the difference
between the average yield on interest-earning assets and the
average rate paid on interest-bearing liabilities. This measurement
gives a more accurate representation of the effect market interest
rate movements have on interest rate-sensitive assets and
liabilities. The average volume of the interest-bearing liabilities
as noted in the table, "Distribution of Assets, Liabilities, and
Shareholders' Equity, with Interest Rates and Interest
Differentials," decreased .7 % in 1998, while the average rate of
interest paid increased from 4.57% in 1997 to 4.62% in 1998, an
increase of 5 basis points. Average interest-earning assets
increased 1.5% in 1998, while the average yield increased from
9.36% in 1997 to 10.59% in 1998, an increase of 123 basis points.
Net yield on average interest earning assets increased 118 basis
points from 1997 to 1998. 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 1998, 82% of the Bank's average earning assets were
funded by interest-bearing liabilities as opposed to 84% in 1997
and 82% in 1996. 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,
1998 1997 1996
(In Thousands of Dollars)
Total Interest Income $43,255 $37,648 $34,551
Total Interest Expense 15,518 15,376 15,081
Net Interest Income 27,737 22,272 19,470
Provision for Loan Losses 3,187 1,710 800
Net Interest Income After Provision for
Loan Losses 24,550 20,562 18,670
Non-Interest Income 4,558 4,361 2,725
Non-Interest Expense 17,008 15,229 11,765
Income Before Income Taxes 12,100 9,694 9,630
Applicable Income Taxes 3,521 2,713 2,659
Net Income $ 8,579 $ 6,981 $ 6,971
Changes in Interest Earned and Interest Expense Resulting from
Changes in Volume and Changes in Rates
1998 Compared to 1997 1997 Compared to 1996 1996 Compared to 1995
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 $2,200 $4,233 $6,433 $1,499 $1,246 $2,745 $2,665 $ 276 $2,941
Taxable Investments (862) 300 (562) 919 (376) 543 1,365 (308) 1,057
Non-Taxable Investments (156) (111) (267) (410) 273 (137) 265 (126) 139
Federal Funds (2) 4 2 (48) (5) (53) (174) 16 (158)
Total Interest-
Earning Assets $1,180 $4,426 $5,606 $1,960 $1,138 $3,098 $4,121 $(142) $3,979
Interest Expense On:
Demand Deposits $ (118) $ (139) $ (257) $ (128) $ (133) $ (261) $ 217 $ (8) $ 209
Savings Deposits (57) (24) (81) 357 (26) 331 59 (29) 30
Time Deposits (770) 328 (442) 423 (240) 183 1,265 87 1,352
Other Liabilities 982 (60) 922 (43) 85 42 295 (104) 191
Total Interest-
Bearing Liabilities $ 37 $ 105 $ 142 $ 609 $ (314) $ 295 $1,836 $ (54) $1,782
Increase in Net
Interest Income $1,143 $4,321 $5,464 $1,351 $1,452 $2,803 $2,285 $ (88) $2,197
Provision for Loan Losses
The provision for loan losses is an expense used to establish
the allowance for loan losses. Actual loan losses, net of
recoveries, are charged directly to the allowance. The expense
recorded each year is a reflection of actual losses experienced
during the year and management's judgment as to the adequacy of the
allowance to absorb losses inherent in the portfolio. Charge-offs
exceeded recoveries by $2.2 million during the year, an increase of
$1.4 million over the prior years, and accordingly a provision of
$3.2 million was expensed for loan losses in
1998. This increased the allowance to 2% of total loans outstanding
at December 31, 1998. For additional information and discussion of
the allowance for loan losses, refer to the section entitled "Loans
and Allowance 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.
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
completed in the spring of 1999. This sale along with other less
significant asset sales resulted in a gain of $310,224 in 1997.
Acceptance Loan Company opened four new offices in 1996, fourteen
in 1997, added five more in 1998 and currently has a total of
twenty-five offices. These events coupled with the Bank's Bond
Division formation in 1996 contributed to a $197,306 or 4.5%
increase in 1998 compared to a $1,636,171 and $168,806 increase in
1997 and 1996 respectively.
Fee income from service charges increased $341,310, or 17.4%,
from 1996 to 1998, and credit life commission increased $465,165,
or 226%, during the same period. This significant growth is
attributed to 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 $410,987 in 1998 compared
to a $105,254 gain in 1997 and a $186,802 loss in 1996. Income
generated in the area of securities gains and losses is dependent
on many factors including investment portfolio strategies, interest
rate changes, and the short, intermediate, and long-term outlook
for the economy.
Other income decreased $563,744 or 32.4% in 1998. As
previously mentioned, this decrease is a result of the
extraordinary non-recurring gain realized on the sale of the Bank's
assets in 1997.
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 $402,194 to
non-interest income in 1998 compared to $266,476 in 1997 and
$16,233 in 1996.
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-three offices
of Acceptance Loan Company since 1996 for a total of twenty-five
offices, and the merger of United Security Bank and First Bank and
Trust in 1997.
The ratio of non-interest expenses to average assets increased
to 3.8% in 1998 compared to 3.5% and 2.9% in 1997 and 1996
respectively. This ratio was significantly impacted by the events
noted above.
Salaries and employee benefits increased $1.9 million or 24.8%
in 1998. 1998 was the first full year of the Bank merger,
therefore, it was the first year of a combined incentive program
for the combined banks increasing benefits by approximately
$420,000. The Bank's salary expense was reduced by about $292,000
in 1998 due mainly to attrition. Additionally, Acceptance Loan
Company added 12 employees in 1998 to staff the five new offices
and maintained the fourteen new offices added in 1997 for a full
year in 1998 for an increase of approximately $1.7 million in
salary and benefits expense. At December 31, 1998, United Security
had 286 full-time equivalent employees compared to 266 in 1997 and
226 in 1996. The increase is attributable to Acceptance Loan
Company's growth and one new office opened by the Bank in
Harpersville, Alabama .
United Security sponsors an Employee Stock Ownership Plan with
401(k) provisions. The Company made matching contributions totaling
$376,120, $238,190 and $216,686 in 1998, 1997, and 1996,
respectively.
Furniture and equipment expense increased 5.35% in 1998, 37% in
1997, and 9.6% in 1996. Most of the 1997 increase of $375,497 is a
direct result of the computer and check processing equipment lease
and depreciation expenses associated with the merger as well as the
expenses associated with the new Acceptance Loan Company offices.
The 1998 increase of $74,292 is due to the five new ALC offices and
the equipment upgrade in preparation for the Year 2000.
Occupancy expense includes rents, depreciation, utilities,
maintenance, insurance, taxes, and other expenses associated with
maintaining sixteen banking offices and twenty-five 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 21.3% in 1998,
26.3% in 1997, and 22.7% in 1996. The increases reflect the new
offices of Acceptance Loan Company opened in 1998, 1997 and 1996.
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
decreased 8.3 % in 1998, increased 39.7% in 1997 and decreased 6.8%
in 1996. The 1997 increase was due to costs associated with the
merger of United Security Bank and First Bank and Trust.
Year 2000 - Technology Considerations
The Year 2000 issue is the result of computer systems using a
two-digit format, as opposed to four digits, to indicate the year.
Any of the Company's computer programs or hardware that have
date-sensitive software or embedded chips may not appropriately
interpret dates beyond the year 1999. This could result in a system
failure, miscalculation or other computer errors causing disruption
of operations. The Company believes that it has an effective
program in place to resolve the Year 2000 issue in a timely manner
and that is unlikely that Year 2000 issues will cause any
significant problems with customer service or otherwise have a
material adverse impact on the Company's operations or financial
performance.
Management has approved a Year 2000 plan, which includes
multiple phases, tasks to be completed, and target dates for
completion. Issues addressed therein include awareness, assessment,
validation, implementation, testing and contingency planning.
Progress under this plan is reported to the Board of Directors on
a regular basis.
The Company's core bank operating software has been certified
by the vendor to be Year 2000 compliant. To verify this compliance,
the Company loaded the software along with general ledger data on
a separate test system. Dates on the test system were advanced to
2000, and results from this test have been validated by Company
personnel. The Company's testing and validation of results
indicates that the core bank operating software is 100% Year 2000
compliant. The Company also has a number of secondary systems, and
testing on these systems is either complete or in process. The
Company's target date for completion of such testing is March 31,
1999.
While the Company's plans are to complete testing of inhouse
systems prior to March 31, 1999, there are several industry-wide
tests which require participation of the Company as well as the
testing of new systems. In addition to the systems outlined above,
the Company is tracking the Year 2000 readiness of its utility
companies and is finalizing contingency plans for these services to
critical operations.
Since it routinely upgrades and purchases technologically
advanced software and hardware, the Company has determined that the
cost of making modifications to correct any Year 2000 issues will
not materially affect reported operating results. The Company
estimates that its remaining capital expenditures to prepare for
Year 2000 and correct any Year 2000 issues should not exceed
$100,000, and its remaining operating expenditures should not
exceed $25,000. This cost estimate does not include salaries or
employee benefits of Company employees working on the Year 2000
project, as these costs are not separately tracked.
The Company also recognizes the importance of determining that
its borrowers are addressing the Year 2000 problem to avoid
deterioration of the loan portfolio solely due to this issue. All
material relationships have been identified to assess the inherent
risks and Year 2000 questionnaires are being obtained from such
borrowers where considered appropriate. The target date for the
completion of this assessment is June 30, 1999. Deposit customers
have received statement stuffers and informational matter in this
regard. The Company is working on a one-on-one basis with any
borrower that has been identified as having high Year 2000 risk
exposure.
The Company has contacted all of its essential suppliers
regarding their Year 2000 compliance and has substantially
completed an analysis of the possible impact of noncompliance on
their ability to fulfill their commitments to the Company. To date,
the Company is not aware of any external supplier with a Year 2000
issue that would materially impact the Company's results of
operations, liquidity or capital resources.
Management does not believe that the Company will incur
significant additional costs associated with the Year 2000 issue.
However, management cannot predict the amount of financial
difficulties it may incur due to customer and vendor inability to
perform according to their agreements with the Company or the
effects that other third parties may bring as a result of this
issue. The Company also anticipates that deposit customers may
perceive a need for increased cash in the latter part of 1999, and
management has made liquidity contingency plans to address this
potential additional need for currency. Management has held
discussions with the Federal Reserve and the Federal Home Loan Bank
with regard to such potential increased currency and funding needs.
Although the Federal Reserve has announced plans to increase the
amount of currency in circulation in preparing for Year 2000, a
lack of liquidity in the financial system could have a significant
negative impact on the Company. Accordingly, there can be no
assurance that the failure or delay of others to address the issue
or that the costs involved in such process will not have a material
adverse impact on the Company's business, financial condition and
results of operations.
The Company's contingency plans are being tested and may be
modified as testing progresses. The Securities and Exchange
Commission has asked reporting companies to address a reasonable
"worst case" scenario with respect to the Year 2000 issue.
Management's estimate of the "worst case" scenario is a loss of
electrical power and telecommunication service. The Company has a
backup electrical power generator to run its mainframe computer
system in case of difficulties with the electricity vendor, but is
unable to ascertain how such a loss of electrical power would
impact its operations and those of its customers if such power loss
was sustained.
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk
The Information required by this item is contained in Item 7
herein under the heading "Liquidity and Interest Rate Sensitivity
Management."
Item 8. Financial Statements and Supplementary Data.
INDEPENDENT AUDITOR'S REPORT
To United Security Bancshares, Inc.:
We have audited the accompanying consolidated statements of
condition of United Security Bancshares, Inc. (an Alabama
corporation) and subsidiaries as of December 31, 1998 and 1997 and
the related consolidated statements of income, shareholders' equity
and comprehensive income, and cash flows for the years 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 audits. We did
not audit the accompanying consolidated statements of income,
shareholders' equity and comprehensive income, and cash flows for
the year ended December 31, 1996. 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 income, shareholders' equity and
comprehensive income, and cash flows for the year December 31,
1996, of United Security Bancshares, Inc. and First Bancshares,
Inc. 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 audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of United Security Bancshares, Inc. and subsidiaries as of
December 31, 1998 and 1997 and the results of their operations and
their cash flows for years then ended in conformity with generally
accepted accounting principles.
Birmingham, Alabama
January 22, 1999
UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
December 31, 1998 and 1997
ASSETS
1998 1997
CASH AND DUE FROM BANKS $ 12,102,669 $ 14,312,127
INTEREST BEARING DEPOSITS IN OTHER BANKS 14,728,357 226,451
Total cash and cash equivalents 26,831,026 14,538,578
INVESTMENT SECURITIES AVAILABLE FOR SALE 164,019,411 172,499,227
LOANS, net of allowance for loan losses
of $4,989,173 and $4,045,844, respectively 235,059,761 215,897,434
PREMISES AND EQUIPMENT, net of accumulated
depreciation of $8,436,763 and $7,559,857 8,225,007 6,837,080
ACCRUED INTEREST RECEIVABLE 4,520,783 4,048,668
INVESTMENT IN LIMITED PARTNERSHIPS 4,234,447 4,272,547
OTHER ASSETS 7,182,352 7,847,183
Total assets $450,072,787 $425,940,717
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand, noninterest bearing $ 39,786,298 $ 40,983,995
Demand, interest bearing 64,585,952 61,217,614
Savings 39,801,921 41,352,245
Time, $100,000 and over 40,548,173 34,099,172
Other time 141,922,237 144,765,347
Total deposits 326,644,581 322,418,373
OTHER LIABILITIES 7,001,153 5,933,331
SHORT-TERM BORROWINGS 11,742 3,912,821
LONG-TERM DEBT 55,847,223 40,965,644
Total liabilities 389,504,699 373,230,169
COMMITMENTS AND CONTINGENCIES (Note 18)
Shareholders' equity:
Common stock, par value $.01 per share;
10,000,000 shares authorized; 3,610,945
and 3,601,604 shares issued, respectively 36,109 36,018
Surplus 8,218,651 8,057,792
Accumulated other comprehensive income,
net of tax 2,821,556 1,012,620
Retained earnings 49,743,592 43,858,538
Less treasury stock, 64,100 shares and
65,015 shares, respectively, at cost (251,820) (254,420)
Total shareholders' equity 60,568,088 52,710,548
Total liabilities and shareholders' equity $450,072,787 $425,940,717
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, 1998, 1997, and 1996
1998 1997 1996
INTEREST INCOME:
Interest and fees on loans $29,397,310 $22,964,581 $20,219,182
Interest on investment securities
available for sale:
Taxable 12,087,389 12,702,142 12,136,212
Tax-exempt 1,468,851 1,735,501 1,872,279
Other interest and dividends 188,786 132,802 166,321
13,745,026 14,570,445 14,174,812
Interest on trading account securities 15,267 18,323 8,844
Interest on federal funds sold 97,350 95,023 148,030
Total interest income 43,254,953 37,648,372 34,550,868
INTEREST EXPENSE:
Interest on deposits 12,495,765 13,274,760 13,021,430
Interest on short-term borrowings 230,738 335,505 1,732,150
Interest on long-term debt 2,791,794 1,765,440 327,164
15,518,297 15,375,705 15,080,744
NET INTEREST INCOME 27,736,656 22,272,667 19,470,124
PROVISION FOR LOAN LOSSES 3,187,103 1,710,128 799,527
Net interest income after provision
for loan losses 24,549,553 20,562,539 18,670,597
NONINTEREST INCOME:
Service and other charges on deposit accounts 2,302,530 2,194,963 1,961,220
Credit life insurance commissions 670,694 312,757 205,529
Investment securities gains (losses), net 410,987 105,254 (186,802)
Trading securities gains (losses), net 0 10,187 (2,031)
Other income 1,173,930 1,737,674 746,748
Total noninterest income 4,558,141 4,360,835 2,724,664
NONINTEREST EXPENSE:
Salaries and employee benefits 9,766,080 7,823,601 6,379,413
Furniture and equipment expense 1,461,872 1,387,580 1,012,083
Occupancy expense 1,061,902 875,523 693,188
Other expense 4,718,118 5,142,485 3,680,994
Total noninterest expense 17,007,972 15,229,189 11,765,678
INCOME BEFORE INCOME TAXES 12,099,722 9,694,185 9,629,583
PROVISION FOR INCOME TAXES 3,521,072 2,712,727 2,658,593
NET INCOME $ 8,578,650 $ 6,981,458 $ 6,970,990
AVERAGE NUMBER OF SHARES OUTSTANDING 3,543,325 3,536,642 3,536,585
NET INCOME PER SHARE:
Basic $ 2.42 $ 1.97 $ 1.97
Diluted $ 2.40 $ 1.96 $ 1.97
DIVIDENDS PER SHARE $ .76 $ .53 $ .40
The accompanying notes are an integral part of these consolidated statements.
UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
For the Years Ended December 31, 1998, 1997 and 1996
Accumulated
Other Total
Common Comprehensive Retained Treasury Shareholders'
Stock Surplus Income Earnings Stock at Cost Equity
BALANCE AT JANUARY 1, 1996 $ 36,016 $8,046,542 $ 786,900 $33,185,749 $(259,548) $41,795,659
Comprehensive income:
Net income 0 0 0 6,970,990 0 6,970,990
Net change in unrealized gain (loss)
on securities available for sale,
net of tax 0 0 258,278 0 0 258,278
Comprehensive income 7,229,268
Dividends declared 0 0 0 (1,409,144) 0 (1,409,144)
BALANCE AT DECEMBER 31, 1996 36,016 8,046,542 1,045,178 38,747,595 (259,548) 47,615,783
Comprehensive income:
Net income 0 0 0 6,981,458 0 6,981,458
Net change in unrealized gain (loss)
on securities available for sale,
net of tax 0 0 (32,558) 0 0 (32,558)
Comprehensive income 6,948,900
Dividends declared 0 0 0 (1,870,515) 0 (1,870,515)
Retirement of treasury stock (9) (5,119) 0 0 5,128 0
Exercise of stock options 11 16,369 0 0 0 16,380
BALANCE AT DECEMBER 31, 1997 36,018 8,057,792 1,012,620 43,858,538 (254,420) 52,710,548
Comprehensive income:
Net income 0 0 0 8,578,650 0 8,578,650
Net change in unrealized gain (loss)
on securities available for sale,
net of tax 0 0 1,808,936 0 0 1,808,936
Comprehensive income 10,387,586
Dividends declared 0 0 0 (2,693,596) 0 (2,693,596)
Sale of treasury stock 0 651 0 0 2,600 3,251
Exercise of stock options 91 160,208 0 0 0 160,299
BALANCE AT DECEMBER 31, 1998 $ 36,109 $8,218,651 $2,821,556 $49,743,592 $(251,820) $60,568,088
The accompanying notes are an integral part of these consolidated statements.
UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1998, 1997 and 1996
1998 1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 8,578,650 $ 6,981,458 $ 6,970,990
Adjustments:
Depreciation 797,959 894,702 969,983
Provision for loan losses 3,187,103 1,710,128 799,527
Deferred income tax benefit (1,191,833) (335,835) (118,683)
Amortization of intangibles 636,651 604,811 338,689
(Gain) loss on sale of securities, net 410,987 (105,254) 186,802
(Gain) on sale of branch 0 (592,012) 0
(Gain) loss on sale of fixed assets 0 (364,378) 1,004
Equity in loss of unconsolidated investee 0 150,000 6,029
Amortization of premium and discounts, net 630,654 1,297,363 1,285,411
Changes in assets and liabilities:
(Increase) decrease in accrued interest
receivable (472,115) (381,024) 143,129
(Increase) decrease in other assets 162,925 (515,295) (410,413)
Increase (decrease) in interest payable 218,808 48,849 (2,643)
Increase in other liabilities 840,717 900,534 932,434
Net cash provided by operating activities 13,800,506 10,294,047 11,102,259
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investment securities available
for sale (81,139,966) (49,711,539) (68,311,896)
Proceeds from sales of investment securities
available for sale 37,687,753 47,507,930 39,166,424
Proceeds from maturities and prepayments of
investment securities available for sale 54,511,409 15,948,700 8,851,014
Proceeds from redemptions of Federal Home
Loan Bank stock 0 0 503,000
Purchases of Federal Home Loan Bank stock (746,700) (211,260) (398,900)
Net cash received in acquisition of bank 0 0 8,605,941
Net cash paid in sale of branch 0 (6,518,424) 0
Loan (originations) and principal
repayments, net (22,311,330) (15,555,151) (9,372,493)
(Purchase of) proceeds from sale of premises
and equipment, net (2,185,886) (970,598) (820,777)
Net cash used in investing activities (14,184,720) (9,510,342) (21,777,687)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in customer deposits 4,226,208 (14,008,721) 8,361,670
Net increase (decrease) in short-term borrowings (3,901,079) (79,260) 34,398
Proceeds from FHLB advances and other borrowings 30,000,000 37,281,088 4,964,913
Repayment of FHLB advances and other borrowings (15,118,421) (23,854,663) (673,833)
Proceeds from issuance of common stock 160,299 16,380 0
Dividends paid (2,693,596) (1,605,654) (1,366,386)
Sale of treasury stock 3,251 0 0
Net cash (used in) provided by
financing activities 12,676,662 (2,250,830) 11,320,762
Net increase (decrease) in cash and
cash equivalents 12,292,448 (1,467,125) 645,334
Cash and cash equivalents, beginning of year 14,538,578 16,005,703 15,360,369
Cash and cash equivalents, end of year $26,831,026 $14,538,578 $16,005,703
The accompanying notes are an integral part of these consolidated statements.
UNITED SECURITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
1. DESCRIPTION OF BUSINESS
United Security Bancshares, Inc. (the "Company" or "USB") and its
subsidiary, First United Security Bank (the "Bank" or "FUSB")
provide commercial banking services to customers located primarily
in Clarke, Choctaw, Bibb and surrounding counties in Alabama and
Mississippi. The Company also owns all the stock of First Security
Courier Corporation, ("FSCC") an Alabama corporation. FSCC is a
courier service organized to transport items for processing to the
Federal Reserve for financial institutions located in Southwest
Alabama.
The Bank owns all of the stock of Acceptance Loan Company, Inc.
("Acceptance" or "ALC"), an Alabama corporation. Acceptance is a
finance company organized for the purpose of making consumer loans
and purchasing consumer loans from vendors. Acceptance has offices
located within the communities served by the Bank as well as
offices outside the Bank's market area in north and southeast
Alabama, and northwest Florida. The Bank also invests in limited
partnerships that operate qualified affordable housing projects to
receive tax benefits.
2. SUMMARY OF SIGNIFICANT ACCOUNT POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company, FSCC, the Bank and its wholly owned subsidiary. All
significant intercompany balances and transactions have been
eliminated. The Bank's investment in limited partnerships are
carried on an unconsolidated basis under either the equity or cost
method based on the percentage of ownership and influence over
operations.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents
include cash on hand, amounts due from banks, and federal funds
sold. Federal funds are generally purchased and sold for one-day
periods.
Supplemental disclosures of cash flow information and noncash
transactions related to cash flows for the years ended December 31,
1998, 1997, and 1996 are as follows:
1998 1997 1996
Cash paid during the period for:
Interest $15,284,661 $15,326,856 $15,083,387
Income taxes 3,648,211 2,351,304 2,605,267
Supplemental schedule of noncash investment
and financing activities:
Dividends declared but unpaid 686,080 542,796 277,935
Details of acquisition:
Fair value of assets acquired 0 0 25,095,174
Liabilities assumed 0 0 (33,701,115)
Details of branch sale:
Fair value of assets sold 0 3,433,740 0
Liabilities transferred 0 9,952,164 0
Securities
Securities may be held in three portfolios: trading account
securities, held to maturity securities, and securities available
for sale. Trading account securities are carried at market value,
with unrealized gains and losses included immediately in other
income. Investment securities held to maturity are carried at cost,
adjusted for amortization of premiums and accretion of discounts.
With regard to investment securities held to maturity, management
has the intent and the Bank has the ability to hold such securities
until maturity. Investment securities available for sale are
carried at market value, with any unrealized gains or losses
excluded from earnings and reflected, net of tax, as a separate
component of shareholders' equity. Investment securities available
for sale are so classified because management may decide to sell
certain securities prior to maturity for liquidity, tax planning,
or other valid business purposes. The Company held no securities in
their trading and held to maturity portfolios at December 31, 1998
and 1997.
Included in investment securities available for sale is stock in
the Federal Home Loan Bank (FHLB) of Atlanta. FHLB stock is carried
at cost, has no contractual maturity, has no quoted fair value, and
no ready market exists; therefore, the fair value of such stock is
assumed to approximate cost. The investment in the stock is
required of every member of the FHLB system.
Interest earned on investment securities held to maturity,
investment securities available for sale, and trading account
securities is included in interest income. Amortization of premiums
and discounts on investment securities is by the interest method.
Net gains and losses on the sale of investment securities held to
maturity and investment securities available for sale, computed
principally on the specific identification method, are shown
separately in noninterest income in the consolidated statements of
income.
Derivative Financial Instruments
To hedge interest rate exposure, the Company uses derivative
financial instruments consisting of interest rate swaps, caps, and
floors which are accounted for using the accrual method. Net
interest income or expense related to interest rate swaps, caps,
and floors is recorded over the life of the agreement as an
adjustment to net interest income. The premiums paid for the caps
and floors are amortized straight-line over the life of the
agreement. Changes in the estimated fair values of derivative
financial instruments used as hedges are not reflected in the
financial statements until realized. Gains or losses realized on
the sales or terminations of interest rate swaps are deferred and
amortized into interest income over the maturity period of the
contract.
The Company's criteria for use of derivatives as hedges include
reduction of the risk associated with the exposure being hedged and
such derivatives must be designated as a hedge at the inception of
the derivative contract. Derivatives that do not meet these
criteria are carried at fair value with changes in value recognized
currently in earnings.
Loans and Interest Income
Loans are reported at the principal amounts outstanding adjusted
for unearned income, deferred loan origination fees and costs,
purchase premiums and discounts, writedowns, and the allowance for
loan losses. Loan origination fees, net of certain deferred
origination costs, and purchase premiums and discounts are
recognized as an adjustment to yield of the related loan.
Interest on commercial and real estate loans is accrued and
credited to income based on the principal amount outstanding.
Interest on installment loans is recognized using the interest
method and according to the rule of 78's which approximates the
interest method.
The accrual of interest on loans is discontinued when, in the
opinion of management, there is an indication that the borrower may
be unable to meet payments as they become due. Upon such
discontinuance, all unpaid accrued interest is reversed against
current income unless the collateral for the loan is sufficient to
cover the accrued interest. Interest received on nonaccrual loans
generally is either applied against principal or reported as
interest income, according to management's judgment as to the
collectibility of principal. Generally, loans are restored to
accrual status when the obligation is brought current and has
performed in accordance with the contractual terms for a reasonable
period of time and the ultimate collectibility of the total
contractual principal and interest is no longer in doubt.
Allowance for Loan Losses
The allowance for loan losses is increased by a provision for loan
losses, which is charged to expense, and reduced by charge-offs,
net of recoveries. The allowance for loan losses is maintained at
a level which, in management's judgment, is adequate to absorb
credit losses inherent in the loan portfolio. The amount of the
allowance is based on management's evaluation of the collectibility
of the loan portfolio, including the nature of the portfolio and
changes in its risk profile, credit concentrations, historical
trends, specific impaired loans, and economic conditions. This
evaluation also considers the balance of impaired loans. Losses on
individually identified impaired loans are measured based on the
present value of expected future cash flows discounted at each
loan's original effective market interest rate. As a practical
expedient, impairment may be measured based on the loan's
observable market price or the fair value of the collateral if the
loan is collateral dependent. When the measure of the impaired loan
is less than the recorded investment in the loan, the impairment is
recorded through the provision added to the allowance for loan
losses. One-to-four family residential mortgages and consumer
installment loans are subjected to a collective evaluation for
impairment, considering delinquency and repossession statistics,
historical loss experience, and other factors. Though management
believes the allowance for loan losses to be adequate, ultimate
losses may vary from their estimates. However, estimates are
reviewed periodically, and as adjustments become necessary, they
are reported in earnings during periods they become known.
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 $215,250 and $506,000 at December 31, 1998 and 1997,
respectively, and is included in other assets.
Income Taxes
The Company accounts for income taxes through the use of the asset
and liability method. Under the asset and liability method,
deferred taxes are recognized for the tax-consequences of temporary
differences by applying enacted statutory tax rates applicable to
future years to differences between the financial statement
carrying amounts and the bases of existing assets and liabilities.
The effect on deferred taxes of a change in tax rates would be
recognized in income in the period that includes the enactment
date.
Treasury Stock
Treasury stock repurchases and sales are accounted for using the
cost method.
Earnings Per Share
Basic earnings per share ("EPS") is computed by dividing net income
by the weighted average number of shares outstanding during the
period. Diluted EPS, presented now in accordance with a new
accounting standard, is computed in the same manner as fully
diluted EPS presented in earlier periods, except that, among other
changes, the average share price for the period is used in all
cases when applying the treasury stock method to potentially
dilutive securities.
The following table represents the earnings per share calculations
for the years ended December 31, 1998, 1997, and 1996:
Per Share
For the Years Ended Income Shares Amount
December 31, 1998:
Net income $8,578,650
Basic earnings per share 8,578,650 3,543,325 $ 2.42
Dilutive securities 0 27,056
Diluted earnings per share $8,578,650 3,570,381 $ 2.40
December 31, 1997:
Net income $6,981,458
Basic earnings per share 6,981,458 3,536,642 $ 1.97
Dilutive securities 0 17,205
Diluted earnings per share $6,981,458 3,553,847 $ 1.96
December 31, 1996:
Net income $6,970,990
Basic earnings per share 6,970,990 3,536,585 $ 1.97
Dilutive securities 0 0
Diluted earnings per share $6,970,990 3,536,585 $ 1.97
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
The AICPA has issued Statements of Position 98-1, Accounting for
the Costs of Computer Software Developed or Obtained for Internal
Use. This statement requires capitalization of external direct
costs of materials and services; payroll and payroll-related costs
for employees directly associated; and interests costs during
development of computer software for internal use (planning and
preliminary costs should be expensed). Also, capitalized costs of
computer software developed or obtained for internal use should be
amortized on a straight-line basis unless another systematic and
rational basis is more representative of the software's use. This
statement is effective for financial statements for fiscal years
beginning after December 15, 1998 and is not expected to have a
material effect on the consolidated financial statements.
In June 1998, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No.
133, Accounting for Derivative Instruments and Hedging Activities.
This Statement establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. This Statement is
effective for all fiscal quarters of fiscal years beginning after
June 15, 1999. Initial application of this Statement should be as
of the beginning of an entity's fiscal quarter; on that date,
hedging relationships must be designated anew and documented
pursuant to the provisions of this Statement. Management believes
there will be no material effect on the consolidated financial
statements from the adoption of this pronouncement.
In October 1998, the FASB issued No. 134, Accounting for
Mortgage-Backed Securities Retained After the Securitization of
Mortgage Loans Held for Sale by a Mortgage Banking Enterprise. This
Statement, an amendment to SFAS No. 65, requires that after the
securitization of mortgage loans held for sale, an entity engaged
in mortgage banking activities classify the resulting
mortgage-backed securities or other retained interests based on its
ability to sell or hold those investments. This Statement is
effective the first fiscal quarter beginning after December 15,
1998. The Company adopted the provisions of this Statement on
January 1, 1999. Based on the Company's current operating
activities, management does not believe that adoption of this
Statement will have a material impact on the presentation of the
Company's financial condition or results of operations.
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 were restated to include the results of FBI for all
periods presented. Merger costs of approximately $650,000 were
expensed in the accompanying 1997 consolidated statement of income.
Combined and separate results of the Company and FBI during the
periods preceding the merger were as follows:
USB FBI Combined
Six months ended June 30, 1997 (unaudited):
Net interest income $ 5,352,810 $5,265,778 $10,618,588
Net income $ 2,272,489 $1,201,565 $ 3,474,054
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
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 net income, basic and diluted earnings per share had
the purchase business combination been completed as of the first
day of 1996 were as follows:
Net income (in thousands) $ 6,728
Basic net income per share $ 1.92
Diluted net income per share $ 1.92
4. INVESTMENT SECURITIES
Details of investment securities available for sale at December 31,
1998 and 1997 are as follows
December 31, 1998
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Obligations of states, counties,
and political subdivisions $ 23,841,566 $1,686,442 $ 0 $ 25,528,008
Mortgage-backed securities 132,587,552 3,559,540 761,265 135,385,827
Equity securities 200,123 45,598 14,019 231,702
Corporate notes 80,279 0 1,805 78,474
FHLB stock 2,795,400 0 0 2,795,400
Total $159,504,920 $5,291,580 $ 777,089 $164,019,411
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
FHLB stock 2,048,700 0 0 2,048,700
Total $170,879,211 $3,292,611 $1,672,595 $172,499,227
The scheduled maturities of investment securities available for
sale at December 31, 1998 are presented in the following table:
Amortized Market
Cost Value
Maturing within one year $ 1,219,990 $ 1,239,271
Maturing after one but before five years 4,224,043 4,245,557
Maturing after five but before fifteen years 28,333,577 29,626,597
Maturing after fifteen years 122,731,787 125,880,884
Equity securities and FHLB stock 2,995,523 3,027,102
Total $159,504,920 $164,019,411
For purposes of the maturity table, mortgage-backed securities,
which are not due at a single maturity date, have been allocated
over maturity groupings based on the weighted-average contractual
maturities of underlying collateral. The mortgage-backed securities
generally mature earlier than their weighted-average contractual
maturities because of principal prepayments.
Investment securities with a carrying value of $70,149,059 and
$86,328,794 at December 31, 1998 and 1997, respectively, were
pledged to secure public deposits and for other purposes.
Gross gains realized on sales of securities available for sale were
$1,240,170 in 1998, $512,843 in 1997, and $42,026 in 1996. Gross
realized losses on those sales were $829,183 in 1998, $407,589 in
1997, and $228,828 in 1996. Gross realized gains on trading account
securities sales were $0 in 1998, $19,111 in 1997, and $36,250 in
1996. Gross realized losses on those sales were $0 in 1998, $8,924
in 1997, and $38,281 in 1996.
5. LOANS
At December 31, 1998 and 1997, the composition of the loan
portfolio was as follows:
1998 1997
Commercial, financial, and agricultural $ 35,443,976 $ 35,036,350
Real estate mortgage 123,263,732 126,823,581
Installment 86,282,286 61,821,754
Less:
Allowance for loan losses 4,989,173 4,045,844
Unearned interest, commissions, and fees 4,941,060 3,738,407
Total $235,059,761 $215,897,434
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, 1998, approximately $41,465,784 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, 1998 and 1997 were $1,692,312 and $1,801,356,
respectively. During the year ended December 31, 1998, new loans to
these parties totaled $130,989 and repayments were $240,033.
A summary of the transactions in the allowance for loan losses
follows:
1998 1997 1996
Balance at beginning of year $4,045,844 $3,133,768 $2,466,979
Acquired in branch acquisitions 0 0 423,251
Provision for loan losses 3,187,103 1,710,128 799,527
Loans charged off (2,589,300) (1,038,585) (773,423)
Recoveries of loans previously charged off 345,526 240,533 217,434
Balance at end of year $4,989,173 $4,045,844 $3,133,768
At December 31, 1998, the Company had one loan considered to be
impaired. The amount of this loan, which is on nonaccrual, is
$486,826 and the related allowance is $243,000. The average
recorded investment in impaired loans during the year ended
December 31, 1998 was approximately $512,752. For the year ended
December 31, 1998, the Company did not recognize interest income on
the impaired loan during the period the loan was considered
impaired. The Company had approximately $538,677 considered to be
impaired at December 31, 1997.
Loans on which the accrual of interest has been discontinued
amounted to $3,459,814 and $1,487,514 at December 31, 1998 and
1997, respectively. If interest on those loans had been accrued,
such income would have approximated $339,710, $153,870, and $90,740
for 1998, 1997, and 1996, respectively. Interest income actually
recorded on those loans amounted to $298,335, $108,060, and $36,719
for 1998, 1997, and 1996, respectively.
6. PREMISES AND EQUITPMENT
Premises and equipment are summarized as follows:
1998 1997
Land $ 1,037,436 $ 920,041
Premises 7,656,911 6,436,849
Furniture, fixtures, and equipment 7,967,423 7,040,047
16,661,770 14,396,937
Less accumulated depreciation 8,436,763 7,559,857
Total $ 8,225,007 $ 6,837,080
Depreciation expense of $797,959, $894,702, and $969,983 was
recorded in 1998, 1997, and 1996, 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 $4,234,447 and
$4,272,547 at December 31, 1998 and 1997, respectively. Losses
related to these partnerships amounted to approximately $128,000,
$122,000, and $137,000 for 1998, 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. 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, 1998 in the amount of $360,000.
8. DEPOSITS
At December 31, 1998, the scheduled maturities of the Bank's time
deposits greater than $100,000 are as follows:
1999 $25,350,035
2000 5,848,176
2001 6,361,449
2002 1,109,343
2003 and thereafter 1,879,170
$40,548,173
Additionally, included in the Bank's other time deposits at
December 31, 1998 is $6,840,928 in state and municipal time
deposits greater than $100,000 maturing within one year.
9. SHORT-TERM BORROWINGS
Short-term borrowings consist of federal funds purchased and
securities sold under agreements to repurchase which generally
mature within one to four days from the transaction date, treasury
tax and loan deposits which are withdrawable on demand, and FHLB
advances with original maturities in less than one year.
Information concerning short-term borrowings is as follows:
1998
Treasury
Federal Tax and
Funds Loan
Purchased Deposits
Average balance during the year $3,081,863 $ 846,955
Average interest rate during the year 5.83% 5.90%
Maximum month-end balance during
the year $9,100,000 $2,520,307
1997
Treasury
Federal Tax and
Funds Repurchase Loan
Purchased Agreements Deposits
Average balance during the year $2,450,151 $ 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 $49,445 $2,536,321
At December 31, 1998, 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 mid-term financing
options. They are also flexible, allowing the Company to quickly
obtain the necessary maturities and rates that best suit its
overall asset/liability strategy. Investment securities and 1-4
family mortgage loans secure these borrowings.
The following summarizes information concerning Federal Home Loan
Bank advances and other borrowings:
1998 1997
Average balance $55,453,921 $30,296,430
Maximum month-end balance during year $55,906,433 $40,972,587
Average rate paid 5.55% 5.83%
Weighted average remaining maturity 7.25 years 2.20 years
Scheduled maturities of Federal Home Loan Bank advances in 1999 are
approximately $10 million. Maturities during 2000 are approximately
$5 million. There are no scheduled maturities in 2001, 2002, and
2003. In years subsequent to 2003, maturities total approximately
$40 million.
At December 31, 1998, the Bank has $19.15 million in available
credit from the Federal Home Loan Bank.
11. INCOME TAXES
The consolidated provisions (benefits) for income taxes for the
years ended December 31 were as follows:
1998 1997 1996
Federal
Current $4,146,035 $2,714,017 $2,366,681
Deferred (1,059,525) (298,811) (106,190)
3,086,510 2,415,206 2,260,491
State
Current 566,870 334,545 410,595
Deferred (132,308) (37,024) (12,493)
434,562 297,521 398,102
Total $3,521,072 $2,712,727 $2,658,593
The consolidated tax provision differed from the amount computed by
applying the federal statutory income tax rate to pretax earnings
for the following reasons:
1998 1997 1996
Income tax expense at federal statutory rate $4,113,755 $3,294,833 $3,274,058
Increase (decrease) resulting from:
Tax-exempt interest (561,148) (600,744) (661,223)
State income tax expense net of federal income
tax benefit 286,810 196,364 275,026
Tax credits (low income housing) (490,000) (480,000) (325,000)
Other 171,655 302,274 95,732
Total $3,521,072 $2,712,727 $2,658,593
Effective tax rate 29% 28% 28%
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax
liabilities at December 31, 1998 and 1997, are presented below:
1998 1997
Deferred tax assets:
Allowance for loan losses $2,095,795 $ 929,297
Accrued vacation 22,200 22,200
Capital loss carryover 80,443 80,443
Deferred commissions and fees 514,925 242,385
Other 574,715 233,936
Total gross deferred tax asset 3,288,078 1,508,261
Valuation allowance (75,903) (75,903)
Net deferred tax assets 3,212,175 1,432,358
Deferred tax liabilities:
Premises and equipment 501,986 501,825
Limited partnerships 224,035 267,589
Unrealized gain on securities available for sale 1,692,935 607,396
Other deferred tax liabilities 754,945 123,568
Total gross deferred tax liabilities 3,173,901 1,500,378
Net deferred tax asset (liability) $ 38,274 $ (68,020)
12. EMPLOYEE BENEFIT PLANS
The Company sponsors an Employee Stock Ownership Plan with 401(k)
provisions. This plan covers substantially all employees and allows
employees to contribute up to 15% of their compensation on a
before-tax basis. The Company may make discretionary contributions
to match employee contributions dollar for dollar up to 6% of an
employee's compensation. Employees have the option to allocate some
or all of their contributions towards the purchase of Company
stock. The Company made matching contributions totaling $284,432
and $238,190 in 1998 and 1997, respectively.
13. LONG-TERM INCENTIVE COMPENSATION PLAN
During 1997, the Company's shareholders' approved the adoption of
the United Security Bancshares, Inc. Long Term Incentive
Compensation Plan ("LTICP"). This plan provides for a number of
forms of stock based compensation for key employees of USB and its
subsidiaries. Under the plan, eligible employees may be awarded
incentive and nonqualified stock options, stock appreciation
rights, and restricted stock. The LTICP provides for the issuance
of up to 60,000 shares of USB common stock with a par value of $.01
per share. In addition, each option expires no later than five
years after the grant date. The exercise price of each option is
determined by the compensation committee, but in the case of
incentive stock options, the price shall not be less than the fair
market value on the grant date.
The Company continues to record compensation cost under Accounting
Principles Board Opinion ("APB") No. 25. Had compensation cost been
determined, consistent with the fair value based method of
recording for stock-based compensation allowed for under SFAS No.
123, the Company's net income would have been decreased to the
following pro forma amounts:
1998 1997
Net income--as reported $8,578,650 $6,981,458
Net income--pro forma 8,372,098 6,805,635
Basic net income per share--as reported 2.42 1.97
Basic net income per share--pro forma 2.36 1.92
Diluted net income per share--as reported 2.40 1.96
Diluted net income per share--pro forma 2.34 1.91
A summary of the status of the Company's stock option plan at
December 31, 1998 and the changes during the year then ended is as
follows:
1998 1997
Exercise Exercise
Shares Price Shares Price
Outstanding at beginning of year 56,250 $17.50 0 $ 0.00
Granted 600 35.00 57,350 17.50
Exercised 9,160 17.50 1,100 17.50
Outstanding at end of year 47,690 $17.72 56,250 $17.50
Exercisable at end of year 47,690 $17.72 56,250 $17.50
Fair value of options granted $4.33 $4.22
The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option pricing model with the
following weighted average assumptions: a risk free interest rate
based on zero coupon governmental issues at grant date with the
maturity equal to the expected term of the options (4.54% and 6.27%
for 1998 and 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 $.76 and $.60 per
share for 1998 and 1997.
14. SHAREHOLDERS' EQUITY
Dividends are paid by the Company from its assets, which are
primarily dividends from the Bank. However, certain restrictions
exist regarding the ability of the Bank to transfer funds to the
Company in the form of cash dividends, loans, or advances. As of
December 31, 1998, approximately $4.5 million of the Bank's
retained earnings was available for dividend distribution without
prior regulatory approval.
The Company is subject to various regulatory capital requirements
that prescribe quantitative measures of the Company's assets,
liabilities, and certain off-balance sheet items. The Company's
regulators have also imposed qualitative guidelines for capital
amounts and classifications such as risk weightings, capital
components, and other details. The quantitative measures to ensure
capital adequacy require that the Company maintain amounts and
ratios, as set forth in the schedule below, of total and Tier I
capital (as defined in the regulations) to risk-weighted assets (as
defined) and 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, 1998, that the Company
meets all capital adequacy requirements imposed by its regulators.
As of December 31, 1998 and 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 institution's category.
Actual capital amounts as well as required and well capitalized
Tier I, total, and Tier I leverage ratios as of December 31 for the
Company and the Bank are as follows:
1998
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
(Dollars in thousands)
Total Capital (to Risk Weighted Assets):
United Security Bancshares, Inc. $56,370 17.37% $25,967 8.00% N/A N/A
First United Security Bank 52,531 16.28 25,809 8.00 $32,261 10.00%
Tier I Capital (to Risk Weighted Assets):
United Security Bancshares, Inc. 52,590 16.20 12,983 4.00% N/A N/A
First United Security Bank 48,499 15.03 12,905 4.00 19,357 6.00
Tier I Leverage (to Average Assets):
United Security Bancshares, Inc. 52,590 12.07 13,067 3.00% N/A N/A
First United Security Bank 48,499 11.24 12,941 3.00 21,568 5.00
[CAPTION]
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
Comprehensive Income
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive
Income. Comprehensive income is the change in equity during a
period from transactions and other events and circumstances from
nonowner sources. It includes all changes in equity during a period
except those resulting from investments by owners and distributions
to owners.
In addition to net income, the Company has identified changes
related to other nonowner transactions in the consolidated
statement of changes in stockholders' equity and comprehensive
income. For the Company, changes in other nonowner transactions
consist entirely of changes in unrealized gains and losses on
securities available for sale.
In the calculation of comprehensive income, certain
reclassification adjustments are made to avoid double counting
items that are displayed as part of net income and other
comprehensive income in that period or earlier periods. The
following table reflects the reclassification amounts and the
related tax effects for the three years ended December 31:
1998
Before After
Tax Tax Tax
Amount Effect Amount
Unrealized gains (losses) arising during
the period $3,282,314 $1,214,456 $2,067,858
Less reclassification adjustments for
(gains) losses included in net income (410,987) (152,065) (258,922)
Net change in unrealized gain/(loss)
on securities $2,871,327 $1,062,391 $1,808,936
1997
Before After
Tax Tax Tax
Amount Effect Amount
Unrealized gains (losses) arising during
the period $ 53,575 $ 19,823 $ 33,752
Less reclassification adjustments for
(gains) losses included in net income (105,254) (38,944) (66,310)
Net change in unrealized gain/(loss)
on securities $ (51,679) $ (19,121) $ (32,558)
1996
Before After
Tax Tax Tax
Amount Effect Amount
Unrealized gains (losses) arising during
the period $ 442,585 $ 301,989 $ 140,593
Less reclassification adjustments for
(gains) losses included in net income 186,802 69,117 117,685
Net change in unrealized gain/(loss)
on securities $ 629,384 $ 371,106 $ 258,278
15. SEGMENT REPORTING
Under SFAS No. 131, Disclosure about Segments of an Enterprise and
Related Information, certain information is disclosed for the two
reportable operating segments of the Company. The reportable
segments were determined using the internal management reporting
system. They are composed of the Company's significant
subsidiaries. The accounting policies for each segment are the same
as those used by the Company as described in Note 2--Summary of
Significant Accounting Policies. The segment results include
certain overhead allocations and intercompany transactions that
were recorded at current market prices. All intercompany
transactions have been eliminated to determine the consolidated
balances. The results for the two reportable segments of the
Company are included in the following table.
1998
FUSB ALC All Other Eliminations Consolidated
(In thousands)
Total interest income $ 35,523 $12,141 $ 133 $ (4,542) $ 43,255
Total interest expense 15,518 4,542 0 (4,542) 15,518
Net interest income 20,005 7,599 133 0 27,737
Provision for loan losses 762 2,425 0 0 3,187
Net interest income after provision 19,243 5,174 133 0 24,550
Total noninterest income 3,580 936 9,096 (9,054) 4,558
Total noninterest expense 12,015 4,696 313 (16) 17,008
Income (loss) before income taxes
(tax benefit) 10,808 1,414 8,916 (9,038) 12,100
Provision for income taxes
(tax benefit) 2,967 557 (3) 0 3,521
Net income (loss) $ 7,841 $ 857 $ 8,919 $ (9,038) $ 8,579
Other significant items:
Total assets $444,408 $67,902 $61,816 $(124,053) $450,073
Total investment securities 160,916 0 3,103 0 164,019
Total loans, net 236,274 64,486 0 (65,700) 235,060
Investment in wholly-owned
subsidiaries 384 0 55,338 (55,722) 0
Total interest income from
external customers 30,981 12,141 133 0 43,255
Total interest income from
affiliates 2,560 0 0 (2,560) 0
1997
FUSB ALC All Other Eliminations Consolidated
(In thousands)
Total interest income $ 35,213 $ 4,166 $ 5 $ (1,736) $ 37,648
Total interest expense 15,253 1,731 127 (1,736) 15,375
Net interest income 19,960 2,435 (122) 0 22,273
Provision for loan losses 657 1,053 0 0 1,710
Net interest income after provision 19,303 1,382 (122) 0 20,563
Total noninterest income 4,113 309 7,569 (7,631) 4,360
Total noninterest expense 12,441 2,264 600 (76) 15,229
Income (loss) before income taxes
(tax benefit) 10,975 (573) 6,847 (7,555) 9,694
Provision for income taxes
(tax benefit) 3,081 (228) (140) 0 2,713
Net income (loss) $ 7,894 $ (345) $ 6,987 $ (7,555) $ 6,981
Other significant items:
Total assets $428,851 $36,624 $53,384 $(92,918) $425,941
Total investment securities 172,436 0 63 0 172,499
Total loans, net 217,363 34,134 0 (35,600) 215,897
Investment in subsidiaries 842 0 51,026 (51,868) 0
Total interest income from
external customers 33,482 4,166 0 0 37,648
Total interest income from
affiliates 1,736 0 0 (1,736) 0
1996
FUSB ALC All Other Eliminations Consolidated
(In thousands)
Total interest income $ 33,713 $ 1,339 $ 5 $ (506) $ 34,551
Total interest expense 15,081 506 0 (506) 15,081
Net interest income 18,632 833 5 0 19,470
Provision for loan losses 518 281 0 0 799
Net interest income after provision 18,114 552 5 0 18,671
Total noninterest income 2,628 97 2,095 (2,095) 2,725
Total noninterest expense 10,811 708 247 0 11,766
Income (loss) before income taxes
(tax benefit) 9,931 (59) 1,853 (2,095) 9,630
Provision for income taxes
(tax benefit) 2,681 (22) 0 0 2,659
Net income (loss) $ 7,250 $ (37) $ 1,853 $ (2,095) $ 6,971
Other significant items:
Total assets $391,527 $11,861 $50,946 $(23,951) $430,383
Total investment securities 187,160 0 46 0 187,206
Total loans, net 193,555 11,331 0 0 204,886
Investment in subsidiaries (25,044) 0 48,995 (23,951) 0
Total interest income from
external customers 33,207 1,339 5 0 34,551
Total interest income from
affiliates 506 0 0 (506) 0
16. OTHER OPERATING EXPENSES
Other operating expenses for the years 1998, 1997, and 1996 consist
of the following:
1998 1997 1996
Telephone expense $ 543,509 $ 478,060 $ 340,354
Amortization of intangibles 626,651 604,811 338,689
Postage, stationery, and supplies 246,051 680,248 501,810
Merger expense 0 650,330 0
Other 3,291,907 2,729,036 2,500,141
Total $4,718,118 $5,142,485 $3,680,994
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, 1998:
Year ending December 31,
1999 $394,062
2000 243,731
2001 144,864
2002 28,025
2003 9,600
Total rental expense under all operating leases was $532,056,
$347,377, and $176,846 in 1998, 1997, and 1996, respectively.
18. COMMITMENTS AND CONTINGENCIES
The Company is a defendant in certain claims and legal actions
arising in the normal course of business. In the opinion of
management, the ultimate disposition of these matters is not
expected to have a material adverse effect on the financial
position or results of operations of the Company.
19. DERIVATIVE FINANCIAL INSTRUMENTS
The Bank is a party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs
of its customers and in connection with its interest rate risk
management, investing, and trading activities. These financial
instruments include commitments to make loans, options written,
standby letters of credit, commitments to purchase or sell
securities for forward delivery, interest rate caps and floors
purchased, caps sold, and interest rate swaps.
The Bank's exposure to credit loss in the event of nonperformance
by the other party for commitments to make loans and standby
letters of credit is represented by the contractual amount of those
instruments. The Bank uses the same credit policies in making these
commitments as it does for on-balance sheet instruments. For
interest rate caps, floors, and swap transactions, options written,
and commitments to purchase or sell securities for forward
delivery, the contract or notional amounts do not represent
exposure to credit loss. The Bank controls the credit risk of these
instruments through credit approvals, limits, and monitoring
procedures. The Bank has credit risk on caps and floors for the
carrying value plus the amount to replace such contracts in the
event of counterparty default. The Bank is fully
cross-collateralized with counterparties on all interest rate swap
agreements. At December 31, 1998, the Bank estimates its credit
risk on purchased caps and floors in the event of total
counterparty default to be $467,000. All of the Bank's financial
instruments are held for risk management and not for trading
purposes.
In the normal course of business there are outstanding commitments
and contingent liabilities, such as commitments to extend credit,
letters of credit, and others, which are not included in the
consolidated financial statements. The financial instruments
involve, to varying degrees, elements of credit and interest rate
risk in excess of amounts recognized in the financial statements.
A summary of these commitments and contingent liabilities is
presented below.
December 31,
1998 1997
(In thousands)
Standby letters of credit $ 6,477 $ 5,310
Commitments to extend credit 23,546 35,249
Commitments to extend credit are agreements to lend to a customer
as long as there is no violation of any condition established in
the contract. Commitments generally have fixed expiration dates or
other termination clauses and may require payment of a fee. Since
many of the commitments are expected to expire without being drawn
upon, the total commitment amounts do not necessarily represent
future cash requirements. The Company evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the Company upon extension of
credit, is based on management's credit evaluation of the
counter-party. Collateral held varies but may include accounts
receivable, inventory, property, plant, and equipment, and
income-producing commercial properties.
At December 31, 1998 and 1997, commitments to purchase and sell
securities for delayed delivery are summarized as follows:
December 31,
1998 1997
(In thousands)
Commitments to purchase securities for delayed delivery $ 0 $ 3,000
Commitments to sell securities for delayed delivery 12,000 4,000
Commitments to purchase securities for delayed delivery require the
Bank to purchase a specified security at a specified price for
delivery on a specified date. Similarly, commitments to sell
securities for delayed delivery require the Bank to sell a
specified security at a specified price for delivery on a specified
date. Market risk arises from potential movements in security
values and interest rates between the commitment and delivery
dates.
The Bank's principal objective in holding derivative financial
instruments is asset-liability management. The operations of the
Bank are subject to a risk of interest rate fluctuations to the
extent that there is a difference between the amount of the Bank's
interest-earning assets and the amount of interest-bearing
liabilities that mature or reprice in specified periods. The
principal objective of the Bank's asset-liability management
activities is to provide maximum levels of net interest income
while maintaining acceptable levels of interest rate and liquidity
risk and facilitating the funding needs of the Bank. To achieve
that objective, the Bank uses a combination of derivative financial
instruments, including interest rate swaps, caps, floors, and
futures.
An interest rate swap is an agreement in which two parties agree to
exchange, at specified intervals, interest payment streams
calculated on an agreed-upon notional principal amount with at
least one stream based on a specified floating-rate index. Interest
rate swaps are used by the Bank to effectively convert a portion of
its floating rate securities to fixed rate securities, except for
one swap which is used to convert a fixed rate loan to prime.
Interest rate caps and floors are option-like contracts that
require the seller to pay the purchaser at specified future dates
the amount, if any, by which a specified market interest rate
exceeds the fixed cap rate or falls below the fixed floor rate,
applied to a notional principal amount. The Bank uses floors to
protect CMO floaters and variable rate loans against a decline in
rates. The Bank uses caps purchased to partially hedge against
rising interest rates on their floating rate short-term borrowings
and to 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 $164,006, $208,316, and $238,900 in 1998, 1997,
and 1996, respectively.
Interest-rate futures contracts are entered into by the Bank as
hedges against exposure to interest-rate risk and are not for
speculative purposes. Changes in the market value of interest-rate
futures contracts are deferred while the contracts are open and
subsequently amortized into interest income or expense over the
maturity period of the hedged assets or liabilities after the
contract closes.
The following table details various information regarding swaps,
caps, floors and forward contracts used for purposes other than
trading as of December 31, 1998:
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 $ 10,000 $ 0 $(172) 5.57% 5.59% 4.04 90
Deferred swaps:
Pay floating, receive 5 year 1 month
floating 20,000 0 (267) CMT LIBOR 3.04 30
Caps:
Purchased 72,000 518 187 0.00% N/A 2.45 30-90
Sold 10,000 (17) 0 N/A 0.00% 2.00 30
Forward contract:
Sold 12,000 0 (15) 0 6.52% 7.04 2,570
$124,000 $501 $(237)
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,
1998, such swaps, caps, and floors were associated with the
following asset or liability categories:
Notional Principal
Associated With
Notional Fixed Floating Rate
Amount Rate Loans Securities
(In thousands)
Swaps:
Pay fixed $ 10,000 $10,000 $ 0
Caps:
Purchased 72,000 0 72,000
Sold 10,000 0 10,000
Deferred swaps 20,000 0 20,000
Forward contract 12,000 12,000 0
$124,000 $22,000 $102,000
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 $132,834 and $229,221 as of December
31, 1998 and 1997, respectively, with related amortization into
income of $147,887, $234,459, and $227,847 for the years ended
December 31, 1998, 1997, and 1996, respectively. Fiscal 1998
amounts are scheduled to be amortized into income in the following
periods: $123,015 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
SFAS No. 107, Disclosures About Fair Value of Financial
Instruments, requires disclosure of fair value information about
financial instruments, whether or not recognized on the face of the
statement of condition, for which it is practicable to estimate
that value. The assumptions used in the estimation of the fair
value of the Company's financial instruments are detailed below.
Where quoted prices are not available, fair values are based on
estimates using discounted cash flows and other valuation
techniques. The use of discounted cash flows can be significantly
affected by the assumptions used, including the discount rate and
estimates of future cash flows. The following disclosures should
not be considered a surrogate of the liquidation value of the
Company, but rather represent a good-faith estimate of the increase
or decrease in value of financial instruments held by the Company
since purchase, origination, or issuance. The Company has not
undertaken any steps to value any intangibles.
The 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 and payable: Fair value equals the
carrying value of these instruments.
Loans: For variable rate loans, those repricing within six months,
fair values are based on carrying values. Fixed rate commercial
loans, other installment loans, and certain real estate mortgage
loans were valued using discounted cash flows. The discount rate
used to determine the present value of these loans was based on
interest rates currently being charged by the Bank on comparable
loans as to credit risk and term.
Off-balance-sheet instruments: Fair values of the Company's
off-balance-sheet instruments (futures, forwards, swaps, caps,
floors, and options written) are based values obtained from
counterparties, or other quotations received from third parties.
The Company's loan commitments are negotiated at current market
rates and are relatively short-term in nature. As a matter of
policy, the Company generally makes commitments for fixed rate
loans for relatively short periods of time. Because of this policy
and the absence of any known credit exposure, the estimated value
of the Company's loan commitments is nominal.
Demand and savings deposits: The fair values of demand deposits are
equal to the carrying value of such deposits. Demand deposits
include noninterest bearing demand deposits, savings accounts, NOW
accounts, and money market demand accounts.
Time deposits: The fair value of relatively short-term time
deposits is equal to their carrying values. Discounted cash flows
have been used to value long-term time deposits. The discount rate
used is based on interest rates currently being offered by the Bank
on comparable deposits as to amount and term.
Short-term borrowings: These borrowings 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, 1998 At December 31, 1997
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
(In thousands)
Assets:
Cash and cash equivalents $ 26,831 $ 26,831 $ 14,538 $ 14,538
Investment securities available for sale 164,019 164,019 172,499 172,499
Accrued interest receivable 4,521 4,521 4,049 4,049
Loans, net 235,060 237,246 215,897 216,127
Off-balance-sheet instruments 501 (237) 475 498
Liabilities:
Deposits 326,645 327,774 322,418 323,889
Short-term borrowing 12 12 3,913 3,913
Long-term debt 55,847 56,000 40,965 40,984
21. UNITED SECURITY BANCSHARES,INC. (PARENT COMPANY ONLY)
FINANCIAL INFORMATION
Statements of Condition
December 31,
1998 1997
ASSETS:
Cash on deposit $ 1,826,501 $ 1,022,289
Investment in subsidiaries 55,337,773 51,026,597
Investments available for sale 3,103,340 63,000
Other assets 1,185,211 1,226,749
$61,452,825 $53,338,635
LIABILITIES:
Other liabilities $ 884,737 $ 628,087
SHAREHOLDERS' EQUITY 60,568,088 52,710,548
$61,452,825 $53,338,635
Statements of Income
Year Ended December 31,
1998 1997 1996
INCOME
Dividend income, First United Security Bank $6,188,517 $5,526,531 $2,095,403
Interest income 132,788 496 4,621
Investment securities gains (losses), net 24,797 0 0
Total income 6,346,102 5,527,027 2,100,024
EXPENSES 278,990 573,588 246,763
INCOME BEFORE EQUITY IN UNDISTRIBUTED
INCOME OF SUBSIDIARIES 6,067,112 4,953,439 1,853,261
EQUITY IN UNDISTRIBUTED INCOME
OF SUBSIDIARIES 2,511,538 2,028,019 5,117,729
Net income $8,578,650 $6,981,458 $6,970,990
Statements of Cash Flows
Year Ended December 31,
1998 1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $8,578,650 $ 6,981,458 $ 6,970,990
Adjustments to reconcile net income to net cash
provided by operating activities:
Undistributed income of subsidiaries (2,511,538) (2,028,019) (5,117,729)
(Increase) decrease in other assets 41,538 548,541 (10,595)
Increase (decrease) in other liabilities 228,769 248,708 (30,138)
Net cash provided by operating activities 6,337,419 5,750,688 1,812,528
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investment securities available for sale (3,003,161) 0 (33,926)
Net cash used in investing activities (3,003,161) 0 (33,926)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on other borrowings 0 (3,004,000) (375,500)
Proceeds from sale of treasury stock 3,251 0 0
Proceeds from issuance of common stock 160,299 16,380 0
Cash dividends paid (2,693,596) (1,870,515) (1,366,385)
Net cash used in financing activities (2,530,046) (4,858,135) (1,741,885)
INCREASE IN CASH 804,212 892,553 36,717
CASH AT BEGINNING OF YEAR 1,022,289 129,736 93,019
CASH AT END OF YEAR $1,826,501 $1,022,289 $ 129,736
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information called for in this item is incorporated herein
by reference to Bancshares' definitive proxy statement, under the
caption "Election of Directors," to be filed pursuant to Regulation
14A with the Securities and Exchange Commission within 120 days
after the end of the fiscal year ended December 31, 1998.
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,
1998.
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 Shareholders," 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, 1998.
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, 1998.
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,
1998 and 1997.
Consolidated Statements of Shareholders' Equity,
December 31, 1998, 1997, and 1996.
Consolidated Statements of Income, December 31,
1998, 1997, and 1996.
Consolidated Statements of Cash Flows, December 31,
1998, 1997, and 1996.
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) 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)(b) Bylaws of Bancshares, incorporated herein
by reference to the Exhibits to Form 10-K
for the year ended December 31, 1987,
filed with the Commission in Washington,
D.C., File No. 0-14549.
(3)(c) 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)(d) 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, filed with the Commission in
Washington, D.C., File No. 0-14549.
(10)(b) Amendments to the United Security
Bancshares, Inc. Employee Stock Ownership
Plan, incorporated herein by reference to
the Exhibits to Form 10-K for the year
ended December 31, 1997.
(10)(c) Employment Agreement dated January 1,
1999, between Bancshares and R. Terry
Phillips.
(10)(d) Form of Indemnification Agreement between
Bancshares and its directors,
incorporated herein by reference to the
Exhibits to Form 10-K for the year ended
December 31, 1994, filed with the
Commission in Washington, D.C., File No.
0-14549.
(10)(e) United Security Bancshares, Inc. Long
Term Incentive Compensation Plan,
incorporated herein by reference to the
Exhibits to Form S-4 dated April 16, 1997
(No. 333-21241).
(13) Bancshares' definitive proxy statement
for 1999 annual meeting of shareholders,
to be filed within 120 days after the end
of the fiscal year ended December 31,
1998, furnished for the information of
the Commission.
(21) List of Subsidiaries of Bancshares.
(27) Financial Data Schedule
(b) Reports on Form 8-K
One report on Form 8-K, dated December 1, 1998 and
filed December 15, 1998, was filed during the last
quarter of the year ended December 31, 1998,
reporting the employment of R. Terry Phillips as
President and CEO of Bancshares.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
UNITED SECURITY BANCSHARES, INC.
By: /s/ R. Terry Phillips March 18, 1999
-----------------------------
R. Terry Phillips
Its President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates
indicated.
Signature Title Date
/s/ R. Terry Phillips President, Chief Executive March 18, 1999
- -------------------------- Officer, and Director
R. Terry Phillips (Principal Executive Officer)
/s/ Larry M. Sellers Treasurer (Principal Financial March 18, 1999
- -------------------------- Officer, Principal Accounting
Larry M. Sellers Officer)
/s/ Dan Barlow Director March 18, 1999
- --------------------------
Dan Barlow
/s/ Linda Breedlove Director March 18, 1999
- --------------------------
Linda Breedlove
Director March 18, 1999
- ---------------------------
Gerald P. Corgill
/s/ Roy G. Cowan Director March 18, 1999
- ---------------------------
Roy G. Cowan
/s/ John C. Gordon Director March 18, 1999
- ---------------------------
John C. Gordon
/s/ William G. Harrison Director March 18, 1999
- ---------------------------
William G. Harrison
/s/ Fred L. Huggins Director March 18, 1999
- ---------------------------
Fred L. Huggins
/s/ Hardie B. Kimbrough Director March 18, 1999
- ---------------------------
Hardie B. Kimbrough
/s/ Jack W. Meigs Director March 18, 1999
- ---------------------------
Jack W. Meigs
/s/ James L. Miller Director March 18, 1999
- ---------------------------
James L. Miller
/s/ Ray Sheffield Director March 18, 1999
- ---------------------------
Ray Sheffield
/s/ James C. Stanley Director March 18, 1999
- ---------------------------
James C. Stanley
/s/ Howard M. Whitted Director March 18, 1999
- ---------------------------
Howard M. Whitted
/s/ Bruce N. Wilson Director March 18, 1999
- ---------------------------
Bruce N. Wilson
EXHIBIT 21
List of Subsidiaries
Name Where Organized
First United Security Bank Alabama
Acceptance Loan Company, Inc. Alabama
First Security Courier Corporation Alabama
EXHIBIT (10)(C)
R. TERRY PHILLIPS 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"); FIRST UNITED SECURITY BANK, a
banking corporation organized under the laws of Alabama
(hereinafter referred to as "FUSB) USB and FUSB are hereinafter
collectively referred to as the "Employer"); and R. Terry Phillips
(hereinafter referred to as "Phillips").
W I T N E S S E T H, T H A T:
WHEREAS, USB owns all of the issued and outstanding shares of
common capital stock of FUSB;
WHEREAS, the principal place of business of USB and FUSB is in
Thomasville, Alabama; and
WHEREAS, USB desires to employ Phillips as the President and
Chief Executive Officer of USB; FUSB desires to employ Phillips as
the President and Chief Executive Officer of FUSB; and Phillips
desires to become employed as such;
NOW, THEREFORE, in consideration of the premises 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 Phillips in the
capacity of President and Chief Executive Officer of USB and of
FUSB and Phillips will serve USB and FUSB in that capacity for a
term of three (3) years, commencing on January 1, 1999, and
continuing through December 31, 2001.
2. Duties. As President and Chief Executive Officer of USB
and of FUSB, Phillips will be the principal executive officer of
USB and FUSB, and as such he will be responsible for the
implementation of the policies promulgated by the Boards of
Directors of USB and FUSB and for the oversight and direction of
all phases of the operations of USB and FUSB, including Acceptance
Loan Company, a subsidiary of FUSB.
3. Time and Efforts. Phillips shall devote his full time
and best efforts to the discharge of his duties as President and
Chief Executive Officer of USB and FUSB. However, it is recognized
that in so discharging his duties Phillips 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 FUSB hereunder, Employer will pay or provide
to Phillips the following:
(a) A base salary of $185,000 with appropriate review
annually based on individual performance and on the performance of
USB and FUSB, as determined by the Boards of Directors of USB and
FUSB. Salary will be payable in equal monthly or other installments
in accordance with the general payroll practice of FUSB.
(b) Incentive compensation calculated in accordance
with (i) the plan adopted by the Board of Directors of FUSB now in
effect, and all subsequent modifications, regardless of whether
said plan may be terminated hereafter with respect to all other
employees of FUSB. For purposes of Phillips' participation in said
incentive plan, he will be treated as though he shall have remained
employed through the end of FUSB's fiscal year following that in
which his termination occurred.
(c) A policy of "term-life" insurance on Phillips'
life in the face of One Hundred Thousand and no/100 Dollars
($100,000.00), of which Phillips will be the owner. All of the
premiums on such policy shall be paid by the Employer during
Phillips' employment hereunder.
(d) The use of a Chevrolet Tahoe 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 Phillips
for membership in all local private or civic clubs of which he may
become a member.
5. Severance Compensation. Upon (A) the termination of
Phillips' 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 his
agreement three years from the employment date, or upon (b) the
reduction in the level or a change in nature of Phillips'
responsibilities as President and Chief Executive Officer of USB or
as President and Chief Executive Officer of FUSB, Phillips will be
entitled to the following:
(i) the Employer shall pay to Phillips an amount
equal to his average annualized base salary then in effect at that
time, except in the case of a change in ownership of USB or FUSB,
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 Phillips the medical coverages and
benefits provided to Phillips 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
Phillips than the most favorable of such coverages and benefits
provided to Phillips 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 Phillips obtains any such coverages or benefits pursuant to a
subsequent employer's benefit plan, in which case the Employer may
reduce the coverage of any benefits it is required to provide
Phillips hereunder as long as the aggregate coverages and benefits
of the combined benefit plans is no less favorable to Phillips 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 Phillips 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 Phillips' inability to
perform his duties. In the case of any disagreement between the
parties with respect to Phillips' alleged total disability,
Phillips 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 the
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 239
Thomasville, AL 36784
If to FUSB: First United Security Bank
131 West Front Street
Thomasville, AL 36784
If to Phillips: R. Terry Phillips
Rt. 1, Box 251
Millry, AL 36558
8. Attorney's Fees. If Employer shall fail to make any
payment due to Phillips hereunder, then Employer will pay Phillips
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 Phillips with
regard to all matters addressed herein. There are no other
agreements, conditions, or representations oral or written, express
or implied, with regard hereto. This agreement may be amended only
by a written instrument executed by the parties hereto.
10. Governing Law. This agreement shall be construed and
enforced in accordance with the laws of the State of Alabama.
11. Binding Effect. This agreement shall inure to the
benefit of and be binding upon USB and FUSB, their successors and
assigns, including, without limitation, any person, partnership, or
corporation which may acquire substantially all of USB's and/or
FUSB's assets or business or with or into which USB and/or FUSB may
be liquidated, consolidated, merged, or otherwise combined, and
shall inure to the benefit of and be binding upon Phillips, his
heirs, distributees, and personal representatives.
12. Waiver. The failure 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 First
United Security Bank have caused their corporate signatures and
seals to be hereunto affixed by their duly authorized officers and
R. Terry Phillips, has executed this agreement on this the 1st day
of JANUARY, 1999.
UNITED SECURITY BANCSHARES,INC.
ATTEST:
BY: /s/ Larry M. Sellers BY: /s/ J. L. Miller
---------------------------- ---------------------------
ITS: Secretary ITS: Chairman
[CORPORATE SEAL]
FIRST UNITED SECURITY BANK
ATTEST:
BY: /s/ Larry M. Sellers BY: /s/ J. L. Miller
----------------------------- ----------------------------
ITS: Secretary ITS: Chairman
[CORPORATE SEAL]
/s/ R. Terry Phillips
----------------------------------
R. Terry Phillips