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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 [FEE REQUIRED]
For the fiscal year ended December 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from_________________________to___________________
Commission File Number 0-14549
UNITED SECURITY BANCSHARES, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 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 February 28,
2001: 3,572,232.
The aggregate market value of the voting stock held by non-affiliates of
the Registrant on February 28, 2001 is $79,106,000.
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
Portions of the Company's definitive proxy statement for the 2001 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, 2000
TABLE OF CONTENTS
CAPTION>
Sequential
Item Caption Part I Page No.
1 Business....................................................... 3
2 Properties..................................................... 6
3 Legal Proceedings.............................................. 6
4 Submission of Matters to a Vote of Security Holders............ 7
Part II
5 Market for Registrant's Common Equity and Related Stockholder
Matters........................................................ 7
6 Selected Financial Information................................. 8
7 Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................... 9
7A Quantitative and Qualitative Disclosures About Market Risk..... 32
8 Financial Statements and Supplementary Data.................... 33
9 Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure....................................... 62
Part III
10 Directors and Executive Officers of the Registrant............. 62
11 Executive Compensation......................................... 62
12 Security Ownership of Certain Beneficial Owners
and Management................................................. 62
13 Certain Relationships and Related Transactions................. 62
Part IV
14 Exhibits, Financial Statement Schedules, and Reports on
Form 8-K....................................................... 63
Signatures............................................................... 65
2
PART I
Item 1. Business.
General
United Security Bancshares, Inc. ("Bancshares") is a Delaware corporation
organized in 1999, as a successor by merger to United Security Bancshares, Inc.,
an Alabama corporation. Bancshares is a bank holding company registered under
the Bank Holding Company Act of 1956, as amended, and it operates one banking
subsidiary, First United Security Bank (the "Bank"). The Bank's name was
changed from United Security Bank to First United Security Bank on July 9, 1997.
The Bank owns all of the stock of Acceptance Loan Company, Inc. ("ALC"), a
finance company organized for the purpose of making consumer loans and
purchasing consumer loans from vendors. Bancshares owns all the stock of First
Security Courier Corporation ("First Security"), an Alabama corporation
organized for the purpose of providing certain bank courier services.
The Bank has seventeen banking offices, which are located in Thomasville,
Coffeeville, Fulton, Gilbertown, Grove Hill, Butler, Jackson, Brent,
Centreville, Woodstock, Bucksville and Harpersville, Alabama, and its market
area includes portions of Bibb, Clarke, Choctaw, Jefferson, Marengo, Shelby,
Sumter, Tuscaloosa, Washington, and Wilcox Counties in Alabama, as well as
Clarke, Lauderdale and Wayne Counties in Mississippi.
The Bank conducts a general commercial banking business and offers banking
services such as the receipt of demand, savings and time deposits, personal and
commercial loans, credit card and safe deposit box services, and the purchase
and sale of government securities.
As of December 31, 2000, the Bank had 185 full-time equivalent employees,
ALC had 122 full-time equivalent employees, and Bancshares had no employees,
other than the officers of Bancshares who are indicated in Part III, Item 10 of
this report.
The Bank has organized a wholly-owned subsidiary in the State of Arizona.
The subsidiary, FUSB Reinsurance, Inc. ("FUSB Reinsurance"), reinsures or
"underwrites" credit life and credit accident and health insurance policies sold
to the Bank's consumer loan customers. FUSB Reinsurance is responsible for the
first level of risk on these policies up to a specified maximum amount, and the
primary third-party insurer retains the remaining risk. The third-party insurer
and/or a third-party administrator is responsible for performing most of the
administrative functions of FUSB Reinsurance on a contract basis.
Competition
The Bank encounters strong competition in making loans, acquiring deposits
and attracting customers for investment services. Competition among financial
institutions is based upon interest rates offered on deposit accounts, interest
rates charged on loans, other credit and service charges relating to loans, the
quality and scope of the services rendered, the convenience of banking
facilities and, in the case of loans to commercial borrowers, relative lending
limits. The Bank competes with other commercial banks (including at least 10 in
its service area), savings and loan associations, credit unions, finance
companies, mutual funds, insurance companies, brokerage and investment banking
companies, and other financial intermediaries operating in Alabama and
elsewhere. Many of these competitors, some of which are affiliated with large
bank holding companies, have substantially greater resources and lending limits.
In addition, many of the Bank's non-bank competitors are not subject to the same
extensive federal regulations that govern bank holding companies and federally-
insured banks.
The Gramm-Leach-Bliley Act (the "GLB Act"), effective March 11, 2000,
permits bank holding companies to become financial holding companies and thereby
affiliate with securities firms and insurance companies and engage in other
activities that are financial in nature. See "Supervision and Regulation." Under
the GLB Act, securities firms and insurance companies that elect to become
financial holding companies may acquire banks and other financial institutions.
The GLB Act, which represents the most sweeping reform of financial services
regulation in over sixty years, may significantly change the competitive
environment in which Bancshares and the Bank conduct business. At this time,
however, it is not possible to predict the full effect that the GLB Act will
have on Bancshares. One consequence may be increased competition from large
financial services companies that will be permitted to provide many types of
financial services, including bank products, to their customers.
The financial services industry is also likely to become more competitive
as further technological advances enable more companies to provide financial
services. These technological advances may diminish the importance of depository
institutions and other financial intermediaries in the transfer of funds between
parties.
3
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
(the "IBBEA") authorized bank holding companies to acquire banks and other bank
holding companies without geographic limitations beginning September 30, 1995.
The arrival of interstate banking is expected to increase further the
competitiveness of the banking industry.
In addition, beginning on June 1, 1997, the IBBEA authorized interstate
mergers and consolidations of existing banks, provided that neither bank's home
state had opted out of interstate branching by May 31, 1997. The State of
Alabama opted in with respect to interstate branching. Once a bank has
established branches in a state through an interstate merger, the bank may
establish and acquire additional branches at any location in the state where any
bank involved in the interstate merger could have established or acquired
branches under applicable federal or state law.
Under the IBBEA, Alabama banks may also establish branches or offices in
any other state, any territory of the United States or any foreign country,
provided that the branch or office is established in compliance with federal law
and the law of the proposed location and is approved by the Alabama
Superintendent of Banks. Under former law, Alabama banks could not establish a
branch in any location other than its principal place of business, except as
authorized by local laws or general laws of local application. These more
liberal branching laws are likely to increase competition within the State of
Alabama among banking institutions located in Alabama and from those located
outside of Alabama, many of which are larger than Bancshares. Size gives the
larger banks certain advantages in competing for business from large
corporations. These advantages include higher lending limits and the ability to
offer services in other areas of Alabama and the southeast region.
Supervision and Regulation
Bancshares and the Bank are subject to state and federal banking laws and
regulations which impose specific requirements and restrictions on, and provide
for general regulatory oversight with respect to, virtually all aspects of
operations. These laws and regulations are generally intended to protect
depositors, not stockholders. To the extent that the following summary describes
statutory or regulatory provisions, it is qualified in its entirety by reference
to the particular statutory and regulatory provisions. Any change in applicable
laws or regulations may have a material effect on the business and prospects of
Bancshares.
Beginning with the enactment of the Financial Institutions Reform, Recovery
and Enforcement Act of 1989 and following in December 1991 with the Federal
Deposit Insurance Corporation Act ("FDICIA"), numerous additional regulatory
requirements have been placed on the banking industry in the past ten years, and
additional changes have been proposed. The operations of Bancshares and the Bank
may be affected by legislative changes and the policies of various regulatory
authorities. Bancshares is unable to predict the nature or the extent of the
effect on its business and earnings that fiscal or monetary policies, economic
control or new federal or state legislation may have in the future.
As a bank holding company, Bancshares is subject to the regulation and
supervision of the Board of Governors of the Federal Reserve System (the "Board
of Governors"). Bancshares is required to file with the Board of Governors an
annual report and such additional information as the Board of Governors may
require. The Board of Governors may also conduct examinations of Bancshares and
each of its subsidiaries.
The Bank Holding Company Act imposes numerous restrictions on Bancshares.
In particular, the Act requires a bank holding company to obtain the prior
approval of the Board of Governors before it may acquire substantially all of
the assets of any bank or control of any voting shares of any bank, if, after
such acquisition, it would own or control, directly or indirectly, more than 5%
of the voting shares of such bank. The Board of Governors may not approve an
acquisition by Bancshares of substantially all the assets or the voting shares
of any bank located outside Alabama unless such acquisition is specifically
authorized by the laws of the state in which the bank to be acquired is located.
The GLB Act permits bank holding companies to become financial holding
companies and thereby affiliate with securities firms and insurance companies
and engage in other activities that are financial in nature. A bank holding
company may become a financial holding company by filing a declaration if each
of its subsidiary banks is well capitalized under the FDICIA prompt corrective
action provisions, is well managed, and has at least a satisfactory rating under
the Community Reinvestment Act ("CRA"). No regulatory approval will be required
for a financial holding company to acquire a company, other than a bank or
savings association, engaged in activities
4
that are financial in nature or incidental to activities that are financial in
nature, as determined by the Board of Governors.
The GLB Act defines "financial in nature" to include securities
underwriting, dealing and market making; sponsoring mutual funds and investment
companies; insurance underwriting and agency; and activities that the Board of
Governors has determined to be closely related to banking. A national bank also
may engage, subject to limitations on investment, in activities that are
financial in nature (other than insurance underwriting, insurance company
portfolio investment, merchant banking, real estate development and real estate
investment) through a financial subsidiary of the bank, if the bank is well
capitalized, well managed and has at least a satisfactory CRA rating. Subsidiary
banks of a financial holding company or national banks with financial
subsidiaries must continue to be well capitalized and well managed in order to
continue to engage in activities that are financial in nature without regulatory
actions or restrictions, which could include divestiture of the financial
subsidiary or subsidiaries. In addition, a financial holding company or a bank
may not acquire a company that is engaged in activities that are financial in
nature unless each of the subsidiary banks of the financial holding company or
the bank at issue has a CRA rating of satisfactory or better.
The GLB Act preserves the role of the Board of Governors as the umbrella
supervisor for holding companies while at the same time incorporating a system
of functional regulation designed to take advantage of the strengths of the
various federal and state regulators. In particular, the GLB Act replaces the
broad exemption from Securities and Exchange Commission regulation that banks
previously enjoyed with more limited exemptions, and it reaffirms that states
are the regulators for the insurance activities of all persons, including
federally-chartered banks.
The GLB Act also establishes a minimum federal standard of financial
privacy. In general, the applicable regulations issued by the various federal
regulatory agencies prohibit affected financial institutions (including banks,
insurance agencies and broker/dealers) from sharing information about their
customers with non-affiliated third parties unless (1) the financial institution
has first provided a privacy notice to the customer; (2) the financial
institution has given the customer an opportunity to opt out of the disclosure;
and (3) the customer has not opted out after being given a reasonable
opportunity to do so. Compliance with the notice and other requirements under
the regulations is required by July 1, 2001.
Subsidiary banks of a bank holding company are subject to certain
restrictions on extensions of credit to the bank holding company or any of its
non-bank subsidiaries, on investments in the stock or other securities thereof,
and on the acceptance of such stocks or securities as collateral for loans to
any borrower. Among other requirements, transactions between a bank and its
affiliates must be on an arm's-length basis.
The Bank is subject to extensive supervision and regulation by the Alabama
State Banking Department and the Federal Deposit Insurance Corporation (the
"FDIC"). Among other things, these agencies have the authority to prohibit the
Bank from engaging in any activity (such as paying dividends) that, in the
opinion of the agency, would constitute an unsafe or unsound practice. The Bank
is also subject to various requirements and restrictions under federal and state
law. Areas subject to regulation include dividend payments, reserves,
investments, loans (including loans to insiders and significant shareholders),
mergers, issuance of securities, establishment of branches and other aspects of
operation, including compliance with truth-in-lending laws, usury laws and other
consumer protection laws. The recently enacted GLB Act establishes minimum
federal standards of financial privacy pursuant to which financial institutions
will be required to institute written privacy policies that must be disclosed to
customers at certain required intervals. In addition to the impact of
regulation, commercial banks are affected significantly by the actions of the
Board of Governors as it attempts to control the money supply and credit
availability in order to influence the economy.
There are a number of obligations and restrictions imposed on bank holding
companies and their depository institution subsidiaries by federal law and
regulatory policy that are designed to reduce potential loss exposure to the
depositors of such depository institutions and to the FDIC insurance fund in the
event the depository institution becomes in danger of default or is in default.
For example, under a policy of the Board of Governors with respect to bank
holding company operations, a bank holding company is required to serve as a
source of financial strength to its subsidiary depository institutions and
commit resources to support such institutions in circumstances where it might
not do so absent such policy. In addition, the "cross-guarantee" provisions of
federal law require insured depository institutions under common control to
reimburse the FDIC for any loss suffered or reasonably anticipated as a result
of the default of a commonly controlled insured depository institution or for
any assistance provided by the FDIC to a commonly controlled insured depository
institution in danger
5
of default. Although the FDIC's claim is junior to the claims of non-affiliated
depositors, holders of secured liabilities, general creditors, and subordinated
creditors, it is superior to the claims of shareholders.
The federal banking agencies have broad powers under current federal law to
take prompt corrective action to resolve problems of insured depository
institutions. The extent of these powers depends upon whether the institutions
in question are "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized" as such terms are defined under regulations issued by the
federal banking agencies. In general, the agencies measure capital adequacy
within a framework that makes capital requirements sensitive to the risk
profiles of individual banking companies. The guidelines define capital as
either Tier 1 (primarily common shareholders' equity) or Tier 2 (certain debt
instruments and a portion of the allowance for loan losses). Bancshares and the
Bank are subject to a minimum Tier 1 capital ratio (Tier 1 capital to risk-
weighted assets) of 4%, total capital ratio (Tier 1 plus Tier 2 to risk-weighted
assets) of 8% and Tier 1 leverage ratio (Tier 1 to average quarterly assets) of
3%. To be considered a "well capitalized" institution, the Tier 1 capital ratio,
the total capital ratio, and the Tier 1 leverage ratio must equal or exceed 6%,
10% and 5%, respectively.
The CRA requires that, in connection with examinations of a financial
institution such as the Bank, the FDIC must evaluate the record of the financial
institution in meeting the credit needs of its local communities, including low
and moderate income neighborhoods, consistent with the safe and sound operation
of those institutions. The CRA does not establish specific lending requirements
or programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community. These factors are considered in
evaluating mergers, acquisitions and applications to open a branch or facility.
The CRA also requires all institutions to make public disclosure of their CRA
ratings. The Bank received a satisfactory rating in its most recent evaluation.
From time to time, various bills are introduced in the United States
Congress with respect to the regulation of financial institutions. Certain of
these proposals, if adopted, could significantly change the regulation of banks
and the financial services industry. Bancshares cannot predict whether any of
these proposals will be adopted or, if adopted, how these proposals would affect
Bancshares.
FDIC regulations require that management report on its responsibility for
preparing its institution's financial statements and for establishing and
maintaining an internal control structure and procedures for financial reporting
and compliance with designated laws and regulations concerning safety and
soundness.
Supervision, regulation and examination of banks by the bank regulatory
agencies are intended primarily for the protection of depositors rather than for
holders of Bancshares common stock.
Statistical Information
Statistical information concerning the business of Bancshares is set forth
in Part II of this report.
Item 2. Properties.
Bancshares owns no property and does not expect to own any. The business of
Bancshares is conducted from the offices of the Bank. With the exception of
leasing a small facility in Centreville, the Bank owns all of its offices in fee
without encumbrances. ALC leases office space throughout Alabama but owns no
property. The aggregate annual rental payments for office space for ALC total
approximately $402,475.82.
Item 3. Legal Proceedings.
Bancshares and the Bank, because of the nature of their businesses, are
subject at various times to numerous legal actions, threatened or pending. In
the opinion of Bancshares, based on review and consultation with legal counsel,
the outcome of any litigation presently pending against Bancshares or the Bank
will not have a material effect on Bancshares' consolidated financial statements
or results of operations.
6
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
There were 3,636,232 shares of Bancshares common stock issued and 3,572,232
shares outstanding as of February 28, 2001. As of February 28, 2001, there were
approximately 1,004 shareholders of Bancshares.
On June 27, 2000, Bancshares' common stock began trading under the symbol
USBI on The Nasdaq SmallCap Market. The sale price range for Bancshares' common
stock during each calendar quarter of 1999 and 2000 are shown below. Market
prices shown for 1999 and the first two quarters of 2000 reflect sales prices
reported by a broker-dealer making a limited market in Bancshares common stock
during that time period. Market prices shown for the third and fourth quarters
of 2000 represent sales prices as reported in the Nasdaq Historical Quotes.
1999 High Low
------ ------
First Quarter............................... $38.00 $38.00
Second Quarter.............................. 34.00 34.00
Third Quarter............................... 33.88 33.50
Fourth Quarter.............................. 27.00 27.00
2000 High Low
------ ------
First Quarter............................... $34.00 $33.50
Second Quarter.............................. 33.00 31.75
Third Quarter............................... 25.88 25.38
Fourth Quarter.............................. 21.00 20.00
Bancshares has paid dividends on its common stock on a quarterly basis in
the past three years as follows:
Dividends Paid
on Common Stock
Fiscal Year (per annum)
----------- -----------
1998................ $.72
1999................ $.82
2000................ $.90
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
of dividends imposed by the Alabama Banking Code are described in Part II, Item
5 of Bancshares Annual Report on Form 10-K for the year ended December 31,
1984, (file no. 0-14549) and such description is incorporated herein by
reference.
7
Item 6. Selected Financial Information.
UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES
SELECTED FINANCIAL INFORMATION
Year Ended December 31,
-----------------------------------------------
2000 1999 1998 1997 1996
------- -------- -------- -------- -------
(In Thousands of Dollars, Except Per Share Amounts)
RESULTS OF OPERATIONS
Interest Revenue......................................... $ 48,323 $ 44,919 $ 43,255 $ 37,648 $ 34,551
Interest Expense......................................... 18,292 15,365 15,518 15,376 15,081
-------- -------- -------- -------- --------
Net Interest Revenue..................................... 30,031 29,554 27,737 22,272 19,470
Provision for Loan Losses................................ 6,837 4,305 3,187 1,710 800
Non-Interest Revenue..................................... 4,883 4,747 4,558 4,361 2,725
Non-Interest Expense..................................... 19,106 18,534 17,008 15,229 11,765
-------- -------- -------- -------- --------
Income Before Income Taxes............................... 8,971 11,462 12,100 9,694 9,630
Income Taxes............................................. 2,193 3,302 3,521 2,713 2,659
-------- -------- -------- -------- --------
Net Income............................................... $ 6,778 $ 8,160 $ 8,579 $ 6,981 $ 6,971
======== ======== ======== ======== ========
Net Income Per Share:
Basic.................................................. $ 1.90 $ 2.29 $ 2.42 $ 1.97 $ 1.97
Diluted................................................ $ 1.89 $ 2.28 $ 2.40 $ 1.96 $ 1.97
Average Number of Shares
Outstanding (000).................................... 3,570 3,561 3,543 3,537 3,537
PERIOD END STATEMENT OF CONDITION
Total Assets............................................. $509,165 $476,599 $450,073 $425,941 $430,383
Loans.................................................... 296,941 276,172 235,060 215,897 204,886
Deposits................................................. 338,156 326,751 326,645 322,418 346,306
Shareholders' Equity..................................... 67,628 61,671 60,568 52,711 47,616
AVERAGE BALANCES
Total Assets............................................. $491,580 $459,922 $439,080 $434,010 $410,541
Average Earning Assets................................... 454,055 424,074 408,506 402,271 382,458
Loans.................................................... 295,394 256,192 231,792 212,570 198,327
Deposits................................................. 331,877 328,263 320,958 345,442 327,531
Shareholders' Equity..................................... 63,604 61,140 57,409 50,164 44,044
PERFORMANCE RATIOS
Net Income to:
Average Total Assets................................... 1.38% 1.77% 1.95% 1.61% 1.70%
Average Shareholders' Equity........................... 10.66% 13.35% 14.94% 13.92% 15.83%
Average Shareholders' Equity to:
Average Total Assets................................... 12.94% 13.29% 13.07% 11.55% 10.73%
Dividend Payout Ratio.................................... 48.47% 36.67% 31.40% 26.79% 20.21%
8
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 2000, 1999, and
1998. All yields presented and discussed herein are based on the accrual basis
and not on the tax-equivalent basis.
United Security is the parent holding company of First United Security Bank
(the "Bank"). The Bank operates a finance company, Acceptance Loan Company, Inc.
("ALC"), that currently has thirty-two offices in Alabama, Northwest Florida,
and Southeast Mississippi. The Bank also owns a reinsurance company, FUSB
Reinsurance, Inc. United Security also operates a courier company as a
subsidiary, First Security Courier Corporation, which is in the business of
delivering checks and documents to the Federal Reserve to aid in check clearing.
This courier company performs courier services for the Bank as well as other
companies in our market area.
At December 31, 2000, United Security had consolidated assets of
approximately $509.2 million and operated seventeen banking locations in five
counties. These seventeen locations contributed approximately $9.8 million to
consolidated net income in 2000. The Bank's sole business is banking; therefore,
loans and investments are its principal sources of income.
This discussion contains certain forward looking statements with respect to
the financial condition, results of operation and business of United Security
and the Bank related to, among other things:
(A) Trends or uncertainties which will impact future operating results,
liquidity and capital resources and the relationship between those
trends or uncertainties and nonperforming loans and other loans;
(B) The diversification of product production among timber-related
entities and the effect of that diversification on the Bank's
concentration of loans to timber-related entities;
(C) The composition of United Security's derivative securities portfolio
and its interest rate hedging strategies and volatility caused by
uncertainty over the economy, inflation and future interest rate
trends;
(D) The effect of the market's perception of future inflation and real
returns and the monetary policies of the Federal Reserve Board on
short and long term interest rates;
(E) The effect of interest rate changes on liquidity and interest rate
sensitivity management;
(F) The amount of anticipated (i) net loan charge offs, (ii) loans on a
non-accrual basis, and (iii) options income and other off-balance-
sheet income, and
(G) The expectations, beliefs, and plans of management as set forth in the
letter to shareholders contained in this Annual Report.
These forward-looking statements involve certain risks and uncertainties.
Factors that may cause actual results to differ materially from those
contemplated by such forward-looking statements include, among others, the
following possibilities:
(1) The perceived diversification in product production when 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;
9
(3) Inflation grows at a greater-than-expected rate with a material
adverse effect on interest rate spreads and the assumptions management
of United Security has used in its interest rate hedging strategies
and interest rate sensitivity gap strategies;
(4) Rising interest rates adversely affect the demand for consumer credit;
and
(5) General economic conditions, either nationally or in Alabama,
Mississippi and Florida, are less favorable than expected.
Financial Condition
United Security's financial condition depends primarily on the quality and
nature of the Bank's assets, liabilities, capital structure, the quality of its
personnel, and prevailing market and economic conditions.
The majority of the assets and liabilities of a financial institution are
monetary and, therefore, differ greatly from most commercial and industrial
companies that have significant investments in fixed assets and inventories.
Inflation has an important impact on the growth of total assets in the banking
industry, resulting in the need to increase equity capital at rates greater than
the applicable inflation rate in order to maintain an appropriate equity to
asset ratio. Also, the category of other expenses tends to rise during periods
of general inflation.
The 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 $78.9 million of the Bank's loans. ALC reported a net
loss of $3 million for the year ended December 31, 2000 due to unsatisfactory
loan portfolio performance.
Management believes the most significant factor in producing quality
financial results is the Bank's ability to react properly and in a timely manner
to changes in interest rates. Management therefore continues 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, 2000, 1999, and 1998.
10
Distribution of Assets, Liabilities, and Shareholders' Equity, with
Interest Rates and Interest Differentials
December 31,
--------------------------------------------------------------------------------------
2000 1999 1998
---------------------------- ------------------------- --------------------------
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).......................... $295,394 $37,069 12.55% $256,192 $33,776 13.18% $231,792 $29,397 12.68%
Taxable Investments (Note B).............. 132,650 9,604 7.24% 140,387 9,498 6.77% 150,678 12,292 8.16%
Non-Taxable Investments................... 22,780 1,445 6.34% 25,029 1,528 6.10% 24,206 1,469 6.07%
Federal Funds Sold........................ 3,231 205 6.34% 2,466 117 4.74% 1,830 97 5.30%
-------- ------- ----- -------- ------- ----- -------- ------- -----
Total Interest-Earning
Assets............................. 454,055 48,323 10.64% 424,074 44,919 10.59% 408,506 43,255 10.59%
-------- ------- ----- -------- ------- ----- -------- ------- -----
Non-Interest Earning
Assets:
Other Assets............................ 37,525 35,848 30,574
-------- -------- --------
Total................................. $491,580 $459,922 $439,080
======== ======== ========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest-Bearing
Liabilities:
Demand Deposits......................... 58,732 1,182 2.01% 59,885 1,225 2.05% 59,794 1,387 2.32%
Savings Deposits........................ 39,591 1,020 2.58% 39,896 1,026 2.57% 41,728 1,137 2.72%
Time Deposits........................... 193,157 11,065 5.73% 188,170 9,932 5.28% 180,128 9,971 5.44%
Other Liabilities....................... 86,470 5,025 5.81% 62,700 3,182 5.07% 54,383 3,023 5.56%
-------- ------- ----- -------- ------- ----- -------- ------- -----
Total Interest-Bearing
Liabilities........................ 377,950 18,292 4.84% 350,651 15,365 4.38% 336,033 15,518 4.62%
-------- ------- ------ -------- ------- ----- -------- ------- -----
Non-Interest Bearing
Liabilities:
Demand Deposits......................... 40,397 40,312 39,308
Other Liabilities....................... 9,629 7,819 6,330
Shareholders' Equity.................... 63,604 61,140 57,409
-------- -------- --------
Total................................ $491,580 $459,922 $439,080
======== ======== ========
Net-Interest Income (Note C).............. $30,031 $29,554 $27,737
======= ======= =======
Net Yield on Interest-
Earning Assets.......................... 6.61% 6.97% 6.79%
===== ===== =====
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 $2,513,817, $1,880,997, and $1,099,758 for 2000, 1999,
and 1998 respectively, are included in interest income amounts above.
11
Loans and Allowances for Loan Losses
Total loans outstanding increased by $20.7 million in 2000 with $296.9
million outstanding at year-end. Real estate loans increased by $23.6 million to
$180.6 million outstanding at December 31, 2000. Real estate loans made up 58.3%
of total gross loans at year-end 2000. Construction activity in the trade areas
continues to be predominately commercial. The Company continues to offer a home
equity loan and a long-term fixed-rate mortgage loan program. A key part of
consolidated loan growth in recent years has been Acceptance Loan Company. ALC
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 was
a total of twenty-five offices open at December 31, 1998, with $71.2 million in
gross loans outstanding. Thirty-two offices were open at December 31, 2000, with
twenty-four offices located in Alabama, four in Mississippi and four in Florida.
At December 31, 2000, combined loans from these offices totaled $80.5 million
and made up 27.1% of total loans of the Bank.
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. ALC had a total of $20.7
million in real estate loans or 11.5% of total real estate loans at year-end
2000.
Commercial loans totaled $41.5 million at December 31, 2000. These loans
increased $1.5 million or 3.8% from December 31, 1999.
Consumer installment loans totaled $87.7 million at December 31, 2000,
compared to $90.6 million at December 31, 1999. This decrease of $2.9 million or
3.2% reflects the high charge offs at ALC and the change in emphasis to loans
secured by real estate. The consumer loans include loans to individuals for
household, family and other personal expenditures including credit cards and
other related credit plans. Consumer installment loans by ALC represent $59.0
million or 67.3% of total consumer installment loans. The yields on these loans
average over 20.9% A.P.R. and enhance the Bank's net interest margin.
The allowance for loan losses is maintained at a level, which, in
management's judgment, is adequate to absorb credit losses inherent in the loan
portfolio. The amount of the allowance is based on management's evaluation of
the collectibility of the loan portfolio, including the nature of the portfolio
and changes in its risk profile, credit concentrations, historical trends,
specific impaired loans, and economic conditions. This evaluation also considers
the balance of impaired loans. Losses on individually identified impaired loans
are measured based on the present value of expected future cash flows discounted
at each loan's original effective market interest rate. As a practical
expedient, impairment may be measured based on the loan's observable market
price or the fair value of the collateral if the loan is collateral dependent.
When the measure of the impaired loan is less than the recorded investment in
the loan, the impairment is recorded through the provision added to the
allowance for loan losses. One-to-four family residential mortgages and consumer
installment loans are subjected to a collective evaluation for impairment,
considering delinquency and repossession statistics, historical loss experience,
and other factors. Though management believes the allowance for loan losses to
be adequate, ultimate losses may vary from their estimates. However, estimates
are reviewed periodically, and as adjustments become necessary they are reported
in earnings during periods they become known.
The Bank's loan policy requires immediate recognition of a loss if
significant doubt exists as to the repayment of the principal balance of a loan.
Consumer installment loans at the Bank and ALC are generally recognized as
losses if they become 90 days and 120 days delinquent, respectively. The only
exception to this policy occurs when the underlying value of the collateral or
the customer's financial position makes a loss unlikely.
A credit review of the Bank's individual loans is conducted periodically by
branch and by loan officer. A risk rating is assigned to each loan and is
reviewed at least annually. In assigning risk, management takes into
consideration the capacity of the borrower to repay, collateral values, current
economic conditions and other factors.
Loan officers and other personnel handling loan transactions undergo
frequent training dedicated to improving the credit quality as well as the yield
of the loan portfolio. The Bank utilizes a written loan policy, which attempts
to guide lending personnel in maintaining consistent underwriting standards.
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.
12
In order to better manage credit risk, ALC carefully oversees its portfolio
through formal underwriting standards, monitoring of customer payments and
active follow-up. ALC assesses the adequacy of the allowance for loan losses on
an aggregate level based upon recent delinquency status. This policy was revised
during 2000 to reflect the changing mix of loans in the company. ALC now
concentrates more on loans secured by real estate and places less emphasis on
automobile loans.
The following table shows the Bank's loan distribution as of December 31,
2000, 1999, 1998, 1997 and 1996.
December 31,
------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- --------- -------- --------
(In Thousands of Dollars)
Commercial, Financial and Agricultural................... $ 41,507 $ 39,996 $ 35,444 $ 35,036 $ 36,387
Real Estate.............................................. 180,627 156,979 123,264 126,824 126,666
Installment.............................................. 87,713 90,599 86,282 61,822 49,119
Less: Unearned Interest, Commissions
& Fees.................................................. 6,377 5,823 4,941 3,738 4,153
-------- -------- -------- -------- --------
Total.................................................. $303,470 $281,751 $240,049 $219,944 $208,019
======== ======== ======== ======== ========
The amounts of total loans (excluding installment loans) outstanding at
December 31, 2000, 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............................ $ 31,140 $ 7,955 $ 2,412 $ 41,507
Real Estate - Mortgage............................................. 78,279 40,253 62,095 180,627
-------- ------- ------- --------
Total......................................................... $109,419 $48,208 $64,507 $222,134
======== ======= ======= ========
Variable rate loans totaled approximately $49.9 million and are included in
the one-year category.
The Bank and ALC began the year with an allowance for loan losses of $5.6
million. This increase of approximately $900,000 over year-end 1999 reflects the
continuing evaluation of the portfolios at both the Bank and ALC. Total loans
charged off in 2000 totaled $6.5 million. Recoveries on loans previously charged
off totaled $594,000, resulting in net charge-offs of $5.9 million. Net charge-
offs for 1999 totaled $4.0 million. Management allocated and charged to
operations $6.8 million in 2000 as an addition to the allowance for loan losses.
This compares to $4.3 million charged to operations for 1999. Of this amount,
$6.6 million was allocated from ALC operations and $.2 million from FUSB. Net
loan charge-offs as a percentage of average loans increased from .97% in 1998,
1.54% in 1999, to 1.99% in 2000 due to the recognition of the loans with
unsatisfactory credit quality at ALC.
13
Non-Performing Assets
The following table presents information on non-performing loans and real
estate acquired in settlement of loans.
December 31,
------------------------------------------
2000 1999 1998 1997 1996
------ ------ ------ ------ ------
(In Thousands of Dollars)
Non-Performing Assets:
Loans Accounted for on a Non-Accrual Basis.......................................... $2,104 $1,725 $3,460 $1,488 $1,797
Accruing Loans Past Due 90 Days or More............................................. 2,237 1,347 1,610 1,285 1,122
Real Estate Acquired in Settlement of Loans......................................... 860 286 215 506 18
------ ------ ------ ------ ------
Total............................................................................ $5,201 $3,358 $5,285 $3,279 $2,937
====== ====== ====== ====== ======
Percent of Net Loans and Other Real Estate............................................ 1.75% 1.21% 2.25% 1.52% 1.44%
====== ====== ====== ====== ======
Accruing loans past due 90 days or more at December 31, 2000, totaled $2.2
million. These loans are 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.
Loans past due 90 days originated by ALC totaled $2 million at December 31,
2000, or 88.7% of all loans past due 90 days or more and still accruing.
At December 31, 2000, the Bank had one loan considered to be impaired. The
amount of this loan, which is on non-accrual, is $455,317, and the related
allowance is $227,659. The average recorded investment in impaired loans during
the year ended December 31, 2000, was approximately $456,393. For the year ended
December 31, 2000, the Bank did not recognize interest income on the impaired
loan during the period the loan was considered impaired. The Bank had
approximately $457,468 considered to be impaired at December 31, 1999.
In the opinion of management, non-performing loans and any other loans
which have been classified for regulatory purposes do not represent or result
from trends or uncertainties which will materially impact future operating
results, liquidity, or capital resources. Management is not aware of information
which would cause serious doubts as to the ability of borrowers to comply with
present repayment terms. Non-performing assets as a percentage of net loans and
other real estate was 1.71% at December 31, 2000. Loans past due 90 days or more
and still accruing are reviewed closely by management and are allowed to
continue accruing only when underlying collateral values and management's belief
that the financial strength of the borrowers is sufficient to protect the Bank
from loss. If at any time management determines there may be a loss of interest
or principal, these loans will be changed to non-accrual and their asset value
downgraded. Through frequent training, our lending officers are directed by the
Bank's and ALC'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 and ALC's management conducts an independent review of individual loans
by branch and officer.
The 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 recognized on a cash basis, according to management's judgment 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. Non-accrual loans totaled
$2.1 million. This is an increase over $1.7 million reported in 1999 and a
decrease from the $3.5 million reported in 1998.
14
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,
-------------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
---------------------- -------------------- ------------------- -------------------- ------------------
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............. $ 980 14% $ 837 14% $ 748 15% $1,416 16% $1,097 17%
Real Estate................ 653 59% 558 55% 499 50% 405 57% 313 60%
Installment................ 4,896 27% 4,184 31% 3,742 35% 2,225 27% 1,724 23%
------- --- ------ --- ------ --- ------ --- ------ ---
Totals............. $ 6,529 100% $5,579 100% $4,989 100% $4,046 100% $3,134 100%
======= === ====== === ====== === ====== === ====== ===
The allowance for loan losses is established by risk group as follows:
Large classified loans and nonaccrual loans are evaluated individually
with specific reserves allocated based on management's review.
Smaller nonaccrual and adversely classified loans are assigned a
portion of the allowance based on loan grading. Smaller past due loans
are assigned a portion of the allowance using a formula that is based
on the severity of the delinquency.
The remainder of the portfolio is also allocated a portion of the
allowance based on past loss experience and the economic conditions for
the particular loan portfolio. Allocation weights are assigned based on
the Company's historical loan loss experience in each category,
although a higher allocation weight may be used if current conditions
indicate that the loan losses may exceed historical experience.
An unallocated portion of the allowance is for inherent losses which may
exist as of the valuation date even though they may not have been identified by
the more objective processes used for the allocated portion of the allowance.
This portion of the allowance is particularly subjective and requires judgments
based upon qualitative factors which do not lend themselves to exact
mathematical calculations. Some of the factors considered are changes in credit
concentrations, loan mix, changes in underwriting practices, historical loss
experience, and the general economic environment in the Company's markets. While
the total allowance is described as consisting of an allocated and an
unallocated portion, these terms are primarily used to describe a process. Both
portions are available to support inherent losses in the loan portfolio.
The table above is based in part on the loan portfolio make-up, the Bank's
internal risk evaluation, historical charge-offs, past-due loans, non-accrual
loans and management's judgment. The portion of the allowance that has not been
identified by the Company as related to specific loan categories has been
allocated to the individual loan categories on a pro rata basis for purposes of
the table above.
Net charge-offs as shown in the "Summary of Loan Loss Experience" table
below indicates the trend for the last five years.
15
Summary of Loan Loss Experience
This table summarizes the Bank's loan loss experience for each of the five
years indicated.
December 31,
----------------------------------------------
2000 1999 1998 1997 1996
------- ------- ------- ------ -------
(In Thousands of Dollars)
Balance at Beginning of Period.................................................. $ 5,579 $ 4,989 $ 4,046 $ 3,134 $2,467
Charge-Offs:
Commercial, Financial, and Agricultural....................................... (89) (94) (94) (299) (246)
Real Estate - Mortgage........................................................ (199) (116) (111) (20) (21)
Installment................................................................... (6,170) (4,232) (2,373) (694) (497)
Credit Cards.................................................................. (23) (30) (11) (26) (9)
------- ------- ------- -------- -----
(6,481) (4,472) (2,589) (1,039) (773)
Recoveries:
Commercial, Financial, and Agricultural....................................... 20 66 20 110 96
Real Estate - Mortgage........................................................ 7 21 15 18 0
Installment................................................................... 554 418 305 107 117
Credit Cards.................................................................. 13 9 5 6 4
------- ------- ------- ------- ------
594 514 345 241 217
------- ------- ------- ------- ------
Net Charge-Offs (Deduction)..................................................... (5,887) (3,958) (2,244) (798) (556)
Additions Charged to Operations................................................. 6,837 4,305 3,187 1,710 800
Allowances Acquired............................................................. 0 243** 0 0 423*
------- ------- ------- ------- ------
Balance at End of Period........................................................ $ 6,529 $ 5,579 $ 4,989 $ 4,046 $3,134
======= ======= ======= ======= ======
Ratio of Net Charge-Offs During Period to
Average Loans Outstanding..................................................... 1.99% 1.54% 0.97% 0.38% 0.28%
* Acquisition of Brent Banking Company by United Security Bank in 1996.
** Branch acquisitions by ALC in 1999.
Non-Accruing Loans
Summarized below is information concerning the income on those loans with
deferred interest or principal payments resulting from deterioration in the
financial condition of the borrower.
December 31,
-------------------------
2000 1999 1998
-------- ------ --------
(In Thousands of Dollars)
Total Loans Accounted for on a Non-Accrual Basis...... $2,104 $1,725 $3,460
Interest Income that Would Have Been Recorded
Under Original Terms................................ $ 194 $ 247 $ 340
Interest Income Reported and Recorded During
The Year............................................ $ 30 $ 211 $ 298
Total loans on non-accrual increased by $400,000 from December 31, 1999, to
December 31, 2000. The majority of the loans in this category are in the 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 believes that at December 31, 2000, 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.
16
Industry Concentration Factors
The Bank's trade area includes Clarke, Choctaw, Bibb, Tuscaloosa, and
Shelby Counties in Alabama. In addition, parts of Chilton, Hale, Jefferson,
Marengo, Monroe, Perry, Washington, Sumter and Wilcox Counties in Alabama as
well as parts of Clarke, Lauderdale and Wayne Counties in Mississippi are
included. There are several major paper mills in our trade area including the
Alabama River Companies, Boise Cascade, Fort James and Weyerhauser. In addition,
there are several sawmills, lumber companies, and pole and piling producers. The
table below shows the dollar amount of loans made to timber and timber-related
companies as of December 31, 2000. The amount of timber-related loans increased
from $31.2 million in 1999 to $36.0 million in 2000. The percentage of timber-
related loans to gross loans increased from 11.07% to 12.12%.
Timber Total Percentage of
Related Loans Gross Loans Total Loans
-------------- -------------- -------------
$36.0 million $296.9 million 12.12%
Management understands the concern about concentration of loans in timber
and timber-related industries. However, we continue to feel these risks are
reduced by the diversification of product production within these industries.
Some of the mills and industries specialize in paper and pulp, some in lumber
and plywood, some in poles and pilings, and others in wood and veneer. We do not
believe that this concentration is excessive or that it represents a trend which
might materially impact future earnings, liquidity, or capital resources of the
Bank. Management realizes that the Company is heavily dependent on the economic
health of the timber-related industries. The Company continues to benefit from
the area industries engaged in the growing, harvesting, processing and marketing
of timber and timber-related products. The majority of the land in our trade
area is used to grow pine and hardwood timber. Agricultural production loans
make up less than 1% of the Company's total loan portfolio.
Investments in Limited Partnerships
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 the cost method based on the percentage ownership and
influence over operations. The Company's interest in these partnerships was $5.2
million and $5.5 million for 2000 and 1999, respectively. Costs associated with
the partnerships carried under the equity method amounted to approximately
$176,000, $119,000, and $128,000 for 2000, 1999, and 1998, 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
had remaining cash commitments to these partnerships at December 31, 2000 in the
amount of $36,000. Although these investments are considered non-earning assets
they do contribute to the bottom line in the form of Federal income tax credits.
These credits amounted to $561,000 in 1999 and are estimated to be approximately
$600,000 for 2000. Also, operating losses related to these partnerships are
available as deductions for taxes on the Company's books.
Deposits
Average total deposits were up a modest amount, with a 1.1% increase in
2000. Management believes this deposit level was affected by the competitive
interest rate environment and the availability of other low cost funding sources
for the Bank.
Average non-interest bearing demand deposits have increased 2.8% over the
last three years, while the increase for 2000 was less than 1%. The ratio of
average non-interest bearing deposits to average total deposits remained
relatively steady in 2000 at 12.2% from 12.3% in 1999 and 12.3% in 1998.
Average interest-bearing transaction accounts have decreased 1.8% during
the last three years. Nevertheless, interest-bearing transaction accounts
continue to be an important source of funds for the Bank, accounting for 17.7%
of average total deposits in 2000.
Average time deposits increased by 2.7% in 2000, compared to an increase of
4.5% in 1999. Time deposits represented 58.2% of the total average deposits in
2000 compared to 57.3% in 1999 and 56.1% in 1998.
17
Average savings deposits have declined 5.1% since 1998. Average savings
declined .76% in 2000. The ratio of average savings to average total deposits
decreased to 11.9% in 2000 compared to 12.2% in 1999 and 13.0% in 1998.
The Bank's deposit base remains the primary source of funding for the Bank.
These deposits represented 73.1% of the average earning assets in 2000 and 77.4%
of the average earning assets in 1999. As seen in the following table, overall
rates on the deposits increased to 4.00% in 2000, compared to 3.71% in 1999, and
3.89% in 1998. Emphasis continues to be placed on attracting consumer deposits.
Management, as part of an overall program to emphasize the growth of
transaction accounts, has introduced "on line" banking and a bill paying program
as well as enhancing the telephone banking product and the employee incentive
plan. In addition, an increased effort is being placed on promotions, direct
mail campaigns and cross-selling efforts. This is being accomplished by
remaining safe and sound, emphasizing our products and providing quality
service.
Other Interest-Bearing Liabilities - Other interest-bearing liabilities
include all interest-bearing liabilities except deposits, such as: federal funds
purchased and Federal Home Loan Bank advances. This category continues to be
more fully utilized as an alternative source of funds as evidenced by the $23.8
million, or 37.9%, increase in average borrowing during 2000. The increase was
due to a 44.3% increase in average long term advances from the Federal Home Loan
Bank (FHLB). The advances from the FHLB are an alternative to funding sources
with similar maturities such as certificates of deposit. These advances
generally offer more attractive rates when compared to other mid-term financing
options. Average federal funds purchased and securities sold under agreements to
repurchase decreased 35.1%. These borrowings are considered short-term with
maturities up to four days. For additional information and discussion of the
borrowings, refer to Notes 8 and 9 of the "Notes to Consolidated Financial
Statements".
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,
-----------------------------------------------------------
2000 1999 1998
------------------ ------------------ -------------------
Amount Rate Amount Rate Amount Rate
-------- -------- -------- ------- --------- -------
(In Thousands of Dollars, Except Percentages)
Non-Interest Bearing DDA.............................................. $ 40,397 $ 40,312 $ 39,308
Interest Bearing DDA.................................................. 58,732 2.01% 59,885 2.05% 59,794 2.32%
Savings Deposits...................................................... 39,591 2.58% 39,896 2.57% 41,728 2.72%
Time Deposits......................................................... 193,157 5.73% 188,170 5.28% 180,128 5.44%
-------- ---- -------- ---- -------- ----
Total............................................................... $331,877 4.00% $328,263 3.71% $320,958 3.89%
======== ==== ======== ==== ======== ====
Maturities of time certificates of deposits and other time deposits of
$100,000 or more outstanding at December 31, 2000, are summarized as follows:
Time Other
Certificates Time
Maturities of Deposit Deposits Total
---------- ------------ ---------- ------------
(In Thousands of Dollars)
3 Months or Less................................... $10,310,987 $7,955,940 $18,266,927
Over 3 Through 6 Months............................ 10,218,440 0 10,218,440
Over 6 Through 12 Months........................... 15,930,201 0 15,930,210
Over 12 Months..................................... 18,460,624 0 18,460,624
----------- ---------- -----------
Total............................................ $54,920,252 $7,955,940 $62,876,201
=========== ========== ===========
18
Investment Securities and Securities Available-for-Sale
Investment securities available-for-sale included mortgage-backed
securities of $116.0 million, U. S. treasury and agency securities of $4.8
million, state, county and municipal securities of $22.2 million, and other
securities of $5.1 million. The securities portfolio is carried at fair value,
and it decreased $9.8 million from December 31, 1999, to December 31, 2000, as a
result of an overall decrease in investments, net of increases in unrealized
gains due to changes in the rate environment.
At December 31, 2000, approximately $24.1 million in Collateral Mortgage
"Obligation's (CMO's) had floating interest rates which reprice monthly, and
$53.0 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 the Company 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 principal 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 to approximately three to seven
years.
Although the Federal Financial Institution Examination Council no longer
requires that all CMO's be tested for suitability as an investment in the
portfolio of financial institutions, the 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 $15.7 million in securities which, at December 31,
2000, were designated high risk. $6.1 million of these securities were floating
rate; $9.1 million were inverse floating rate securities; and $.5 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 gains in this portion of the portfolio at December 31,
2000, of $116,186.
The overall securities portfolio is formally monitored on a monthly basis,
and assessments are continually made 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 CMO's 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 values of securities vary significantly as interest rates
change. The gross unrealized gains and losses in the securities portfolio are
not expected to have a material impact on future income, liquidity or other
funding needs. There were unrealized gains (net of taxes) of $.7 million in the
securities portfolio on December 31, 2000, versus unrealized losses (net of
taxes) of $1.8 million one year ago.
United Security has used other off-balance sheet derivative products for
hedging purposes. These include interest rate swaps and caps. The use and detail
regarding these products are fully discussed under "Liquidity and
19
Interest Rate Sensitivity Management" and in Note 18 in the "Notes to
Consolidated Financial Statements". The fair value of the Company's derivative
financial instruments was not reflected on the consolidated statement of
condition as of December 31, 2000. The Company adopted the provisions of SFAS
No. 133, as amended, effective January 1, 2001, as required by the Financial
Accounting Standards Board. On that date, United Security reassessed and
designated derivative instruments used for risk management as fair value hedges,
cash flow hedges and derivatives not qualifying for hedge accounting treatment,
as appropriate. On January 1, 2001, the Company had derivatives with a notional
value of $69,000,000. In conjunction with the adoption of SFAS No. 133, the
Company recorded a transition adjustment of $24,000, net of taxes, to
accumulated other comprehensive income and $200,000 to net income on January 1,
2001.
Investment Securities Available-for-Sale
The following table sets forth the amortized costs of investment securities
as well as their fair value and related unrealized gains or losses at the dates
indicated.
December 31,
------------------------------------
2000 1999 1998
--------- -------- ---------
(In Thousands of Dollars)
Investment Securities Available-for-Sale:
U.S. Treasury and Agency Securities....................................... $ 4,774 $ 2,891 $ 0
Obligations of States, Counties, and Political Subdivisions............... 21,687 24,550 23,841
Mortgage-Backed Securities................................................ 115,568 129,737 132,588
Other Securities.......................................................... 5,017 3,501 3,076
-------- -------- --------
Total Book Value....................................................... 147,046 160,679 159,505
Net Unrealized Gains/Losses............................................... 1,072 (2,805) 4,514
-------- -------- --------
Total Market Value..................................................... $148,118 $157,874 $164,019
======== ======== ========
Investment Securities Available-for-Sale Maturity Schedule
Stated Maturity
-----------------------------------------------------------------------------
After One After Five
Within But Within But Within After
One Year Five Years Ten Years Ten 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..................................... $ 0 0.00% $ 1,387 6.98% $ 3,438 6.93% $ 0 0.00%
State, County and Municipal
Obligations.................................... 1,864 11.62% 3,559 10.80% 4,262 9.27% 12,495 8.56%
Mortgage-Backed
Securities..................................... 273 6.91% 982 6.98% 11,333 7.02% 103,405 7.21%
Corporate Bank Notes.............................. 0 0.00% 11 8.11% 0 0.00% 0 0.00%
------ ----- ------- ----- ------- ---- -------- ----
Total.......................................... $2,137 11.02% $ 5,939 9.27% $19,033 7.51% $115,900 7.35%
====== ===== ======= ===== ======= ==== ======== ====
Total Securities With Stated Maturity............... $143,009 7.51%
Equity Securities................................... 5,109 7.56%
-------- ----
TOTAL $148,118 7.51%
======== ====
Available-for-Sale Securities are stated at Market Value and Tax Equivalent
Market Yields.
The maturities and weighted average yields of the investment securities
available-for-sale at the end of 2000 are presented in the preceding table based
on stated maturity. While the average stated maturity of the mortgage-backed
securities (excluding CMO's) was 23.30 years, the average life expected was 9.18
years. The average stated maturity of the CMO portion of the portfolio was 19.81
years, and the average expected life was 5.79 years. The average expected life
of investment securities available-for-sale was 6.86 years with an average tax
equivalent yield of 7.51 percent.
20
Condensed Portfolio Maturity Schedule
Dollar Portfolio
Maturity Summary Amount Percentage
- ---------------- ------------ ----------
Maturing in 3 months or less............ $ 444,127 0.31%
Maturing in 3 months to 1 year.......... 2,808,093 1.96
Maturing in 1 to 3 years................ 2,816,069 1.97
Maturing in 3 to 5 years................ 2,993,471 2.09
Maturing in 5 to 15 years............... 26,739,490 18.70
Maturing in over 15 years............... 107,207,892 74.97
------------ ------
Total................................. $143,009,142 100.00%
============ ======
The following Marketable Equity Securities have been excluded from the
above Maturity Summary due to no stated maturity date.
Federal Home Loan Bank Stock........... $4,805,600
Mutual Funds........................... $ 9,772
Other Marketable Equity Securities..... $ 293,950
Condensed Portfolio Repricing Schedule
Dollar Portfolio
Repricing Summary Amount Percentage
- ----------------- ------------ ----------
Repricing in 30 days or less............... $ 27,756,418 19.41%
Repricing in 31 days to 1 year............. 2,690,025 1.88
Repricing in 1 to 3 years.................. 2,816,069 1.97
Repricing in 3 to 5 years.................. 2,993,471 2.09
Repricing in 5 to 15 years................. 23,498,702 16.43
Repricing in over 15 years................. 83,254,457 58.22
------------ ------
Total................................. $143,009,142 100.00%
============ ======
Repricing in 30 days or less does not include:
Mutual Funds......................................... $ 9,772
Repricing in 31 days to 1 year does not include:
Federal Home Loan Bank Stock......................... $4,805,600
Other Marketable Equity Securities................... $ 293,950
The tables above reflect all securities at market value on December 31,
2000.
Security Gains and Losses
Non-interest income from securities transactions, trading account
transactions and associated option premium income decreased in 2000 compared to
1999, as can be seen in the table below. The majority of the profits realized in
2000 were generated through the sale of trading account securities. Gains in
this area occurred in connection with United Security's asset and liability
management activities and strategies. Option income and other off-balance sheet
income declined 54.33% from $208,377 to $95,171.
21
The table below shows the associated net gains or losses for the periods
2000, 1999, and 1998.
2000 1999 1998
-------- -------- --------
Investment Securities.................................. $ 15,330 $533,806 $410,987
Trading Account........................................ 112,003 0 0
Options and Off-Balance Sheet Transactions............. 95,171 208,377 319,918
-------- -------- --------
Total............................................. $222,504 $742,183 $730,905
======== ======== ========
Gains in 2000 from sales of trading account securities were net of losses
of $3,055. Volume of sales as well as other information on securities is further
discussed in Note 3 in the Notes to Consolidated Financial Statements.
Short-Term Borrowings
Purchased funds can be used to satisfy daily funding needs, and, when
advantageous, for arbitrage. The following table shows information for the last
three years regarding the Bank's short- and long-term borrowings consisting of
U. S. Treasury demand notes included in its Treasury, Tax, and Loan Account,
securities sold under repurchase agreements, Federal Fund purchases (one-day
purchases), and other borrowings from the Federal Home Loan Bank.
Short-Term Borrowings Long-Term Borrowings
Maturity Less Than One Year Maturity One Year or Greater
--------------------------- ----------------------------
(In Thousands of Dollars)
Year Ended December 31:
2000.............................................. $ 1,128 $96,110
1999.............................................. 17,044 65,729
1998.............................................. 12 55,847
Weighted Average Interest Rate at Year-End:
2000.............................................. 5.66% 5.61%
1999.............................................. 5.34% 5.40%
1998.............................................. 4.41% 5.04%
Maximum Amount Outstanding at Any Month's End:
2000.............................................. $17,900 $96,110
1999.............................................. 16,453 65,788
1998.............................................. 2,520 55,906
Average Amount Outstanding During the Year:
2000.............................................. $ 3,193 $83,402
1999.............................................. 4,898 57,781
1998.............................................. 3,929 50,454
Weighted Average Interest Rate During the Year:
2000.............................................. 6.59% 5.77%
1999.............................................. 5.19% 5.07%
1998.............................................. 5.87% 5.03%
Balances in these accounts fluctuate dramatically on a day-to-day basis.
Rates on these balances also fluctuate daily, but as reflected in the chart
above, they generally depict the current interest rate environment.
Shareholders' Equity
United Security has always placed great emphasis on maintaining its strong
capital base. At December 31, 2000, shareholders' equity totaled $67.6 million,
or 13.3% of total assets compared to 12.9% and 13.5% for year-end 1999 and 1998,
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.
22
Over the last three years shareholders' equity grew from $52.7 million at
the beginning of 1998 to $67.6 million at the end of 2000. All of this growth
was the result of internally generated retained earnings, with the exception of
approximately $710,000 from stock options being exercised. Shareholders' equity
was also impacted by the year 2000 market value adjustment of $2.4 million to
comprehensive income, net of tax, related to available-for-sale investments. The
internal capital generation rate (net income less cash dividends as a percentage
of average shareholders' equity) was 5.5% in 2000, 7.4% in 1999 and 10.3% in
1998.
United Security is required to comply with capital adequacy standards
established by the Federal Reserve and FDIC. Currently, there are two basic
measures of capital adequacy: a risk-based measure and a leverage measure. The
risk-based capital standards are designed to make regulatory capital
requirements more sensitive to differences in risk profile among banks and bank
holding companies, to account for off-balance sheet exposure, and to minimize
disincentives for holding liquid assets. Assets and off-balance sheet items are
assigned to risk categories, each with a specified risk weighting factor. The
resulting capital ratios represent capital as a percentage of total risk
weighted assets and off-balance sheet items. The banking regulatory agencies
have also adopted regulations which supplement the risk-based guidelines to
include a minimum leverage ratio of 3% of Tier 1 Capital to total assets less
goodwill (the "leverage ratio"). Depending upon the risk profile of the
institution and other factors, the regulatory agencies may require a leverage
ratio of 1% or 2% higher than the minimum 3% level.
The minimum standard for the ratio of total capital to risk weighted assets
is 8%. At least 50% of that capital level must consist of common equity,
undivided profits, and non-cumulative perpetual preferred stock, less goodwill
and certain other intangibles ("Tier 1 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 1 Capital and Tier II Capital is "total risk-
based capital".
The following chart summarizes the applicable regulatory capital requirements.
United security's capital ratios at December 31, 2000, substantially exceeded
all regulatory requirements.
Risk-Based Capital Requirements
Minimum United Security's
Regulatory Ratio at
Requirements December 31, 2000
------------ ------------------
Total Capital to Risk-Adjusted Assets.................. 8.00% 19.02%
Tier I Capital to Risk-Adjusted Assets................. 4.00% 17.75%
Tier I Leverage Ratio.................................. 3.00% 12.71%
Total capital also has an important effect on the amount of FDIC insurance
premiums paid. Lower capital ratios can cause the rates paid for FDIC insurance
to increase. United Security plans to maintain the capital necessary to keep
FDIC insurance rates at a minimum.
United Security attempts to balance the return to shareholders through the
payment of dividends with the need to maintain strong capital levels for future
growth opportunities. Total cash dividends declared were $3.3 million or $.92
per share in 2000 compared to $.84 per share in 1999 and $.76 per share in 1998.
The total cash dividends represented a payout ratio of 48.5% in 2000 with a
payout ratio of 36.7% and 31.4% in 1999 and 1998 respectively. This is the
twelfth consecutive year that United Security has increased cash dividends.
Ratio Analysis
The following table presents operating and equity performance ratios for each of
the last three years.
Year Ended December 31,
-----------------------
2000 1999 1998
---- ---- ----
Return on Average Assets..................................................... 1.38% 1.77% 1.95%
Return on Average Equity..................................................... 10.66% 13.35% 14.94%
Cash Dividend Payout Ratio................................................... 48.47% 36.67% 31.40%
Average Equity to Average Assets Ratio....................................... 12.94% 13.29% 13.07%
23
Liquidity and Interest Rate Sensitivity Management
The primary function of asset and liability management is to assure
adequate liquidity and to maintain an appropriate balance between interest-
sensitive assets and interest-sensitive liabilities. Liquidity management
involves the ability to meet day-to-day cash flow requirements of United
security's customers, whether they are depositors wishing to withdraw funds or
borrowers requiring funds to meet their credit needs. Without proper liquidity
management, United Security would not be able to perform the primary function of
a financial intermediary and would, therefore, not be able to meet the needs of
the communities it serves. Interest rate risk management focuses on the maturity
structure of assets and liabilities and their repricing characteristics during
changes in market interest rates. Effective interest rate sensitivity management
ensures 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 $129.5 million at December 31, 2000.
Investment securities maturing or repricing in the same time frame totaled
$35.6 million or 24% of the investment portfolio at year-end 2000. In addition,
principal payments on mortgage-backed securities totaled $4.7 million in 2000.
The liability portion of the balance sheet provides liquidity through
interest-bearing and non-interest bearing deposit accounts. Federal Funds
purchased, securities sold under agreements to repurchase, short-term, and long-
term borrowings are additional sources of liquidity. Liquidity management
involves the continual monitoring of the sources and uses of funds to maintain
an acceptable cash position. Long-term liquidity management focuses on
considerations related to the total balance sheet structure.
Although the majority of the securities portfolio has stated maturities
between 3 to 10 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 to either purchase additional
investments or to fund loan growth.
United Security, at December 31, 2000, had long-term debt and short-term
borrowings that, on average, represented 18.0 percent of total liabilities and
equity. United Security currently has up to $122.5 million in borrowing capacity
from the Federal Home Loan Bank and $48 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
24
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, 2000, as measured by gap analysis. Over the next 12 months
approximately $45.3 million more interest-bearing liabilities than interest-
earning assets can be repriced to current market rates at least once. This
analysis indicated that United Security has a negative gap within the next 12-
month range. Therefore, net interest income would benefit slightly from a
falling interest rate environment and would be adversely impacted slightly by a
rising rate environment according to the table.
Interest Rate Sensitivity Analysis
December 31, 2000
-----------------------------------------------------------------------
(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)................ $ 79,023 $ 49,708 $128,731 $ 99,320 $ 75,420 $ 0 $303,471
Investment Securities......................... 34,099 5,486 39,585 37,153 71,380 0 148,118
Interest-Bearing Deposits
in Other Banks............................. 20,865 0 20,865 0 0 0 20,865
-------- -------- -------- -------- -------- -------- --------
Total Earning Assets....................... $133,987 $ 55,194 $189,181 $136,473 $146,800 $ 0 $472,454
Percent of Total Earning Assets.......... 28.4% 11.7% 41.1% 28.9% 31.1% 0% 100%
Interest-Bearing Liabilities:
Interest-Bearing Deposits and Liabilities
Demand Deposits (1)........................ $ 12,010 $ 0 $ 12,010 $ 48,041 $ 0 $ 0 $ 60,051
Savings Deposits (1)....................... 7,493 0 7,493 29,974 0 0 37,467
Time Deposits.............................. 47,912 94,909 142,821 59,762 0 0 202,583
Other Liabilities.......................... 46,157 25,087 71,244 25,964 30 0 97,238
Non-Interest-Bearing Liabilities
Demand Deposits............................ 951 0 951 0 0 37,105 38,056
Equity..................................... 0 0 0 0 0 37,059 37,059
-------- -------- -------- -------- -------- -------- --------
Total Funding Sources...................... $114,523 $119,996 $234,519 $163,741 $ 30 $ 74,164 $472,454
Percent of Total Funding Sources......... 24.2% 25.4% 49.6% 34.7% 0% 15.7% 100%
Interest Sensitivity Gap (Balance Sheet) $ 19,464 $(64,802) $(45,338) $(27,268) $146,770 $(74,164) $ 0
Off-Balance Sheet $ 0 $ 0 $ 0 $(20,000) $ 0 $ 20,000 $ 0
Interest Sensitive Gap $ 19,464 $(64,802) $(45,338) $(47,268) $146,770 $(54,164) $ 0
Cumulative Interest-Sensitive Gap $ 19,464 $(45,338) $ N/A $(92,606) $ 54,164 $ 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% 0.46% 0.81% 0.74% 2.71% 1.00%
Cumulative Ratio................................. 1.17% 0.81% N/A 0.78% 1.00% 1.00%
25
(1) Management adjustments reflect the Company's anticipated repricing
sensitivity of non-maturity deposit products. Historically, balances
on non-maturity deposit accounts have remained relatively stable
despite changes in market interest rates. Management has classified
certain of these accounts as non-rate sensitive based on management's
historical pricing practices and runoff experience. Approximately 80%
of the interest-bearing demand deposit account balances and savings
account balances are classified as over one year.
Certain interest-sensitive assets and liabilities are included in the
table based on historical repricing experience and expected
prepayments in the case of mortgage-backed securities rather than
contractual maturities. Non-accruing loans are included in loans at
the contractual maturity.
United Security also uses additional tools to monitor and manage interest
rate risk sensitivity. These tools include income simulation analysis and
duration analysis. Both analyses are methods of estimating earnings at risk and
capital at risk under varying interest rate conditions. They are used to test
the sensitivity of net interest income and stockholders' equity to changing
levels of interest rates and include adjustments for the expected timing and the
magnitude of assets and liability cash flows. Also, these measures capture
adjustments for the lag between movements in market interest rates and the
movement of administered rates on prime rate loans, interest-bearing transaction
accounts, regular savings, and money market savings accounts. Income simulation
analysis indicates that United Security is slightly liability sensitive.
Condensed Balance Sheet Duration Analysis
Estimated
Book Modified Duration
Value Down 1% Up 1%
-------- ------- ------
ASSETS
Cash and Due From Banks............................................. $ 11,593 4.34% 4.34%
Interest Bearing Balances in Other Banks............................ 20,866 0.07 0.07
Investment Securities Available-for-Sale............................ 148,118 2.13 3.53
Trading Securities.................................................. 3,713 0.07 0.07
Loans............................................................... 296,941 2.42 2.47
Premises and Equipment.............................................. 9,201 4.43 4.43
Accrued Interest Receivable......................................... 5,057 4.43 4.43
Investment in Limited Partnerships.................................. 5,230 4.43 4.43
Other Assets........................................................ 8,446 4.43 4.43
-------- ---- ----
Total Assets................................................... $509,165 2.38% 2.81%
======== ==== ====
LIABILITIES AND SHAREHOLDERS' EQUITY
Demand, Non-Interest Bearing........................................ $ 38,056 4.43% 4.43%
Demand, Interest Bearing............................................ 60,051 4.00 3.36
Savings............................................................. 37,467 3.73 3.52
Time Deposits....................................................... 202,582 0.99 1.33
--------
Total Deposits................................................. $338,156
Other Liabilities................................................... $ 6,143 4.43% 4.43%
Short-Term Borrowing................................................ 1,128 0.07 0.07
Long-Term Borrowing................................................. 96,110 0.73 0.73
Shareholders' Equity................................................ 67,628 4.36 4.36
-------- ---- ----
Total Liabilities and Shareholders' Equity..................... $509,165 2.24% 2.29%
======== ==== ====
Modified Duration Differential...................................... 0.13 0.53
*Suggested Change in Market Value of Equity (Pre-tax) ($000)........ $ 685 ($2,681)
* 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 the interest
rates.
26
United Security uses a five-step process to calculate the duration of each
asset and liability category. The first step is to assemble maturity and
repricing data on loans, investments, CD's and other financial instruments with
contractual maturities. The second step is to determine how bank management
would alter the interest rate for each category of assets and liabilities
assuming market interest rates rose or fell 1%. The third step is to combine the
maturity analysis and repricing assumptions in order to formulate a modified
duration estimate for each category. The fourth step is to calculate a weighted
average for total assets and liabilities, and the fifth step is to multiply the
modified duration differential as calculated (for both up 1% and down 1%
interest rate scenarios) in step four by total assets. Based on the current
position of the balance sheet, management believes these present value
calculations approximate United Security's aggregate pre-tax earnings exposure
for the next 5 years.
In this methodology, all non-rate sensitive assets, liabilities, and
shareholders' equity are assigned a modified duration based on a five year time
horizon (4.36 years). Additionally, estimates of modified duration incorporate
the likelihood that the investment portfolio would shorten maturity if interest
rates fell and lengthen maturity if interest rates rose. The model also
incorporates management's belief that deposit and loan rates would not rise or
fall equally either by category or by interest rate scenario. Increases in loan
prepayments are considered in the methodology. There is no allowance for growth
or runoff in deposit or loan balances.
The duration analysis presented above suggests long term (the market value
of equity) that the Company's earnings should decline slightly if interest rates
rise and should increase slightly if interest rates fall.
As part of the ongoing monitoring of interest-sensitive assets and
liabilities, United Security enters into various interest rate contracts
("interest rate protection contracts") to help manage United Security's interest
sensitivity. Such contracts generally have a fixed notional principal amount and
include (i) interest rate swaps where United Security typically receives or pays
a fixed rate and a counterparty pays or receives a floating rate based on a
specified index, and (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 Statements."
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 normally does
not require collateral for standby letters of credit. As of December 31, 2000,
the Bank had outstanding standby letters of credit and commitments to make loans
of $6.55 million and $24.1 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 do 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,
27
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, 2000, 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 $2.5
million in commitments to sell securities for delayed delivery and no
commitments to purchase securities as of December 31, 2000.
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 (interest income less interest expense) is an effective
measurement of how well management has matched interest-rate sensitive assets
and interest-bearing liabilities and is United Security's principal source of
income. The fluctuations in interest rates materially affect net interest
income. The accompanying table analyzes these changes.
Net interest income increased by $476,535, or 1.6%, in 2000 compared to
6.6% and 24.5% increases in 1999 and 1998 respectively. Volume, rate and yield
changes in interest-earning assets and interest-bearing liabilities contributed
to the growth in net interest income. Much of this change has resulted from an
increase in loan volume and a decrease in investment securities volume since
1997, as a result of a change in earning asset strategy. Average interest-
earning assets increased by $30 million, or 7.1%, in 2000, while average
interest-bearing liabilities increased $27.3 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 2000,
average interest-earning assets outgained average interest-bearing liabilities
by $2.7 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 6.6% in 2000
compared to 7.0% in 1999 and 6.8% in 1998.
Interest margins are affected by several factors, one of which is the
relationship of rate-sensitive earning assets to rate-sensitive interest-bearing
liabilities. This factor determines the effect that fluctuating interest rates
will have on net interest income. Rate-sensitive earning assets and interest-
bearing liabilities are those which can be repriced to current market rates
within a relatively short time. United Security's objective in managing interest
rate sensitivity is to achieve reasonable stability in the interest margin
throughout interest rate cycles by maintaining the proper balance of rate
sensitive assets and liabilities. For further analysis and discussion of
interest rate sensitivity, refer to the preceding section entitled "Liquidity
and Interest Rate Sensitivity Management."
Another factor that affects the interest margin is the interest rate
spread. The interest rate spread measures the difference between the average
yield on interest-earning assets and the average rate paid on interest-bearing
liabilities. This measurement gives a more accurate representation of the effect
market interest rate movements have on interest rate-sensitive assets and
liabilities. The average volume of the interest-bearing liabilities as noted in
the table, "Distribution of Assets, Liabilities, and Shareholders' Equity, with
Interest Rates and Interest Differentials," increased 7.8% in 2000, while the
average rate of interest paid increased from 4.38% in 1999 to 4.84% in 2000.
Average interest-earning assets increased 7.1% in 2000, while the average yield
in earning assets increased from 10.59% in 1999 to 10.64% in 2000.
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 2000, 83.2% of the Bank's average earning
assets were funded by interest-bearing liabilities as opposed to 82.7% in 1999
and 82.2% in 1998. Net interest income is improved as earning assets are funded
by a decreasing percentage of interest-bearing liabilities.
28
Summary of Operating Results
Year Ended December 31,
---------------------------------
2000 1999 1998
------- ------- -------
(In Thousands of Dollars)
Total Interest Income.............................. $48,323 $44,919 $43,255
Total Interest Expense............................. 18,292 15,365 15,518
------- ------- -------
Net Interest Income................................ 30,031 29,554 27,737
Provision for Loan Losses.......................... 6,837 4,305 3,187
------- ------- -------
Net Interest Income After Provision for
Loan Losses...................................... 23,194 25,249 24,550
Non-Interest Income................................ 4,883 4,747 4,558
Non-Interest Expense............................... 19,106 18,534 17,008
------- ------- -------
Income Before Income Taxes......................... 8,971 11,462 12,100
Applicable Income Taxes............................ 2,193 3,302 3,521
------- ------- -------
Net Income......................................... $ 6,778 $ 8,160 $ 8,579
======= ======= =======
Changes in Interest Earned and Interest Expense Resulting from
Changes in Volume and Changes in Rates
2000 Compared to 1999 1999 Compared to 1998 1998 Compared to 1997
----------------------------- ----------------------------- --------------------------
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........................ $ 4,760 $ 2,912 $ 7,672 $ 3,183 $ 1,196 $ 4,379 $2,200 $4,233 $6,433
Taxable Investments.......... (649) (2,040) (2,689) (799) (1,995) (2,794) (862) 300 (562)
Non-Taxable Investments...... (238) 214 (24) 50 9 59 (156) (111) (267)
Federal Funds................ 36 72 108 29 (9) 20 (2) 4 2
------- ------- ------- ------- ------- ------- ------- -------- -------
Total Interest-
Earnings Assets......... 3,909 1,158 5,067 2,463 (799) 1,664 1,180 4,426 5,606
------- ------- ------- ------- ------- ------- ------- -------- -------
Interest Expense On:
Demand Deposits.............. (27) (328) (355) 2 (314) (312) (118) (139) (257)
Savings Deposits............. (58) (89) (147) (50) (91) (141) (57) (24) (81)
Time Deposits................ 730 544 1,274 401 (260) 141 (770) 328 (442)
Other Liabilities............ 1,859 143 2,002 369 (210) 159 982 (60) 922
------- ------- ------- ------- ------- ------- ------- -------- -------
Total Interest-
Bearing Liabilities..... 2,504 270 2,774 722 (875) (153) 37 105 142
------- ------- ------- ------- ------- ------- ------- -------- -------
Increase in Net
Interest Income.............. $ 1,405 $ 888 $ 2,293 $ 1,741 $ 76 $ 1,817 $1,143 $4,321 $5,464
======= ======= ======= ======= ======= ======= ======= ======= =======
Provision for Loan Losses
The provision for loan losses is an expense used to establish the allowance
for loan losses. Actual loan losses, net of recoveries, are charged directly to
the allowance. The expense recorded each year is a reflection of actual losses
experienced during the year and management's judgment as to the adequacy of the
allowance to absorb losses inherent to the portfolio. Charge-offs exceeded
recoveries by $5.9 million during the year, an increase of $2.0 million over the
prior year, and accordingly a provision of $6.8 million was expensed for loan
losses in 2000. The allowance is at 2.2% of total loans outstanding at December
31, 2000. The increase was due to the unsatisfactory performance of the ALC loan
portfolio. For additional information and discussion of the allowance for loan
losses, refer to the section entitled "Loans and Allowances for Loan Losses."
29
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.
The Bank opened a new office in 1998 and two new offices in 1999. ALC
opened five offices in 1998, added eight in 1999 and closed one office in 2000
for a total of thirty-two offices. The Bank introduced an overdraft protection
product in 2000 called "Bounce Protection". This product allows for automatic
payment of a non-sufficient fund check, and the fees generated contributed to
the 12% increase in service and other charges on deposit accounts. These events
coupled with the Bank's Bond Division activities contributed to a $135,862, or
2.9%, increase in non-interest income in 2000 compared to $189,016 and $197,306
increases in 1999 and 1998, respectively.
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 $15,330, and trading securities had a net gain of $112,003 for a total gain
of $127,333 in 2000 compared to a $533,806 gain in 1999 and a $410,987 gain in
1998. 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.
The Bank organized a wholly-owned subsidiary, FUSB Reinsurance, Inc., in
2000. This Company reinsures or "underwrites" credit life, credit accident and
health insurance policies sold to the Bank's consumer loan customers. FUSB
Reinsurance, Inc. is responsible for the first level of risk on the policies up
to a specified maximum amount, and the primary third party insurer retains the
remaining risk. As a result, more credit life insurance commissions were
retained and are reflected in the $400,909 increase in 2000.
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 such as electronic banking. 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
$391,226 to non-interest income in 2000 compared to $426,230 in 1999 and
$402,194 in 1998. The reinsurance company is another example of this philosophy.
Non-Interest Expense
Non-interest expense consists primarily of four major categories: salaries
and employee benefits, occupancy expense, furniture and equipment expense, and
other expense. These expenses have been impacted by the start-up of fourteen new
offices of ALC in the last three years for a total of thirty-two offices and the
opening of three new offices of the Bank in the same period. However, 2000 was
marked by an emphasis on evaluating profitability of locations and actually
resulted in a reduction in personnel. These events impacted the ratio of non-
interest expense to average assets; however, the ratio remained stable during
the period at 3.9%, 4.0% and 3.8% in 2000, 1999 and 1998, respectively.
Total salaries and benefits increased $450,796, or 4.2%, in 2000. This
increase is attributable to normal merit adjustments, net of staff reduction of
4.8%. The increases of 10.1% in 1999 and 24.8% in 1998 were due to staffing
needs of the new offices opened by ALC and the Bank during that period. At
December 31, 2000, United Security had 300 full-time equivalent employees
compared to 315 in 1999. The reduction in staff was accomplished by closing one
ALC office and a continued effort to consolidate and manage the attrition as a
result of the bank merger in 1997 between First Bank and Trust and United
Security Bank.
United Security sponsors an Employee Stock Ownership Plan with 401 (k)
provisions. The Company made matching contributions totaling $471,393, $451,483
and $376,120 in 2000, 1999, and 1998, respectively.
Occupancy expense includes rents, depreciation, utilities, maintenance,
insurance, taxes, and other expenses associated with maintaining seventeen
banking offices and thirty-two finance company offices. The Company owns all but
one banking office, and all ALC offices are leased. Net occupancy expense
increased 11.2% in 2000, 12.3% in 1999, and 21.3% in 1998. The increases reflect
the new offices opened by ALC and the Bank in 1999 and 1998.
30
Furniture and equipment expense increased 5.3% in 2000, 6.9% in 1999 and
5.3% in 1998. These increases relate to rising price levels and increased
depreciation and service contract expenses associated with new office equipment
needs.
Other expenses consist of stationery, printing supplies, advertising,
postage, telephone, legal and other professional fees, other non-credit losses,
and other insurance including deposit insurance, and other miscellaneous
expenses. Other expenses decreased 1.9% in 2000, increased 6.5% in 1999 and
decreased 8.3% in 1998. The decrease in 2000 was due in part to a reduction in
telephone expense of $56,072, which resulted from efficiency management, new
technology utilization, and a negotiated rate reduction. Refer to Note 15 to the
consolidated financial statements for an analysis of the significant components
of other expenses.
Provision for Income Taxes
Management's determination of the realization of the deferred tax asset is
based upon management's judgment of various future events and uncertainties,
including the timing and amount of future income earned by subsidiaries and the
implementation of various tax planning strategies to maximize realization of the
deferred tax asset. Management believes that the subsidiaries may be able to
generate sufficient operating earnings to realize the deferred tax benefits.
However, a portion of the amount of the deferred tax asset that can be realized
in any year is subject to certain statutory federal income tax limitations.
Because of these uncertainties, a valuation allowance has been established.
Management periodically evaluates the realizability of the deferred tax asset
and, if necessary, adjusts the valuation allowance accordingly.
United security's provision for income taxes decreased 33.6% in 2000. This
decrease was caused primarily by a 21.7% decrease in income before taxes. The
Company's effective income tax rates for 2000, 1999, and 1998 were 24%, 29%, and
29%, respectively. Note 10 to the Consolidated Financial Statements provides
additional information about the provision for income taxes.
31
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."
32
Item 8. Financial Data and Supplementary Data.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To United Security Bancshares, Inc.:
We have audited the accompanying consolidated statements of condition of
UNITED SECURITY BANCSHARES, INC. (a Delaware corporation) AND SUBSIDIARIES as of
December 31, 2000 and 1999 and the related consolidated statements of income,
shareholders' equity, and cash flows for each of the three years in the period
ended December 31, 2000. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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, 2000 and 1999, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 2000 in conformity with accounting principles
generally accepted in the United States.
/s/ Arthur Andersen LLP
Birmingham, Alabama
February 2, 2001
33
UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
DECEMBER 31, 2000 AND 1999
2000 1999
----- ----
ASSETS
CASH AND DUE FROM BANKS................................................. $ 11,593,193 $ 12,222,761
INTEREST BEARING DEPOSITS IN OTHER BANKS................................ 20,865,281 665,663
------------ ------------
Total cash and cash equivalents................................ 32,458,474 12,888,424
INVESTMENT SECURITIES AVAILABLE FOR SALE................................ 148,118,464 157,873,943
TRADING SECURITIES...................................................... 3,712,997 0
LOANS, net of allowance for loan losses of $6,529,155 and
$5,579,072, respectively....................................... 296,941,478 276,172,120
PREMISES AND EQUIPMENT, net of accumulated depreciation
of $10,388,009 and $9,432,896, respectively.................... 9,200,648 9,541,383
ACCRUED INTEREST RECEIVABLE............................................. 5,056,736 5,663,118
INVESTMENT IN LIMITED PARTNERSHIPS...................................... 5,230,193 5,469,829
OTHER ASSETS............................................................ 8,445,853 8,989,879
------------ ------------
Total assets................................................... $509,164,843 $476,598,696
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
DEPOSITS:
Demand, noninterest bearing......................................... $ 38,055,878 $ 39,235,317
Demand, interest bearing............................................ 60,051,045 60,309,668
Savings............................................................. 37,466,963 39,102,161
Time, $100,000 and over............................................. 54,920,252 46,053,294
Other time.......................................................... 147,662,320 142,050,237
------------ ------------
Total deposits................................................. 338,156,458 326,750,677
OTHER LIABILITIES....................................................... 6,142,552 5,403,417
SHORT-TERM BORROWINGS................................................... 1,127,807 17,044,989
LONG-TERM DEBT.......................................................... 96,110,381 65,728,802
----------- -----------
Total liabilities.............................................. 441,537,198 414,927,885
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 17)
SHAREHOLDERS' EQUITY:
Common stock, par value $.01 per share; 10,000,000 shares authorized;
3,634,431 and 3,632,081 shares issued, respectively................. 36,344 36,320
Surplus................................................................. 8,768,978 8,727,877
Accumulated other comprehensive income (loss), net of tax............... 669,966 (1,752,880)
Retained earnings....................................................... 58,404,177 54,911,314
Treasury stock, 64,000 shares at cost................................... (251,820) (251,820)
------------ ------------
Total shareholders' equity..................................... 67,627,645 61,670,811
------------ ------------
Total liabilities and shareholders' equity..................... $509,164,843 $476,598,696
============ ============
The accompanying notes are an integral part of these consolidated statements.
34
UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
2000 1999 1998
---- ---- ----
INTEREST INCOME:
Interest and fees on loans.............................. $37,068,571 $33,776,492 $29,397,310
Interest on investment securities available for sale:
Taxable.............................................. 9,209,478 9,229,339 12,087,389
Tax-exempt........................................... 1,445,327 1,527,535 1,468,851
Other interest and dividends............................ 327,257 223,114 188,786
----------- ----------- -----------
10,982,062 10,979,988 13,745,026
Interest on trading account securities.................. 67,095 45,335 15,267
Interest on federal funds sold.......................... 205,049 117,424 97,350
----------- ----------- -----------
Total interest income................................ 48,322,777 44,919,239 43,254,953
INTEREST EXPENSE:
Interest on deposits.................................... 13,266,859 12,183,430 12,495,765
Interest on short-term borrowings....................... 210,284 254,008 230,738
Interest on long-term debt.............................. 4,815,017 2,927,719 2,791,794
----------- ----------- -----------
18,292,160 15,365,157 15,518,297
----------- ----------- -----------
NET INTEREST INCOME........................................ 30,030,617 29,554,082 27,736,656
PROVISION FOR LOAN LOSSES.................................. 6,837,463 4,305,450 3,187,103
----------- ----------- -----------
Net interest income after provision for loan losses..... 23,193,154 25,248,632 24,549,553
NONINTEREST INCOME:
Service and other charges on deposit accounts........... 2,293,328 2,044,260 2,067,722
Credit life insurance commissions....................... 1,054,434 653,525 670,694
Investment securities gains (losses), net............... 15,330 533,806 410,987
Trading securities gains (losses), net.................. 112,003 0 0
Other income............................................ 1,407,925 1,515,567 1,408,738
----------- ----------- -----------
Total noninterest income............................. 4,883,020 4,747,158 4,558,141
NONINTEREST EXPENSE:
Salaries and employee benefits.......................... 11,206,133 10,755,337 9,766,080
Furniture and equipment expense......................... 1,645,441 1,562,705 1,461,872
Occupancy expense....................................... 1,326,296 1,192,610 1,061,902
Other expense........................................... 4,928,084 5,023,291 4,718,118
----------- ----------- -----------
Total noninterest expense............................ 19,105,954 18,533,943 17,007,972
---------- ---------- ----------
INCOME BEFORE INCOME TAXES................................. 8,970,220 11,461,847 12,099,722
PROVISION FOR INCOME TAXES................................. 2,192,562 3,302,131 3,521,072
----------- ----------- -----------
NET INCOME................................................. $ 6,777,658 $ 8,159,716 $ 8,578,650
=========== =========== ===========
AVERAGE NUMBER OF SHARES OUTSTANDING....................... 3,570,131 3,561,051 3,543,325
=========== =========== ===========
NET INCOME PER SHARE:
Basic................................................... $1.90 $2.29 $2.42
=========== =========== ===========
Diluted................................................. $1.89 $2.28 $2.40
=========== =========== ===========
DIVIDENDS PER SHARE........................................ $.92 $.84 $.76
=========== =========== ===========
The accompanying notes are an integral part of these consolidated statements.
35
UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
Accumulated
Other Total
Common Comprehensive Retained Treasury Shareholders'
Stock Surplus Income (loss) Earnings Stock, at Cost Equity
------- ---------- ------------- ------------ -------------- -------------
BALANCE AT DECEMBER 31, 1997.................... $36,018 $8,057,792 $1,012,620 $43,858,538 $(254,420) $52,710,548
Comprehensive income:
Net income.................................. 0 0 0 8,578,650 0 8,578,650
Net change in unrealized gain (loss)
on securities available for sale,
net of tax................................ 0 0 1,808,936 0 0 1,808,936
-----------
Comprehensive income........................ 10,387,586
Dividends declared............................ 0 0 0 (2,693,596) 0 (2,693,596)
Sale of treasury stock........................ 0 651 0 0 2,600 3,251
Exercise of stock options..................... 91 160,208 0 0 0 160,299
------- ---------- ---------- ----------- --------- -----------
BALANCE AT DECEMBER 31, 1998.................... 36,109 8,218,651 2,821,556 49,743,592 (251,820) 60,568,088
Comprehensive income:
Net income.................................. 0 0 0 8,159,716 0 8,159,716
Net change in unrealized gain (loss)
on securities available for sale,
net of tax................................ 0 0 (4,574,436) 0 0 (4,574,436)
-----------
Comprehensive income........................ 3,585,280
Dividends declared............................ 0 0 0 (2,991,994) 0 (2,991,994)
Exercise of stock options..................... 211 509,226 0 0 0 509,437
------- ---------- ---------- ----------- --------- -----------
BALANCE AT DECEMBER 31, 1999.................... 36,320 8,727,877 (1,752,880) 54,911,314 (251,820) 61,670,811
Comprehensive income:
Net income.................................. 0 0 0 6,777,658 0 6,777,658
Net change in unrealized gain (loss)
on securities available for sale,
net of tax................................ 0 0 2,422,846 0 0 2,422,846
-----------
Comprehensive income........................ 9,200,504
Dividends paid................................ 0 0 0 (3,284,795) 0 (3,284,795)
Exercise of stock options..................... 24 41,101 0 0 0 41,125
------- ---------- --------- ----------- --------- -----------
BALANCE AT DECEMBER 31, 2000.................... $36,344 $8,768,978 $ 669,966 $58,404,177 $(251,820) $67,627,645
======= ========== ========= =========== ========= ===========
The accompanying notes are an integral part of these consolidated statements.
36
UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
2000 1999 1998
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.......................................................... $ 6,777,658 $ 8,159,716 $ 8,578,650
Adjustments:
Depreciation....................................................... 1,179,153 878,828 797,959
Provision for loan losses.......................................... 6,837,463 4,305,450 3,187,103
Deferred income tax expense (benefit).............................. (324,436) 505,053 (1,191,833)
Amortization of intangibles........................................ 389,643 549,720 636,651
Gain on sale of securities, net.................................... (15,330) (533,806) (410,987)
Amortization of premium and discounts, net......................... 122,266 937,849 630,654
Changes in assets and liabilities:
(Increase) decrease in accrued interest receivable.............. 606,382 (1,142,335) (472,115)
(Increase) decrease in other assets............................. (975,303) (117,638) 154,628
Increase (decrease) in interest payable......................... 87,689 (362,578) 218,808
Increase (decrease) in other liabilities........................ 651,446 (561,139) 706,108
------------ ------------- ------------
Net cash provided by operating activities....................... 15,336,631 12,619,120 12,835,626
------------ ------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investment securities available for sale............... (13,830,038) (102,868,215) (81,139,966)
Proceeds from sales of investment securities available for sale..... 11,592,680 49,314,030 38,509,727
Proceeds from maturities and prepayments of investment
securities available for sale....................................... 13,565,973 52,470,612 54,511,409
Purchases of Federal Home Loan Bank stock........................... (1,516,101) (494,100) (746,700)
Loan (originations) and principal repayments, net................... (27,367,185) (46,653,191) (22,311,330)
Purchase of premises and equipment, net............................. (838,418) (2,195,204) (2,185,886)
------------ ------------- ------------
Net cash used in investing activities........................... (18,393,089) (50,426,068) (13,362,746)
------------ ------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in customer deposits................................... 11,405,781 106,096 4,226,208
Net increase (decrease) in short-term borrowings.................... (15,917,182) 17,033,247 (3,901,079)
Proceeds from FHLB advances and other borrowings.................... 43,000,000 20,000,000 30,000,000
Repayment of FHLB advances and other borrowings..................... (12,618,421) (10,118,421) (15,118,421)
Proceeds from issuance of common stock.............................. 41,125 509,437 160,299
Dividends paid...................................................... (3,284,795) (3,666,013) (2,550,690)
Proceeds from sale of treasury stock................................ 0 0 3,251
------------ ------------- ------------
Net cash provided by financing activities....................... 22,626,508 23,864,346 12,819,568
------------ ------------- ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................. 19,570,050 (13,942,602) 12,292,448
CASH AND CASH EQUIVALENTS, beginning of year......................... 12,888,424 26,831,026 14,538,578
------------ ------------- ------------
CASH AND CASH EQUIVALENTS, end of year............................... $ 32,458,474 $ 12,888,424 $ 26,831,026
============ ============= ============
The accompanying notes are an integral part of these consolidated statements.
37
UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999, AND 1998
1. DESCRIPTION OF BUSINESS
United Security Bancshares, Inc. (the "Company" or "USB") and its
subsidiary, First United Security Bank (the "Bank" or "FUSB") provide
commercial banking services to customers located primarily in Clarke,
Choctaw, Bibb, and surrounding counties in Alabama and Mississippi. The
Company also owns all of the stock of First Security Courier Corporation,
("FSCC") an Alabama corporation. FSCC is a courier service organized to
transport items for processing to the Federal Reserve for financial
institutions located in Southwest Alabama.
The Bank owns all of the stock of Acceptance Loan Company, Inc.
("Acceptance" or "ALC"), an Alabama corporation. Acceptance is a finance
company organized for the purpose of making consumer loans and purchasing
consumer loans from vendors. Acceptance has offices located within the
communities served by the Bank as well as offices outside the Bank's market
area in north and southeast Alabama, eastern Mississippi, and northwest
Florida. The Bank also owns all of the stock of FUSB Reinsurance, Inc.
("Reinsurance"), an Arizona corporation. Reinsurance is an insurance company
that was created to underwrite credit life and accidental death insurance
related to loans written by the Bank and ALC. The Bank also invests in
limited partnerships that operate qualified affordable housing projects to
receive tax benefits.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company,
FSCC, the Bank and its wholly owned subsidiaries. All significant
intercompany balances and transactions have been eliminated. The Bank's
investment in limited partnerships is 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 sold for one-day periods.
Supplemental disclosures of cash flow information and noncash transactions
related to cash flows for the years ended December 31, 2000, 1999, and 1998
are as follows:
2000 1999 1998
---- ---- ----
Cash paid during the period for:
Interest................................... $18,204,471 $15,296,156 $15,284,661
Income taxes............................... 1,735,284 3,823,494 3,648,211
Supplemental schedule of noncash investment
and financing activities:
Dividends declared but unpaid............. 0 12,061 686,080
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 in
accumulated other comprehensive
38
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(continued)
income. 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 its held to maturity portfolio at December 31, 2000 and
1999.
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 has used derivative financial
instruments consisting of interest rate swaps, caps, and floors which have
been accounted for using the accrual method. Net interest income or expense
related to interest rate swaps, caps, and floors has been recorded over the
life of the agreement as an adjustment to net interest income. The premiums
paid for the caps and floors have been amortized straight-line over the life
of the agreement. Changes in the estimated fair values of derivative
financial instruments used as hedges have not been reflected in the
financial statements until realized. Gains or losses realized on the sales
or terminations of interest rate swaps have been deferred and amortized into
interest income over the maturity period of the contract.
The Company's criteria for use of derivatives as hedges has included
reduction of the risk associated with the exposure being hedged and
designation of such derivatives 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.
See also "Recent Accounting Pronouncements."
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, write-downs, 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 loans.
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.
39
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(continued)
Allowance for Loan Losses
The allowance for loan losses is increased by a provision for loan losses,
which is charged to expense, and reduced by charge-offs, net of recoveries.
The allowance for loan losses is maintained at a level which, in
management's judgment, is adequate to absorb credit losses inherent in the
loan portfolio. The amount of the allowance is based on management's
evaluation of the collectibility of the loan portfolio, changes in its risk
profile, credit concentrations, historical trends, and economic conditions.
This evaluation also considers the balance of impaired loans. Losses on
individually identified impaired loans are measured based on the present
value of expected future cash flows discounted at each loan's original
effective market interest rate. As a practical expedient, impairment may be
measured based on the loan's observable market price or the fair value of
the collateral if the loan is collateral dependent. When the measure of the
impaired loan is less than the recorded investment in the loan, the
impairment is recorded through the provision added to the allowance for loan
losses. One-to-four family residential mortgages and consumer installment
loans are subjected to a collective evaluation for impairment, considering
delinquency and repossession statistics, historical loss experience, and
other factors. Though management believes the allowance for loan losses to
be adequate, ultimate losses may vary from their estimates. However,
estimates are reviewed periodically, and as adjustments become necessary,
they are reported in earnings during periods they become known.
Long-Lived Assets
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line and accelerated methods
over the estimated useful lives of the assets. Goodwill and core deposit
intangibles are included in other assets and are amortized using the
straight-line method. Goodwill is being amortized over 20 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 which indicate long-lived assets may be impaired.
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 $188,825 and $295,468 at December 31, 2000 and 1999,
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") are computed by dividing net income by the
weighted average number of shares outstanding during the period. Diluted EPS
is computed in the same manner as fully diluted EPS 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.
40
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(continued)
The following table represents the earnings per share calculations for the
years ended December 31, 2000, 1999, and 1998:
Weighted
Net Average Earnings
For the Years Ended Income Shares Per Share
December 31, 2000:
Net income........................................ $6,777,658
----------
Basic earnings per share.......................... 6,777,658 3,570,131 $1.90
=====
Dilutive securities............................... 0 9,695
---------- ---------
Diluted earnings per share........................ $6,777,658 3,579,826 $1.89
========== ========= =====
December 31, 1999:
Net income........................................ $8,159,716
----------
Basic earnings per share.......................... 8,159,716 3,561,051 $2.29
=====
Dilutive securities............................... 0 20,340
---------- ---------
Diluted earnings per share........................ $8,159,716 3,581,391 $2.28
========== ========= =====
December 31, 1998:
Net income........................................ $8,578,650
----------
Basic earnings per share.......................... 8,578,650 3,543,325 $2.42
=====
Dilutive securities............................... 0 27,056
---------- ---------
Diluted earnings per share........................ $8,578,650 3,570,381 $2.40
========== ========= =====
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") in the United States 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 is secured by real estate in
its primary market area. Accordingly, the ultimate collectibility of a
substantial portion of the Company's loan portfolio and the recovery of a
portion of the carrying amount of foreclosed real estate are susceptible to
changes in economic conditions in the Company's primary market.
Reclassifications
Certain 1999 and 1998 balances have been reclassified to conform to the 2000
presentation. These reclassifications have no effect on previously reported
net income.
41
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(continued)
Recent Accounting Pronouncements
During 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for
Derivative Instruments and Hedging Activities. This statement replaces
existing pronouncements and practices with a single, integrated accounting
framework for derivatives and hedging activities, requiring companies to
formally document, designate, and assess the effectiveness of transactions
that receive hedge accounting. During 1999, the FASB issued SFAS No. 137,
which deferred the effective date of SFAS No. 133 to fiscal years beginning
after June 15, 2000.
On January 1, 2001, the Company adopted SFAS No. 133. The effect of adopting
SFAS No. 133 will be shown as a charge to the Company's results of
operations in the first quarter of 2001 as a cumulative effect of a change
in accounting principle decreasing net income and other comprehensive income
by approximately $200,000 and $24,000, respectively.
In September 2000, FASB issued SFAS No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities. This
Statement replaces SFAS No. 125, Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities. SFAS No. 125 provided
accounting and reporting standards for transfers and servicing of financial
assets and extinguishment of liabilities. Those standards are based on
consistent application of a financial-components approach that focuses on
control. Under that approach, after a transfer of financial assets, an
entity recognizes the financial and servicing assets it controls and the
liabilities it has incurred, derecognizes financial assets when control has
been surrendered, and derecognizes liabilities when extinguished. SFAS No.
140 provides consistent standards for distinguishing transfers of financial
assets that are sales from transfers that are secured borrowings. This
Statement is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after March 31, 2001. This
Statement is effective for recognition and reclassification of collateral
and for disclosure relating to securitization transactions and collateral
for fiscal years which ended after December 15, 2000. Based on the Company's
current operating activities, management believes that the implementation of
this Statement will not have a material impact on the Company's financial
condition or results of operations and no disclosure related to
securitizations is necessary for the fiscal year ended December 31, 2000.
3. INVESTMENT SECURITIES
Details of investment securities available for sale at December 31, 2000 and
1999 are as follows:
December 31, 2000
------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ------------ ----------- ------------
Obligations of states, counties, and
political subdivisions..................... $ 21,687,190 $ 492,885 $ 0 $ 22,180,075
U.S. treasury securities and obligations
of U.S. government agencies................ 4,773,709 51,054 0 4,824,763
Mortgage-backed securities.................... 115,568,591 508,168 (83,911) 115,992,848
Equity securities............................. 200,123 103,599 0 303,722
Corporate notes............................... 11,306 150 0 11,456
FHLB stock.................................... 4,805,600 0 0 4,805,600
------------ ---------- -------- ------------
Total...................................... $147,046,519 $1,155,856 $(83,911) $148,118,464
============ ========== ======== ============
42
3. INVESTMENT SECURITIES--(continued)
December 31, 1999
-----------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ---------- ----------- ------------
Obligations of states, counties, and
political subdivisions................ $ 24,550,127 $ 0 $ (178,371) $ 24,371,756
U.S. treasury securities and obligations
of U.S. government agencies........... 2,890,727 0 (46,340) 2,844,387
Mortgage-backed securities................ 129,736,586 23,363 (2,633,855) 127,126,094
Equity securities......................... 200,123 30,948 0 231,071
Corporate notes........................... 11,488 0 (353) 11,135
FHLB stock................................ 3,289,500 0 0 3,289,500
------------ ------- ----------- ------------
Total.......................... $160,678,551 $54,311 $(2,858,919) $157,873,943
============ ======= =========== ============
The scheduled maturities of investment securities available for sale at December
31, 2000 are presented in the following table:
Estimated
Amortized Fair
Cost Value
------------- ------------
Maturing within one year...................... $ 2,118,019 $ 3,252,220
Maturing after one but before five years...... 5,745,858 5,809,540
Maturing after five but before fifteen years.. 26,341,695 26,739,490
Maturing after fifteen years.................. 107,835,224 107,207,892
Equity securities and FHLB stock.............. 5,005,723 5,109,322
------------- ------------
Total.............................. $147,046,519 $148,118,464
============= ============
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 available for sale with a carrying value of $90,360,095
and $75,431,232 at December 31, 2000 and 1999, respectively, were pledged to
secure public deposits and for other purposes.
Gross gains realized on sales of securities available for sale were $15,330 in
2000, $1,112,574 in 1999, and $1,240,170 in 1998. Gross realized losses on
those sales were $0 in 2000, $578,768 in 1999, and $829,183 in 1998. Gross
realized gains on trading account securities were $115,058 in 2000, and gross
realized losses on those sales were $3,055. No gains or losses were recognized
on trading securities in 1999 and 1998.
43
4. LOANS
At December 31, 2000 and 1999, the composition of the loan portfolio was as
follows:
2000 1999
---- ----
Commercial, financial, and agricultural........ $ 41,507,487 $ 39,996,482
Real estate mortgage........................... 180,627,051 156,978,808
Installment.................................... 87,713,442 90,599,352
Less:
Allowance for loan losses.................... 6,529,155 5,579,072
Unearned interest, commissions, and fees..... 6,377,347 5,823,450
------------ ------------
Total.................................... $296,941,478 $276,172,120
============ ============
The Bank grants commercial, real estate, and installment loans to customers
primarily in Clarke, Choctaw, Bibb, and surrounding counties in southwest
Alabama, northwest Florida, and southeast Mississippi. Although the Bank has
a diversified loan portfolio, the ability of a substantial number of the
Bank's loan customers to honor their obligations is dependent upon the
timber and timber-related industries. At December 31, 2000, approximately
$36,037,213 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, 2000 and 1999 were $2,073,205 and $2,073,267, respectively.
During the year ended December 31, 2000, new loans to these parties totaled
$2,305,979 and repayments were $2,306,041.
A summary of the transactions in the allowance for loan losses follows:
2000 1999 1998
---- ---- ----
Balance at beginning of year................. $ 5,579,072 $ 4,989,173 $ 4,045,844
Acquired in branch acquisitions.............. 0 242,887 0
Provision for loan losses.................... 6,837,463 4,305,450 3,187,103
Loans charged off............................ (6,481,402) (4,472,699) (2,589,300)
Recoveries of loans previously charged off... 594,022 514,261 345,526
----------- ----------- -----------
Balance at end of year....................... $ 6,529,155 $ 5,579,072 $ 4,989,173
=========== =========== ===========
At December 31, 2000, the Company had one loan considered to be impaired.
The amount of this loan, which is on nonaccrual, is $455,317 and the related
allowance is $227,659. The average recorded investment in impaired loans
during the year ended December 31, 2000 was approximately $456,393. For the
year ended December 31, 2000, the Company did not recognize interest income
on the impaired loan during the period the loan was considered impaired. The
Company had approximately $457,468 in loans considered to be impaired at
December 31, 1999.
Loans on which the accrual of interest has been discontinued amounted to
$2,103,776 and $1,725,008 at December 31, 2000 and 1999, respectively. If
interest on those loans had been accrued, such income would have
approximated $193,983, $247,391, and $339,710 for 2000, 1999, and 1998,
respectively. Interest income actually recorded on those loans amounted to
$30,374, $211,264, and $298,335 for 2000, 1999, and 1998, respectively.
44
5. PREMISES AND EQUIPMENT
Premises and equipment and their depreciable lives are summarized as
follows:
2000 1999
---- ----
Land............................................. $ 1,137,437 $ 1,037,436
Premises (40 years).............................. 9,132,750 8,539,348
Furniture, fixtures, and equipment (3-7 years)... 9,318,470 9,397,495
----------- -----------
19,588,657 18,974,279
Less accumulated depreciation.................... 10,388,009 9,432,896
----------- -----------
Total....................................... $ 9,200,648 $ 9,541,383
=========== ===========
Depreciation expense of $1,179,153, $878,828, and $797,959 was recorded in
2000, 1999, and 1998, respectively, on premises and equipment.
6. INVESTMENT IN LIMITED PARTNERSHIPS
The Bank invests in limited partnerships that operate qualified affordable
housing projects to receive tax benefits in the form of tax deductions from
operating losses and tax credits. The Bank accounts for the investments
under either the equity or cost method based on the percentage ownership and
influence over operations. The Bank's interest in these partnerships was
$5,230,193 and $5,469,829 at December 31, 2000 and 1999, respectively.
Losses related to these partnerships amounted to approximately $176,000,
$119,000, and $128,000 for 2000, 1999, and 1998 respectively. Management
analyzes these investments annually for potential impairment.
The assets and liabilities of these partnerships consist primarily of
apartment complexes and related mortgages. The Bank's carrying value
approximates cost or its underlying equity in the net assets of the
partnerships. Market quotations are not available for any of the
aforementioned partnerships.
The Bank has remaining cash commitments to these partnerships at December 31,
2000 in the amount of approximately $36,000.
7. DEPOSITS
At December 31, 2000, the scheduled maturities of the Bank's time deposits
greater than $100,000 are as follows:
2001.................. $36,459,628
2002.................. 11,267,178
2003.................. 3,034,707
2004.................. 552,175
2005 and thereafter... 3,606,564
-----------
$54,920,252
===========
Additionally, included in the Bank's other time deposits at December 31,
2000 are $7,955,940 in state and municipal time deposits greater than
$100,000 and maturing within one year.
45
8. 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:
2000
----------------------------------------
Treasury
Federal Tax and
Funds Repurchase Loan
Purchased Agreements Deposits
--------- ---------- --------
Average balance during the year.................. $ 2,313,251 $0 $ 880,035
========== == ==========
Average interest rate during the year............ 6.63% 0% 6.47
========== == ==========
Maximum month-end balance during the year........ $17,900,000 $0 $2,507,037
========== == ==========
At December 31, 2000, the Bank has $48.0 million in available federal fund
lines from correspondent banks.
2000
----------------------------------------
Treasury
Federal Tax and
Funds Repurchase Loan
Purchased Agreements Deposits
--------- ---------- --------
Average balance during the year................. $ 4,070,482 $82,914 $ 765,458
=========== ======= ==========
Average interest rate during the year........... 5.07% 5.46% 5.66%
=========== ======= ==========
Maximum month-end balance during the year....... $14,600,000 $82,914 $2,504,952
=========== ======= ==========
9. 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:
2000 1999
----------- -----------
Average balance during the year............. $83,401,923 $57,781,427
Maximum month-end balance during the year... 96,110,381 65,788,012
Average rate paid during the year........... 5.77% 5.07%
Weighted average remaining maturity......... 5.18 years 6.14 years
Scheduled maturities of Federal Home Loan Bank advances during 2001 are
approximately $10 million. There are no scheduled maturities in 2002. In 2003,
there are $35 million in scheduled maturities. In years subsequent to 2003,
maturities total approximately $51.1 million.
At December 31, 2000, the Bank has $26.4 million in available credit from the
Federal Home Loan Bank.
46
10. INCOME TAXES
The consolidated provisions (benefits) for income taxes for the years ended
December 31 were as follows:
2000 1999 1998
---------- ---------- -----------
Federal
Current......... $2,036,092 $2,441,731 $ 4,146,035
Deferred........ (288,305) 449,361 (1,059,525)
---------- ---------- -----------
1,747,787 2,891,092 3,086,510
---------- ---------- -----------
State
Current......... 480,906 355,347 566,870
Deferred........ (36,131) 55,692 (132,308)
---------- ---------- -----------
444,775 411,039 434,562
---------- ---------- -----------
Total.............. $2,192,562 $3,302,131 $ 3,521,072
========== ========== ===========
The consolidated tax provision differed from the amount computed by applying the
federal statutory income tax rate of 34% to pretax earnings for the following
reasons:
2000 1999 1998
---------- ---------- -----------
Income tax expense at federal statutory rate....... $3,049,875 $3,897,028 $4,113,755
Increase (decrease) resulting from:
Tax-exempt interest............................. (548,993) (508,501) (561,148)
State income tax expense net of federal income
tax benefit.................................. 293,552 271,286 286,810
Low income housing tax credits.................. (600,000) (540,000) (490,000)
Other.............................................. (1,872) 182,318 171,655
---------- ---------- -----------
Total....................................... $2,192,562 $3,302,131 $3,521,072
========== ========== ==========
Effective tax rate................................... 24% 29% 29%
========== ========== ==========
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 2000 and
1999, are presented below:
2000 1999
---------- ----------
Deferred tax assets:
Allowance for loan losses.............................. $1,877,343 $1,498,068
Accrued vacation....................................... 22,200 22,200
Capital loss carryover................................. 27,041 27,041
Deferred commissions and fees.......................... 537,821 594,909
Unrealized loss on securities available for sale....... 0 1,051,728
Other.................................................. 222,467 167,272
---------- ----------
Total gross deferred tax asset........................ 2,686,872 3,361,218
Valuation allowance................................... (27,041) (27,041)
---------- ----------
Net deferred tax assets.................................. 2,659,831 3,334,177
Deferred tax liabilities:
Premises and equipment................................. 560,997 518,225
Limited partnerships................................... 339,787 210,522
Unrealized gain on securities available for sale....... 401,979 0
Other deferred tax liabilities......................... 208,435 327,526
---------- ----------
Total gross deferred tax liabilities.................. 1,511,198 1,056,273
---------- ----------
Net deferred tax asset................................... $1,148,633 $2,277,904
========== ==========
47
11. 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 $471,392 and $451,483 in 2000 and
1999, respectively.
12. LONG-TERM INCENTIVE COMPENSATION PLAN
During 1997, the Company's shareholders' approved the adoption of the United
Security Bancshares, Inc. Long Term Incentive Compensation Plan ("LTICP"). This
plan provides for a number of forms of stock based compensation for key
employees of USB and its subsidiaries. Under the plan, eligible employees may
be awarded incentive and nonqualified stock options, stock appreciation rights,
and restricted stock. The LTICP provides for the issuance of up to 60,000
shares of USB common stock with a par value of $.01 per share. In addition,
each option expires no later than five years after the grant date. The exercise
price of each option is determined by the compensation committee, but in the
case of incentive stock options, the price shall not be less than the fair
market value on the grant date.
The Company continues to record compensation cost under Accounting Principles
Board Opinion ("APB") No. 25. Had compensation cost been determined, consistent
with the fair value based method of recording for stock-based compensation
allowed for under SFAS No. 123, the Company's net income would have been
decreased to the following pro forma amounts:
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
December 31, December 31, December 31,
2000 1999 1998
---------- ---------- ----------
Net income--as reported....................... $6,777,658 $8,159,716 $8,578,650
Net income--pro forma......................... 6,777,658 8,137,010 8,570,652
Basic net income per share--as reported....... 1.90 2.29 2.42
Basic net income per share--pro forma......... 1.90 2.29 2.42
Diluted net income per share--as reported..... 1.89 2.28 2.40
Diluted net income per share--pro forma....... 1.89 2.28 2.40
48
12. LONG-TERM INCENTIVE COMPENSATION PLAN--(continued)
A summary of the status of the Company's stock option plan at December 31, 2000,
1999, and 1998 and the changes during the year then ended is as follows:
2000 1999 1998
------------------- ------------------ -------------------
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------- -------- ------ -------- ------ --------
Outstanding at beginning of year................. 28,604 $19.21 47,690 $17.72 56,250 $17.50
Granted.......................................... 0 0 2,050 36.25 600 35.00
Exercised........................................ 2,350 17.50 21,136 17.50 9,160 17.50
------ ------ ------ ------ ------ ------
Outstanding at end of year....................... 26,254 $19.36 28,604 $19.21 47,690 $17.72
====== ====== ====== ====== ====== ======
Exercisable at end of year....................... 26,254 $19.36 28,604 $19.21 47,690 $17.72
====== ====== ====== ====== ====== ======
Fair value of options granted.................... $ 0.00 $ 4.71 $ 4.33
====== ====== ======
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions: a risk free interest rate based on zero coupon governmental issues
at grant date with the maturity equal to the expected term of the options
(5.00%, and 4.54% for 1999 and 1998), no expected forfeiture rate as options are
immediately vested at date of grant, an expected stock volatility of 29% and 26%
and an expected annual dividend yield of $.84 and $.76 per share for 1999 and
1998, respectively.
13. SHAREHOLDERS' EQUITY
Dividends paid by the Company are primarily from dividends received 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, 2000, approximately $11.2 million of the Bank's retained
earnings were 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, 2000 and 1999, that the Company meets all capital
adequacy requirements imposed by its regulators.
As of December 31, 2000 and 1999, 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.
49
13. SHAREHOLDERS' EQUITY--(continued)
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:
2000
----------------------------------------------------------------------
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.............. $66,907 19.02% $28,146 8.00% N/A N/A
First United Security Bank................... 62,688 16.70 30,037 8.00 $37,546 10.00%
Tier I Capital (to Risk Weighted Assets):
United Security Bancshares, Inc.............. 62,436 17.75 14,073 4.00 N/A N/A
First United Security Bank................... 57,995 15.45 15,018 4.00 22,528 6.00
Tier I Leverage (to Average Assets):
United Security Bancshares, Inc.............. 62,436 12.71 14,740 3.00 N/A N/A
First United Security Bank................... 57,995 11.89 14,635 3.00 24,391 5.00
1999
----------------------------------------------------------------------
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------- --------------------- -------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in thousands)
Total Capital (to Risk Weighted Assets):
United Security Bancshares, Inc.............. $62,672 19.05% $26,312 8.00% N/A N/A
First United Security Bank................... 58,519 16.52 28,332 8.00 $35,415 10.00%
Tier I Capital (to Risk Weighted Assets):
United Security Bancshares, Inc.............. 58,528 17.79 13,156 4.00 N/A N/A
First United Security Bank................... 54,083 15.27 14,166 4.00 21,249 6.00
Tier I Leverage (to Average Assets):
United Security Bancshares, Inc.............. 58,528 12.47 14,080 3.00 N/A N/A
First United Security Bank................... 54,083 11.77 13,785 3.00 22,976 5.00
Comprehensive Income
Comprehensive income is the change in equity during a period from
transactions and other events and circumstances from nonowner sources.
In addition to net income, changes in other nonowner transactions consist
entirely of changes in unrealized gains and losses on securities available for
sale.
50
13. SHAREHOLDERS' EQUITY--(continued)
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:
2000
-----------------------------------------------
Before After
Tax Tax Tax
Amount Effect Amount
-----------------------------------------------
Unrealized gains (losses) arising during
the period........................................ $ 3,892,298 $ 1,459,794 $ 2,432,504
Less reclassification adjustments for (gains)
losses included in net income..................... (15,330) (5,672) (9,658)
----------- ----------- -----------
Net change in unrealized gain/(loss) on
securities........................................ $ 3,876,968 $ 1,454,122 $ 2,422,846
=========== =========== ===========
1999
-----------------------------------------------
Before After
Tax Tax Tax
Amount Effect Amount
-----------------------------------------------
Unrealized gains (losses) arising during
the period........................................ $(6,785,292) $(2,547,154) $(4,238,138)
Less reclassification adjustments for (gains)
losses included in net income..................... (533,806) (197,508) (336,298)
----------- ----------- -----------
Net change in unrealized gain/(loss) on
securities........................................ $(7,319,098) $(2,744,662) $(4,574,436)
=========== =========== ===========
1998
-----------------------------------------------
Before After
Tax Tax Tax
Amount Effect Amount
-----------------------------------------------
Unrealized gains (losses) arising during
the period........................................ $ 3,282,314 $ 1,214,456 $ 2,067,858
Less reclassification adjustments for (gains)
losses included in net income..................... (410,987) (152,065) (258,922)
----------- ----------- -----------
Net change in unrealized gain/(loss) on
securities........................................ $ 2,871,327 $ 1,062,391 $ 1,808,936
=========== =========== ===========
51
14. 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.
2000
--------------------------------------------------------------------
FUSB ALC All Other Eliminations Consolidated
------- ------- ------ ------- -------
(In thousands)
Total interest income................................. $ 39,864 $15,471 $ 242 $ (7,254) $ 48,323
Total interest expense................................ 18,292 7,254 0 (7,254) 18,292
------- ------- ------ ------- -------
Net interest income................................... 21,572 8,217 242 0 30,031
Provision for loan losses............................. 225 6,612 0 0 6,837
------- ------- ------ ------- -------
Net interest income after provision................... 21,347 1,605 242 0 23,194
Total noninterest income.............................. 3,936 777 8,005 (7,835) 4,883
Total noninterest expense............................. 11,780 6,855 1,193 (722) 19,106
------- ------- ------ ------- -------
Income (loss) before income taxes
(tax benefit)...................................... 13,503 (4,473) 7,054 (7,113) 8,971
Provision for income taxes
(tax benefit)...................................... 3,655 (1,497) 35 0 2,193
------- ------- ------ ------- -------
Net income (loss)..................................... $ 9,848 $(2,976) $ 7,019 $ (7,113) $ 6,778
======= ======= ====== ======= =======
Other significant items:
Total assets........................................ $509,026 $76,136 $69,345 $(145,342) $509,165
Total investment securities......................... 144,373 0 3,745 0 148,118
Total loans, net.................................... 304,427 71,454 0 (78,940) 296,941
Investment in subsidiaries.......................... 2,116 0 62,145 (64,261) 0
Total interest income from
external customers.............................. 32,610 15,471 238 0 48,319
Total interest income from affiliates............... 7,254 0 0 (7,254) 0
52
14. SEGMENT REPORTING--(continued)
1999
------------------------------------------------------------
FUSB ALC All Other Eliminations Consolidated
-------- ------- --------- ------------ ------------
(In thousands)
Total interest income............................... $ 34,390 $16,251 $ 173 $ (5,895) $ 44,919
Total interest expense.............................. 15,365 5,895 0 (5,895) 15,365
-------- ------- ------- --------- --------
Net interest income................................. 19,025 10,356 173 0 29,554
Provision for loan losses........................... 153 4,152 0 0 4,305
-------- ------- ------- --------- --------
Net interest income after provision................. 18,872 6,204 173 0 25,249
Total noninterest income............................ 3,669 1,046 8,353 (8,321) 4,747
Total noninterest expense........................... 11,651 6,591 299 (7) 18,534
-------- ------- ------- --------- --------
Income (loss) before income taxes
(tax benefit)....................................... 10,890 659 8,227 (8,314) 11,462
Provision for income taxes (tax benefit)............ 3,027 279 (4) 0 3,302
-------- ------- ------- --------- --------
Net income (loss)................................... $ 7,863 $ 380 $ 8,231 $ (8,314) $ 8,160
======== ======= ======= ========= ========
Other significant items:
Total assets........................................ $470,889 $79,399 $85,092 $(158,781) $476,599
Total investment securities......................... 153,946 0 3,928 0 157,874
Total loans, net.................................... 279,642 72,695 0 (76,165) 276,172
Investment in subsidiaries.......................... 1,241 0 56,215 (57,456) 0
Total interest income from
external customers.................................. 28,494 16,251 173 0 44,918
Total interest income from affiliates............... 5,895 0 0 (5,895) 0
1998
----------------------------------------------------------
FUSB ALC All Other Eliminations Consolidated
-------- ------- --------- ------------ ------------
(In thousands)
Total interest income............................... $ 35,523 $12,141 $ 133 $ (4,542) $ 43,255
Total interest expense.............................. 15,518 4,542 0 (4,542) 15,518
-------- ------- ------- --------- --------
Net interest income................................. 20,005 7,599 133 0 27,737
Provision for loan losses........................... 762 2,425 0 0 3,187
-------- ------- ------- --------- --------
Net interest income after provision................. 19,243 5,174 133 0 24,550
Total noninterest income............................ 3,580 936 9,096 (9,054) 4,558
Total noninterest expense........................... 12,015 4,696 313 (16) 17,008
-------- ------- ------- --------- --------
Income (loss) before income taxes
(tax benefit).................................... 10,808 1,414 8,916 (9,038) 12,100
Provision for income taxes (tax benefit)............ 2,967 557 (3) 0 3,521
-------- ------- ------- --------- --------
Net income (loss)................................... $ 7,841 $ 857 $ 8,919 $ (9,038) $ 8,579
======== ======= ======= ========= ========
Other significant items:
Total assets...................................... $444,408 $67,902 $61,816 $(124,053) $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 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
53
15. OTHER OPERATING EXPENSES
Other operating expenses for the years 2000, 1999, and 1998 consist of
the following:
2000 1999 1998
---------- ---------- ----------
Telephone expense............................. $ 492,050 $ 548,122 $ 543,509
Amortization of intangibles................... 532,664 549,720 636,651
Postage, stationery, and supplies............. 768,184 762,201 246,051
Other......................................... 3,135,186 3,163,248 3,291,907
---------- ---------- ----------
Total...................................... $4,928,084 $5,023,291 $4,718,118
========== ========== ==========
16. 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, 2000:
Year ending December 31,
2001.......................$251,326
2002....................... 231,437
2003....................... 121,601
2004....................... 56,200
2005 and thereafter........ 38,035
Total rental expense under all operating leases was $460,268, $389,519, and
$532,056 in 2000, 1999, and 1998, respectively.
17. 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.
18. 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 purchased, 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 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 for the carrying value
plus the amount to replace such contracts in the event
54
18. DERIVATIVE FINANCIAL INSTRUMENTS--(continued)
of counterparty default. The Bank is fully cross-collateralized with
counterparties on all interest rate swap agreements. At December 31, 2000, the
Bank estimates its credit risk on purchased caps in the event of total
counterparty default to be $23,000. 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,
-----------------
2000 1999
------- ------
(In thousands)
Standby letters of credit................... $ 6,550 $ 6,175
Commitments to extend credit................ 24,096 21,819
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Company upon extension of credit, is based on
management's credit evaluation of the counterparty. Collateral held varies but
may include accounts receivable, inventory, property, plant, and equipment, and
income-producing commercial properties.
At December 31, 2000, commitments to purchase and sell securities for delayed
delivery are summarized as follows:
2000
------
Commitments to purchase securities for delayed delivery......... $ 0
Commitments to sell securities for delayed delivery............. 2,429
Commitments to purchase securities for delayed delivery require the Bank to
purchase a specified security at a specified price for delivery on a specified
date. Similarly, commitments to sell securities for delayed delivery require
the Bank to sell a specified security at a specified price for delivery on a
specified date. Market risk arises from potential movements in security values
and interest rates between the commitment and delivery dates.
The Bank's principal objective in holding derivative financial instruments is
asset-liability management. The operations of the Bank are subject to a risk of
interest rate fluctuations to the extent that there is a difference between the
amount of the Bank's interest-earning assets and the amount of interest-bearing
liabilities that mature or reprice in specified periods. The principal
objective of the Bank's asset-liability management activities is to provide
maximum levels of net interest income while maintaining acceptable levels of
interest rate and liquidity risk and facilitating the funding needs of the Bank.
To achieve that objective, the Bank uses a combination of derivative financial
instruments, including interest rate swaps and caps.
An interest rate swap is an agreement in which two parties agree to exchange, at
specified intervals, interest payment streams calculated on an agreed-upon
notional principal amount with at least one stream based on
55
18. DERIVATIVE FINANCIAL INSTRUMENTS--(continued)
a specified floating-rate index. Interest rate swaps are used by the Bank to
effectively convert floating-rate debt with a one month LIBOR rate index to a
fixed rate five year constant maturity treasury index.
Interest rate caps and floors are option-like contracts that require the seller
to pay the purchaser at specified future dates the amount, if any, by which a
specified market interest rate exceeds the fixed cap rate or falls below the
fixed floor rate, applied to a notional principal amount. The Bank uses caps
purchased to partially hedge against rising interest rates on their floating
rate short-term borrowings. The cost of the caps is 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 $51,166, $220,120, and $157,436 in 2000, 1999, and 1998,
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 and caps used
for purposes other than trading as of December 31, 2000:
Weighted
Weighted Weighted Average
Average Rate Average Repricing
Notional Carrying Estimated ---------------- Years to Frequency
Amount Value Fair Value Received Paid Expiration (Days)
-------- -------- ---------- -------- ---- ---------- ---------
(In thousands)
Swaps: 5 year 1 month
Pay floating, receive floating..... $20,000 $ 0 $(223) CMT LIBOR 1.040 30
Pay fixed, receive floating........ 17,000 0 (259) 6.804% 6.596% 1.910 90
Caps purchased........................ 32,000 68 23 0.021% N/A 0.727 30-90
------- --- -----
$69,000 $68 $(459)
======= === =====
Swaps and caps 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, 2000, such swaps and caps were associated with the
following asset or liability categories:
Notional Principal Associated With
--------------------------------------------------------
Notional Fixed Floating Rate Floating
Amount Rate Debt Securities Rate Debt
-------- --------- ------------- ---------
(In thousands)
Swaps:
Pay floating, receive floating........... $20,000 $0 $20,000 $ 0
Pay fixed, receive floating.............. 17,000 0 0 17,000
Caps, purchased............................. 32,000 0 0 32,000
------- -- ------- -------
$69,000 $0 $20,000 $49,000
======= == ======= =======
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
56
18. DERIVATIVE FINANCIAL INSTRUMENTS-(continued)
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 $234,745, $253,069, and $132,834 as of December 31, 2000,
1999, and 1998, respectively, with related amortization into income of $95,171,
$150,043, and $147,887 for the years ended December 31, 2000, 1999, and 1998,
respectively. Fiscal 2000 amounts are scheduled to be amortized into income in
the following periods: $132,315 gain in 2001 and $102,430 gain in 2002.
All of the Bank's derivative financial instruments are over-the-counter
instruments and are not exchange traded. Market values are obtained from the
counterparties to each instrument. The Bank only uses other commercial banks as
a counterparty to their derivative activity. The Bank performs stress tests and
other models to assess risk exposure.
19. 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 cash equivalents: Fair value equals the carrying value of such assets.
Trading securities and investment securities available for sale: Fair values
for trading securities and investment securities available for sale are based on
quoted market prices.
Accrued interest receivable and payable: Fair value equals the carrying value
of these instruments.
Loans, net: 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 (swaps and caps) are based on values obtained from counterparties,
or other quotations received from third parties. The Company's loan commitments
are negotiated at current market rates and are relatively short-term in nature.
As a matter of policy, the Company generally makes commitments for fixed rate
loans for relatively short periods of time. Because of this policy and the
absence of any known credit exposure, the estimated value of the Company's loan
commitments is nominal.
57
19. FAIR VALUE OF FINANCIAL INSTRUMENTS--(continued)
Demand and savings deposits: The fair values of demand deposits are equal to
the carrying value of such deposits. Demand deposits include noninterest
bearing demand deposits, savings accounts, NOW accounts, and money market demand
accounts.
Time deposits: The fair value of relatively short-term time deposits is equal
to their carrying values. Discounted cash flows have been used to value long-
term time deposits. The discount rate used is based on interest rates currently
being offered by the Bank on comparable deposits as to amount and term.
Short-term borrowings: These borrowings may consist of federal funds purchased,
securities sold under agreements to repurchase, floating rate borrowings from
the Federal Home Loan Bank and the U.S. Treasury Tax and Loan account. Due to
the short-term nature of these borrowings, fair values approximate carrying
values.
Long-term debt: The fair value of this debt is estimated using discounted cash
flows based on the Company's current incremental borrowing rate for similar
types of borrowing arrangements as of December 31, 2000 and 1999:
2000 1999
------------------------- -------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
----------- ----------- ---------- ----------
(In thousands)
Assets:
Cash and cash equivalents................................. $ 32,458 $ 32,458 $ 12,888 $ 12,888
Investment securities available for sale.................. 148,118 148,118 157,874 157,874
Trading securities........................................ 3,713 3,713 0 0
Accrued interest receivable............................... 5,057 5,057 5,663 5,663
Loans, net................................................ 303,471 304,172 281,751 280,045
Off-balance-sheet instruments............................. 68 (459) 211 198
Liabilities:
Deposits.................................................. 338,156 338,735 326,751 327,353
Short-term borrowings..................................... 1,128 1,128 17,045 17,045
Long-term debt............................................ 96,110 95,761 65,729 65,968
58
20. UNITED SECURITY BANCSHARES, INC. (PARENT COMPANY ONLY)
FINANCIAL INFORMATION
Statements of Condition
December 31,
-------------------------
2000 1999
----------- -----------
ASSETS:
Cash on deposit.......................................... $ 809,358 $ 502,355
Investment in subsidiaries............................... 62,115,474 56,133,015
Investment securities available for sale................. 3,634,688 3,928,026
Other assets............................................. 1,113,842 1,139,832
----------- -----------
$67,673,362 $61,703,228
=========== ===========
LIABILITIES:
Other liabilities........................................ $ 45,717 $ 32,417
SHAREHOLDERS' EQUITY........................................ 67,627,645 61,670,811
----------- -----------
$67,673,362 $61,703,228
=========== ===========
Statements of Income
Year Ended December 31,
--------------------------------------
2000 1999 1998
---------- ---------- ----------
INCOME
Dividend income, First United Security Bank................ $3,284,797 $2,991,994 $6,183,651
Interest income............................................ 244,683 179,103 137,654
Investment securities gains (losses), net.................. 36,500 0 24,797
---------- ---------- ----------
Total income............................................ 3,565,980 3,171,097 6,346,102
EXPENSES...................................................... 370,348 256,910 278,990
---------- ---------- ----------
INCOME BEFORE EQUITY IN UNDISTRIBUTED
INCOME OF SUBSIDIARIES..................................... 3,195,632 2,914,187 6,067,112
EQUITY IN UNDISTRIBUTED INCOME
OF SUBSIDIARIES............................................ 3,582,026 5,245,529 2,511,538
---------- ---------- ----------
Net income.................................................... $6,777,658 $8,159,716 $8,578,650
========== ========== ==========
59
20. UNITED SECURITY BANCSHARES, INC. (PARENT COMPANY ONLY)
FINANCIAL INFORMATION
Statements of Cash Flows
Year Ended December 31,
---------------------------------------
2000 1999 1998
----------- ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 6,777,658 $ 8,159,716 $ 8,578,650
Adjustments to reconcile net income to net cash
provided by operating activities:
Undistributed income of subsidiaries................ (3,582,026) (5,245,529) (2,511,538)
Amortization of intangibles......................... 57,600 57,600 57,600
Increase in other assets............................ (31,610) (12,221) (16,062)
Increase (decrease) in other liabilities............ 13,300 (356,583) 85,863
----------- ----------- -----------
Net cash provided by operating activities........ 3,234,922 2,602,983 6,194,513
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase (sales) of investment securities
available for sale, net................................... 315,751 (770,553) (3,003,161)
----------- ----------- -----------
Net cash provided by (used in)
investing activities................................ 315,751 (770,553) (3,003,161)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of treasury stock...................... 0 0 3,251
Proceeds from exercise of stock options................... 41,125 509,437 160,299
Cash dividends paid....................................... (3,284,795) (3,666,013) (2,550,690)
----------- ----------- -----------
Net cash used in financing activities..................... (3,243,670) (3,156,576) (2,387,140)
----------- ----------- -----------
INCREASE (DECREASE) IN CASH.................................. 307,003 (1,324,146) 804,212
CASH AT BEGINNING OF YEAR.................................... 502,355 1,826,501 1,022,289
----------- ----------- -----------
CASH AT END OF YEAR.......................................... $ 809,358 $ 502,355 $ 1,826,501
=========== =========== ===========
60
21. QUARTERLY DATA (UNAUDITED)
Years Ended December 31,
------------------------------------------------------------------------------
2000 1999
------------------------------------ --------------------------------------
Fourth Third Second First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
-------- ------- ------- ------- ------- ------- ------- -------
(In thousands, except per share data)
Interest income................................... $12,285 $12,162 $11,914 $11,961 $11,801 $11,468 $11,032 $10,618
Interest expense.................................. (4,911) (4,787) (4,424) (4,170) (4,022) (3,958) (3,716) (3,669)
------- ------- ------- ------- ------- ------- ------- -------
Net interest income............................... 7,374 7,375 7,490 7,791 7,779 7,510 7,316 6,949
Provision for loan losses......................... (2,550) (1,631) (1,530) (1,126) (1,536) (918) (837) (1,014)
------- ------- ------- ------- ------- ------- ------- -------
Net interest income, after
provision for loan losses...................... 4,824 5,744 5,960 6,665 6,243 6,592 6,479 5,935
Noninterest:
Income....................................... 194 891 2,796 1,003 985 1,050 1,141 1,571
Expenses..................................... (3,504) (4,429) (6,325) (4,848) (4,847) (4,692) (4,672) (4,323)
------- ------- ------- ------- ------- ------- ------- -------
Income before income taxes........................ 1,514 2,206 2,431 2,820 2,381 2,950 2,948 3,183
Provision for income taxes........................ (400) (391) (632) (770) (607) (848) (899) (948)
------- ------- ------- ------- ------- ------- ------- -------
Net income........................................ $ 1,114 $ 1,815 $ 1,799 $ 2,050 $ 1,774 $ 2,102 $ 2,049 $ 2,235
======= ======= ======= ======= ======= ======= ======= =======
Earnings per common share:
Basic........................................... $ .32 $ .51 $ .50 $ .57 $ .49 $ .59 $ .58 $ .63
======= ======= ======= ======= ======= ======= ======= =======
Diluted......................................... $ .31 $ .51 $ .50 $ .57 $ .50 $ .58 $ .57 $ .63
======= ======= ======= ======= ======= ======= ======= =======
61
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, 2000.
Item 11. Executive Compensation.
The information called for by this item is incorporated herein by reference
to Banchares' 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, 2000.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information called for by this item is incorporated herein by reference
to Bancshares' definitive proxy statement, under the caption Voting Securities
and Principal Stockholders," to be filed pursuant to Regulation 14A with the
Securities and Exchange Commission within 120 days after the end of the fiscal
year ended December 31, 2000.
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, 2000.
62
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, 2000 and 1999.
Consolidated Statements of Shareholders" Equity, December 31, 2000, 1999, and
1998.
Consolidated Statements of Income, December 31, 2000, 1999, and 1998.
Consolidated Statements of Cash Flows, December 31, 2000, 1999, and 1998.
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.
(b) Reports on Form 8-K
None.
(c) Exhibits
(3)(a) Certificate of Incorporation of Bancshares incorporated herein by
reference to the Exhibits to Form 10-Q for the Quarter ended September 30, 2000.
(3)(b) Bylaws of Bancshares, incorporated herein by reference to the Exhibits
to Form 10-Q for the quarter ended September 30, 2000.
(10)(a) The United Security Bancshares, Inc. Employee Stock Ownership Plan, as
amended, dated January 1, 1992, incorporated herein by reference to the Exhibits
to Form 10-K for the year ended December 31, 1992, file with the Commission in
Washington, D.C., File No. 0-14549.
(10)(b) Amendments to the United Security Bancshares, Inc. Employee Stock
Ownership Plan, incorporated herein by reference to the Exhibits to Form 10-K
for the year ended December 31, 1997.
(10)(c) Employment Agreement dated January 1, 2000, 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).
(21) List of Subsidiaries of Bancshares.
(23) Consent of Independent Public Accountants.
63
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64
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
UNITED SECURITY BANCSHARES, INC.
By: /s/ R. Terry Phillips March 23, 2001
-----------------------
R. Terry Phillips
Its President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ R. Terry Phillips President, Chief Executive March 23, 2001
- ------------------------ Officer, and Director
R. Terry Phillips (Principal Executive Officer)
/s/ Larry M. Sellers Treasurer (Principal Financial March 23, 2001
- ------------------------ Officer, Principal Accounting
Larry M. Sellers Officer)
/s/ Dan Barlow Director March 23, 2001
- ------------------------
Dan Barlow
/s/ Linda Breedlove Director March 23, 2001
- ------------------------
Linda Breedlove
/s/ Gerald P. Corgill Director March 23, 2001
- ------------------------
Gerald P. Corgill
/s/ Roy G. Cowan Director March 23, 2001
- ------------------------
Roy G. Cowan
/s/ Wayne C. Curtis Director March 23, 2001
- -------------------------
Wayne C. Curtis
/s/ John C. Gordon Director March 23, 2001
- -------------------------
John C. Gordon
/s/ William G. Harrison Director March 23, 2001
- -------------------------
William G. Harrison
/s/ Fred L. Huggins Director March 23, 2001
- -------------------------
Fred L. Huggins
65
/s/ Hardie B. Kimbrough Director March 23, 2001
- -------------------------
Hardie B. Kimbrough
/s/ Jack W. Meigs Director March 23, 2001
- -------------------------
Jack W. Meigs
/s/ Ray Sheffield Director March 23, 2001
- -------------------------
Ray Sheffield
/s/ James C. Stanley Director March 23, 2001
- -------------------------
James C. Stanley
Director
- -------------------------
Clarence Watters
/s/ Howard M. Whitted Director March 23, 2001
- -------------------------
Howard M. Whitted
/s/ Bruce N. Wilson Director March 23, 2001
- -------------------------
Bruce N. Wilson
66