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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2007
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 incorporation or organization) | (IRS Employer Identification No.) |
131 West Front Street Post Office Box 249 Thomasville, AL | 36784 | |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code:
(334) 636-5424
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 whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “larger accelerated filer” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨ Accelerated filer x Non-accelerated filer ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class | Outstanding at August 14, 2007 | |
| Common Stock, $0.01 par value | 6,169,210 shares |
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UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES
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FORWARD-LOOKING STATEMENTS
Statements contained in this Quarterly Report on Form 10-Q that are not historical facts are forward-looking statements (as defined in the Private Securities Litigation Reform Act of 1995). In addition, United Security Bancshares, Inc. (“Bancshares”), through its senior management, from time to time makes forward-looking statements (as defined in the Private Securities Litigation Reform Act of 1995) concerning its expected future operations and performance and other developments. Such forward-looking statements are necessarily estimates reflecting Bancshares’ best judgment based upon current information and involve a number of risks and uncertainties, and various factors could cause results to differ materially from those contemplated by such forward-looking statements. Such factors could include those identified from time to time in Bancshares’ Securities and Exchange Commission filings and other public announcements, including the factors described in Bancshares’ Annual Report on Form 10-K for the year ended December 31, 2006, as well as the potential reputational risk suffered by Bancshares as a result of the loan irregularities discovered within Acceptance Loan Company, Inc. during the second quarter of 2007, which may have an adverse impact on business generation and retention, funding, liquidity and Bancshares’ stock price. With respect to the adequacy of the allowance for loan losses for Bancshares, these factors include, but are not limited to, the rate of growth in the economy and the relative strength and weakness in the consumer and commercial credit sectors and in the real estate markets. Forward-looking statements speak only as of the date they are made, and Bancshares undertakes no obligation to revise forward-looking statements to reflect circumstances or events that occur after the dates the forward-looking statements are made, except as required by law.
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| ITEM 1. | FINANCIAL STATEMENTS |
UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in Thousands)
June 30, 2007 | December 31, 2006 | |||||||
| (Unaudited) | ||||||||
ASSETS |
| |||||||
Cash and Due from Banks | $ | 12,989 | $ | 14,668 | ||||
Interest Bearing Deposits in Banks | 5,160 | 13,791 | ||||||
Federal Funds Sold | 0 | 25 | ||||||
Investment Securities Available-for-Sale | 135,884 | 119,763 | ||||||
Federal Home Loan Bank Stock | 4,647 | 5,180 | ||||||
Loans, net of allowance for loan losses of $10,379 and $7,664, respectively | 440,773 | 441,574 | ||||||
Premises and Equipment, net | 18,665 | 18,864 | ||||||
Cash Surrender Value of Bank-Owned Life Insurance | 10,735 | 10,531 | ||||||
Accrued Interest Receivable | 6,191 | 6,096 | ||||||
Goodwill | 4,098 | 4,098 | ||||||
Investment in Limited Partnerships | 1,888 | 2,011 | ||||||
Other Assets | 19,011 | 9,695 | ||||||
Total Assets | $ | 660,041 | $ | 646,296 | ||||
LIABILITIES AND SHAREHOLDERS’ EQUITY |
| |||||||
Deposits | $ | 485,457 | $ | 450,062 | ||||
Accrued Interest Expense | 3,720 | 3,170 | ||||||
Short-Term Borrowings | 1,667 | 1,757 | ||||||
Long-Term Debt | 77,535 | 87,553 | ||||||
Other Liabilities | 8,705 | 12,158 | ||||||
Total Liabilities | 577,084 | 554,700 | ||||||
Shareholders’ Equity: | ||||||||
Common Stock, par value $0.01 per share, 10,000,000 shares authorized; 7,317,560 shares issued | 73 | 73 | ||||||
Surplus | 9,233 | 9,233 | ||||||
Accumulated Other Comprehensive Loss | (1,076 | ) | (274 | ) | ||||
Retained Earnings | 92,876 | 96,713 | ||||||
Less Treasury Stock: 1,148,350 and 1,010,708 shares at cost, respectively | (18,149 | ) | (14,149 | ) | ||||
Total Shareholders’ Equity | 82,957 | 91,596 | ||||||
Total Liabilities and Shareholders’ Equity | $ | 660,041 | $ | 646,296 | ||||
The accompanying notes are an integral part of these Consolidated Statements.
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UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands, Except Per Share Data)
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||
| 2007 | 2006 | 2007 | 2006 | ||||||||||
| (Unaudited) | (Unaudited) | ||||||||||||
INTEREST INCOME: | |||||||||||||
Interest and Fees on Loans | $ | 13,372 | $ | 13,002 | $ | 26,704 | $ | 25,671 | |||||
Interest on Investment Securities | 1,837 | 1,587 | 3,639 | 3,082 | |||||||||
Total Interest Income | 15,209 | 14,589 | 30,343 | 28,753 | |||||||||
INTEREST EXPENSE: | |||||||||||||
Interest on Deposits | 3,857 | 2,789 | 7,392 | 5,255 | |||||||||
Interest on Borrowings | 991 | 1,080 | 2,086 | 2,043 | |||||||||
Total Interest Expense | 4,848 | 3,869 | 9,478 | 7,298 | |||||||||
NET INTEREST INCOME | 10,361 | 10,720 | 20,865 | 21,455 | |||||||||
PROVISION FOR LOAN LOSSES | 9,863 | 975 | 10,904 | 1,790 | |||||||||
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES | 498 | 9,745 | 9,961 | 19,665 | |||||||||
NON-INTEREST INCOME: | |||||||||||||
Service and Other Charges on Deposit Accounts | 808 | 797 | 1,565 | 1,525 | |||||||||
Credit Life Insurance Income | 156 | 185 | 254 | 291 | |||||||||
Other Income | 388 | 402 | 774 | 852 | |||||||||
Total Non-Interest Income | 1,352 | 1,384 | 2,593 | 2,668 | |||||||||
NON-INTEREST EXPENSE: | |||||||||||||
Salaries and Employee Benefits | 3,471 | 3,600 | 7,004 | 7,110 | |||||||||
Occupancy Expense | 424 | 405 | 839 | 795 | |||||||||
Furniture and Equipment Expense | 343 | 350 | 664 | 670 | |||||||||
Other Expense | 1,751 | 1,582 | 3,650 | 3,108 | |||||||||
Total Non-Interest Expense | 5,989 | 5,937 | 12,157 | 11,683 | |||||||||
INCOME (LOSS) BEFORE INCOME TAXES | (4,139 | ) | 5,192 | 397 | 10,650 | ||||||||
PROVISION FOR (BENEFIT FROM) INCOME TAXES | (1,408 | ) | 1,716 | 87 | 3,494 | ||||||||
NET INCOME (LOSS) | $ | (2,731 | ) | $ | 3,476 | $ | 310 | $ | 7,156 | ||||
BASIC AND DILUTED NET INCOME (LOSS) PER SHARE | $ | (0.44 | ) | $ | 0.54 | $ | 0.05 | $ | 1.12 | ||||
DIVIDENDS PER SHARE | $ | 0.26 | $ | 0.23 | $ | 0.67 | $ | 0.61 | |||||
The accompanying notes are an integral part of these Consolidated Statements.
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UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Dollars in Thousands, Except Per Share Data)
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2007 | 2006 | 2007 | 2006 | |||||||||||||
| (Unaudited) | (Unaudited) | |||||||||||||||
Net income (loss) | $ | (2,731 | ) | $ | 3,476 | $ | 310 | $ | 7,156 | |||||||
Other comprehensive loss: | ||||||||||||||||
Change in unrealized holding losses for derivatives arising during period, net of tax benefit of $8 | 0 | 0 | 0 | (13 | ) | |||||||||||
Reclassification adjustment for net gains realized on derivatives in net income, net of taxes of $20, $20, $40, and $40, respectively | (34 | ) | (34 | ) | (67 | ) | (67 | ) | ||||||||
Change in unrealized holding losses on available-for-sale securities arising during period, net of tax benefits of $549, $579, $442, and $689, respectively | (915 | ) | (965 | ) | (738 | ) | (1,149 | ) | ||||||||
Reclassification adjustment for net losses realized on available-for-sale securities realized in net income, net of tax benefit of $2 | 4 | 0 | 4 | 0 | ||||||||||||
Other comprehensive loss | (945 | ) | (999 | ) | (801 | ) | (1,229 | ) | ||||||||
Comprehensive income (loss) | $ | (3,676 | ) | $ | 2,477 | $ | (491 | ) | $ | 5,927 | ||||||
The accompanying notes are an integral part of these Consolidated Statements.
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UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
| Six Months Ended June 30, | ||||||||
| 2007 | 2006 | |||||||
| (Unaudited) | ||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net Income | $ | 310 | $ | 7,156 | ||||
Adjustments to reconcile net income to cash provided by operating activities: | ||||||||
Depreciation | 453 | 484 | ||||||
(Accretion) amortization of premiums and discounts, net | (37 | ) | 35 | |||||
Provision for loan losses | 10,904 | 1,790 | ||||||
Loss on sale of securities, net | 6 | 0 | ||||||
Loss on sale of fixed assets, net | 17 | 0 | ||||||
Changes in assets and liabilities: | ||||||||
(Increase) decrease in other assets | (3,025 | ) | 79 | |||||
Decrease in other liabilities | (2,764 | ) | (1,791 | ) | ||||
Total adjustment | 5,554 | 597 | ||||||
Net cash provided by operating activities | 5,864 | 7,753 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Proceeds from maturities and prepayments of investment securities available-for-sale | 18,527 | 14,293 | ||||||
Proceeds from sales of investment securities available-for-sale | 3,204 | 17 | ||||||
Net redemption of Federal Home Loan Bank stock | 983 | 768 | ||||||
Purchase of premises and equipment, net | (271 | ) | (451 | ) | ||||
Purchase of investment securities available-for-sale | (38,994 | ) | (29,338 | ) | ||||
Purchase of Federal Home Loan Bank stock | (450 | ) | (520 | ) | ||||
Net decrease in federal funds sold | 25 | 0 | ||||||
Net increase in loans | (16,339 | ) | (8,408 | ) | ||||
Net cash used in investing activities | (33,315 | ) | (23,639 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Net increase in customer deposits | 35,395 | 25,100 | ||||||
Dividends paid | (4,146 | ) | (3,910 | ) | ||||
Decrease in borrowings | (10,108 | ) | (7,902 | ) | ||||
Purchase of treasury stock | (4,000 | ) | (1,676 | ) | ||||
Net cash provided by financing activities | 17,141 | 11,612 | ||||||
NET DECREASE IN CASH AND CASH EQUIVALENTS | (10,310 | ) | (4,274 | ) | ||||
CASH AND CASH EQUIVALENTS, beginning of period | 28,459 | 21,553 | ||||||
CASH AND CASH EQUIVALENTS, end of period | $ | 18,149 | $ | 17,279 | ||||
SUPPLEMENTAL DISCLOSURES: | ||||||||
Cash paid for: | ||||||||
Interest | $ | 8,928 | $ | 7,134 | ||||
Income Taxes | 3,907 | 4,189 | ||||||
NON-CASH TRANSACTIONS: | ||||||||
Other real estate acquired in settlement of loans | $ | 8,120 | $ | 678 | ||||
The accompanying notes are an integral part of these Consolidated Statements.
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UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. GENERAL
The accompanying unaudited condensed consolidated financial statements include the accounts of United Security Bancshares, Inc. and its subsidiaries (the “Company”). All significant intercompany transactions and accounts have been eliminated.
The interim financial statements are unaudited but, in the opinion of management, reflect all adjustments necessary for a fair presentation of financial position and results of operations for such periods presented. Such adjustments, except for the $7.7 million adjustment for loss resulting from the loan irregularities at ALC, are of a normal, recurring nature. See “INVESTIGATION OF IRREGULARITIES AT ACCEPTANCE LOAN COMPANY, INC.” for a discussion of significant losses recorded at ALC during the quarter ended June 30, 2007, in Item 2 below. The results of operations for any interim period are not necessarily indicative of results expected for the fiscal year ending December 31, 2007. While certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission, management believes that the disclosures herein are adequate to make the information presented not misleading. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006. The accounting policies followed by the Company are set forth in Note 2, Summary of Significant Accounting Policies, in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006.
2. EARNINGS (LOSSES) PER SHARE
Basic earnings (losses) per share are computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the three and six-month periods ended June 30, 2007, and 2006. Common stock outstanding consists of issued shares less treasury stock. Diluted earnings (losses) per share for the three and six-month periods ended June 30, 2007, and 2006, are computed based on the weighted average shares outstanding during the period plus the dilutive effect of outstanding stock options. There are no outstanding options as of June 30, 2007, and 2006.
The following table represents the earnings (losses) per share calculations for the three and six-month periods ended June 30, 2007, and 2006, (dollars in thousands):
| Net Income (Loss) | Weighted Average Shares | Net Income (Loss) Per Share | ||||||||
For the Three Months Ended: | ||||||||||
June 30, 2007 | $ | (2,731 | ) | 6,176,402 | $ | (0.44 | ) | |||
June 30, 2006 | $ | 3,476 | 6,384,703 | $ | 0.54 | |||||
For the Six Months Ended: | ||||||||||
June 30, 2007 | $ | 310 | 6,207,125 | $ | 0.05 | |||||
June 30, 2006 | $ | 7,156 | 6,404,628 | $ | 1.12 | |||||
3. COMPREHENSIVE INCOME (LOSS)
Total comprehensive income (loss) consists of net income (loss), the change in the unrealized gains or losses on the Company’s available-for-sale securities portfolio arising during the period, and the change in the effective portion of cash-flow hedges marked to market. In the calculation of comprehensive income (loss), certain reclassification adjustments are made to avoid double counting items that are displayed as part of net income (loss) for a period that also had been displayed as part of other comprehensive income (loss) in that period or earlier periods.
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4. RECENT ACCOUNTING PRONOUNCEMENTS
In September 2006, the FASB issued Statement No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 addresses how companies should measure fair value when they are required to use a fair value measure for recognition or disclosure purposes under U.S. GAAP. SFAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS 157 is effective prospectively for fiscal years beginning after November 15, 2007. The Company will adopt SFAS 157 on January 1, 2008, and is assessing the impact of the adoption of this Statement.
In February 2007, the FASB issued Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 would allow the Company an irrevocable election to measure certain financial assets and liabilities at fair value, with unrealized gains and losses on the elected items recognized in earnings at each reporting period. The fair value option may only be elected at the time of initial recognition of a financial asset or financial liability or upon the occurrence of certain specified events. The election is applied on an instrument-by-instrument basis, with a few exceptions, and is applied only to entire instruments and not to portions of instruments. SFAS 159 also provides expanded disclosure requirements regarding the effects of electing the fair value option on the financial statements. SFAS 159 is effective prospectively for fiscal years beginning after November 15, 2007. The Company is currently evaluating this Statement and has not yet determined the financial assets and liabilities, if any, for which the fair value option would be elected or the potential impact on the consolidated financial statements, if such election were made.
5. SEGMENT REPORTING
Under SFAS No. 131, “Disclosures 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 and First United Security Bank’s (the “Bank”) significant subsidiaries. The accounting policies for each segment are the same as those described in Note 2, Summary of Significant Accounting Policies, in the Company’s Annual Report on Form 10-K for the period ended December 31, 2006. 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:
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| First United Security Bank | Acceptance Loan Company | All Other | Eliminations | Consolidated | |||||||||||||||
| (In Thousands of Dollars) | |||||||||||||||||||
For the three months ended June 30, 2007: | |||||||||||||||||||
Net interest income | $ | 6,429 | $ | 3,912 | $ | 20 | $ | 0 | $ | 10,361 | |||||||||
Provision for loan losses | 146 | 9,717 | 0 | 0 | 9,863 | ||||||||||||||
Total non-interest income | 1,138 | 127 | (357 | ) | 444 | 1,352 | |||||||||||||
Total non-interest expense | 3,833 | 2,018 | 227 | (89 | ) | 5,989 | |||||||||||||
Income (loss) before income taxes | 3,588 | (7,696 | ) | (564 | ) | 533 | (4,139 | ) | |||||||||||
Provision for (benefit from) income taxes | 1,477 | (2,891 | ) | 6 | 0 | (1,408 | ) | ||||||||||||
Net income (loss) | $ | 2,111 | $ | (4,805 | ) | $ | (570 | ) | $ | 533 | $ | (2,731 | ) | ||||||
Other significant items: | |||||||||||||||||||
Total assets | $ | 657,061 | $ | 131,879 | $ | 99,293 | $ | (228,192 | ) | $ | 660,041 | ||||||||
Total investment securities | 135,453 | 0 | 431 | 0 | 135,884 | ||||||||||||||
Total loans, net | 445,059 | 123,249 | 0 | (127,535 | ) | 440,773 | |||||||||||||
Goodwill | 3,112 | 0 | 986 | 0 | 4,098 | ||||||||||||||
Investment in subsidiaries | 1,737 | 63 | 84,758 | (86,480 | ) | 78 | |||||||||||||
Fixed asset addition | 49 | 45 | 0 | 0 | 94 | ||||||||||||||
Depreciation and amortization expense | 186 | 40 | 3 | 0 | 229 | ||||||||||||||
Total interest income from external customers | 9,170 | 6,033 | 6 | 0 | 15,209 | ||||||||||||||
Total interest income from affiliates | 2,122 | 0 | 14 | (2,136 | ) | 0 | |||||||||||||
For the six months ended June 30, 2007: | |||||||||||||||||||
Net interest income | $ | 12,682 | $ | 8,148 | $ | 35 | $ | 0 | $ | 20,865 | |||||||||
Provision for loan losses | 358 | 10,546 | 0 | 0 | 10,904 | ||||||||||||||
Total non-interest income | 2,248 | 238 | 2,899 | (2,792 | ) | 2,593 | |||||||||||||
Total non-interest expense | 8,000 | 3,918 | 421 | (182 | ) | 12,157 | |||||||||||||
Income (loss) before income taxes | 6,572 | (6,078 | ) | 2,513 | (2,610 | ) | 397 | ||||||||||||
Provision for (benefit from) income taxes | 2,369 | (2,292 | ) | 10 | 0 | 87 | |||||||||||||
Net income (loss) | $ | 4,203 | $ | (3,786 | ) | $ | 2,503 | $ | (2,610 | ) | $ | 310 | |||||||
Other significant items: | |||||||||||||||||||
Fixed asset addition | $ | 139 | $ | 132 | $ | 0 | $ | 0 | $ | 271 | |||||||||
Depreciation and amortization expense | 371 | 77 | 5 | 0 | 453 | ||||||||||||||
Total interest income from external customers | 17,965 | 12,366 | 12 | 0 | 30,343 | ||||||||||||||
Total interest income from affiliates | 4,218 | 0 | 23 | (4,241 | ) | 0 | |||||||||||||
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| First United Security Bank | Acceptance Loan Company | All Other | Eliminations | Consolidated | ||||||||||||
| (In Thousands of Dollars) | ||||||||||||||||
For the three months ended June 30, 2006: | ||||||||||||||||
Net interest income | $ | 6,620 | $ | 4,081 | $ | 19 | $ | 0 | $ | 10,720 | ||||||
Provision for loan losses | 329 | 646 | 0 | 0 | 975 | |||||||||||
Total non-interest income | 1,172 | 112 | 3,788 | (3,688 | ) | 1,384 | ||||||||||
Total non-interest expense | 3,914 | 1,901 | 225 | (103 | ) | 5,937 | ||||||||||
Income before income taxes | 3,549 | 1,646 | 3,582 | (3,585 | ) | 5,192 | ||||||||||
Provision for income taxes | 1,084 | 627 | 5 | 0 | 1,716 | |||||||||||
Net income | $ | 2,465 | $ | 1,019 | $ | 3,577 | $ | (3,585 | ) | $ | 3,476 | |||||
Other significant items: | ||||||||||||||||
Total assets | $ | 626,209 | $ | 137,255 | $ | 101,255 | $ | (228,098 | ) | $ | 636,621 | |||||
Total investment securities | 123,278 | 0 | 640 | 0 | 123,918 | |||||||||||
Total loans, net | 434,524 | 132,945 | 0 | (129,324 | ) | 438,145 | ||||||||||
Goodwill | 3,112 | 0 | 986 | 0 | 4,098 | |||||||||||
Investment in subsidiaries | 1,947 | 63 | 86,592 | (88,524 | ) | 78 | ||||||||||
Fixed asset addition | 249 | 68 | 3 | 0 | 320 | |||||||||||
Depreciation and amortization expense | 164 | 62 | 0 | 0 | 226 | |||||||||||
Total interest income from external customers | 8,367 | 6,214 | 8 | 0 | 14,589 | |||||||||||
Total interest income from affiliates | 2,132 | 0 | 11 | (2,143 | ) | 0 | ||||||||||
For the six months ended June 30, 2006: | ||||||||||||||||
Net interest income | $ | 13,342 | $ | 8,080 | $ | 33 | $ | 0 | $ | 21,455 | ||||||
Provision for loan losses | 460 | 1,330 | 0 | 0 | 1,790 | |||||||||||
Total non-interest income | 2,305 | 251 | 7,672 | (7,560 | ) | 2,668 | ||||||||||
Total non-interest expense | 7,811 | 3,681 | 406 | (215 | ) | 11,683 | ||||||||||
Income before income taxes | 7,376 | 3,320 | 7,299 | (7,345 | ) | 10,650 | ||||||||||
Provision for income taxes | 2,229 | 1,257 | 8 | 0 | 3,494 | |||||||||||
Net income | $ | 5,147 | $ | 2,063 | $ | 7,291 | $ | (7,345 | ) | $ | 7,156 | |||||
Other significant items: | ||||||||||||||||
Fixed asset addition | $ | 330 | $ | 121 | $ | 0 | $ | 0 | $ | 451 | ||||||
Depreciation and amortization expense | 383 | 96 | 5 | 0 | 484 | |||||||||||
Total interest income from external customers | 16,432 | 12,306 | 15 | 0 | 28,753 | |||||||||||
Total interest income from affiliates | 4,226 | 0 | 18 | (4,244 | ) | 0 | ||||||||||
6. 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 extend credit and standby letters of credit.
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
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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.
Two cash-flow hedges with a notional amount of $18.0 million were terminated on March 31, 2005, that resulted in a $592,000 gain, which is reported in other comprehensive income. This gain will be reclassified from other comprehensive income to income over the original remaining term of the swaps. During the second quarter of 2007 and 2006, $53,755 was reclassified into income. The remaining balance not reclassified to income was $108,208 at June 30, 2007.
Two interest rate swaps with a total notional value of $10.0 million were used to convert fixed-rate brokered certificates of deposit to floating rate. On January 1, 2006, the Company began accounting for these interest rate swaps under hedge accounting. This required the Company to increase the carrying value of the two certificates of deposit by $39,900 during the first quarter of 2007 and $14,295 in the second quarter of 2007. Net cash flows from these swaps increased interest expense on certificates of deposit by $67,720 for year-to-date ended June 30, 2007, and $40,251 for year-to-date ended June 30, 2006.
7. GUARANTEES, 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, after consultation with legal counsel, the ultimate disposition of these matters is not expected to have a material adverse effect on the consolidated financial position or results of operations of the Company.
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 swap transactions, 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 derivative instruments through credit approvals, limits, and monitoring procedures. Certain derivative contracts have credit risk for the carrying value plus the amount to replace such contracts in the event of counter party default. All of the Bank’s financial instruments are held for risk management and not for trading purposes. During the period ending June 30, 2007, there were no credit losses associated with derivative contracts.
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 (in thousands).
| June 30, 2007 | December 31, 2006 | |||||
Standby Letters of Credit | $ | 1,028 | $ | 1,869 | ||
Commitments to Extend Credit | $ | 44,747 | $ | 54,777 | ||
Standby letters of credit are contingent commitments issued by the Company generally to guarantee the performance of a customer to a third party. The Company has recourse against the customer for any amount it is required to pay to a third party under a standby letter of credit. Revenues are recognized over the lives of the standby letters of credit. The potential amount of future payments the Company could be required to make under its standby letters of credit at June 30, 2007, is $1,028,000 and represents the Company’s total credit risk.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the counter party. Collateral held varies but may include accounts receivable, inventory, property, plant, equipment, and income-producing commercial properties.
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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. At June 30, 2007, there were no outstanding commitments to purchase and sell securities for delayed delivery.
| ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following discussion and financial information are presented to aid in an understanding of the current financial position and results of operations of the Company. The Company is the parent holding company of the Bank. The Bank operates a finance company, Acceptance Loan Company, Inc. (“ALC”). The Company has no operations of any consequence other than the ownership of its subsidiaries.
The accounting principles and reporting policies of the Company, and the methods of applying these principles, conform with accounting principles generally accepted in the United States (“GAAP”) and with general practices within the financial services industry. Critical accounting policies relate to securities, loans, allowance for loan losses, derivatives and hedging. A description of these policies, which significantly affect the determination of financial position, results of operations and cash flows, is set forth in Note 2, Summary of Significant Accounting Policies, in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006.
The emphasis of this discussion is a comparison of assets, liabilities, and shareholder’s equity as of June 30, 2007, to year-end 2006 while comparing income and expense for the three and six-month periods ended June 30, 2007, and 2006.
All yields and ratios presented and discussed herein are based on the accrual basis and not on the tax-equivalent basis, unless otherwise indicated.
This information should be read in conjunction with the Company’s unaudited consolidated financial statements and related notes appearing elsewhere in this report and Management’s Discussion and Analysis of Financial Condition and Results of Operations appearing in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006.
COMPARING THE THREE AND SIX MONTHS ENDED JUNE 30, 2007, TO THE THREE AND SIX MONTHS ENDED JUNE 30, 2006
Net income decreased from $3.4 million for the second quarter of 2006 to a loss of $2.7 million for the second quarter of 2007. For the six months, net income declined from $7.2 million to $310,000 for the same period in 2007, resulting in a decrease of basic net income per share to $0.05. Annualized return on assets was 0.10% for the first six months of 2007 compared to 2.29% for the same period during 2006. Average return on shareholders’ equity decreased to 0.70% for the first six months of 2007, from 16.35% during the first six months of 2006. Net income for the three and six-months ended June 30, 2007, was severely impacted by the losses that resulted from the loan irregularities at ALC. See “INVESTIGATION OF IRREGULARITIES AT ACCEPTANCE LOAN COMPANY, INC.” below for a discussion of significant losses recorded at ALC during the quarter ended June 30, 2007.
Interest income for the second quarter increased $620,000, or 4.2%, compared to the second quarter of 2006. The increase in interest income was primarily due to an increase in interest earned on loans and investment securities. This increase is due to an overall increase in the average yield and an increase in the volume of loans outstanding. For the 2007 six-month period, interest income increased $1.6 million, or 5.5%, over the same period last year. This increase in interest income was primarily due to an increase in interest earned on loans and investment securities. The increase in loan income is due to both increases in volume and increases in yields.
Interest expense for the second quarter increased $979,000, or 25.3%, compared to the second quarter of 2006. Interest expense increased $2.2 million, or 29.9%, to $9.5 million for the first six months of 2007, compared to $7.3 million for the first six months of 2006. This increase was the result of increased rates and volume of interest bearing deposits, primarily certificates of deposit. Funding rates have increased more than asset yields since the Federal Reserve last raised rates in June of 2006.
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Net interest income decreased $359,000, or 3.3%, for the second quarter of 2007, and decreased $590,000, or 2.7%, for the first six months of 2007, compared to the same periods in 2006, respectively, as a result of the increase in interest paid on deposits and borrowings being larger than the yield on loans and securities.
The provision for loan losses was $9.9 million, or 8.6%, annualized of average loans in the second quarter of 2007, compared to $975,000, or 0.9%, annualized of average loans in the second quarter of 2006. The provision for loan losses increased to $10.9 million year-to-date 2007 compared to $1.8 million in 2006. Charge-offs exceeded recoveries by $8.2 million for the six-month period, an increase of approximately $6.5 million over the same period in the prior year. Most of this increase is attributable to losses identified in the investigation of loan irregularities at ALC.
Total non-interest income (excluding security gains and losses) decreased $34,000, or 2.4%, for the second quarter of 2007, and $69,000, or 2.6%, for the first six months of 2007. Service charges and fees on deposit accounts increased $11,000 quarter-to-date and $40,000 year-to-date 2007 compared to the same periods in 2006. Income on bank-owned life insurance increased $10,000 quarter-to-date and $19,000 year-to-date 2007 compared to the same periods in 2006. Commissions on credit insurance declined $29,000 quarter-to-date and $37,000 year-to-date. Letters of credit and commitment fees declined $10,000 quarter-to-date and $33,000 year-to-date. All other fees and charges increased $15,000 quarter-to-date and declined $27,000 year-to-date when compared to the same periods in 2006.
Total non-interest expense increased $52,000, or 0.9%, quarter-to-date and $474,000, or 4.1%, year-to-date 2007 when compared to the same periods in 2006. Salary and employee benefits decreased $129,000 when comparing second quarter 2006 to 2007 and $106,000 year-to-date 2007 compared to the same period in 2006. These decreases are due to reduced incentive accruals, resulting from reduced earnings as a result of losses sustained due to the loan irregularities at ALC. For the three months ending June 30, 2007, advertising expense increased $11,000, legal and professional fees increased $148,000, telephone and data circuit expense decreased $2,000, and impairment losses on limited partnerships decreased $52,000 when compared to the same quarter in 2006. On a year-to-date basis, advertising expense increased $22,000, legal and professional fees increased $270,000, telephone and data circuit expense increased $54,000, and impairment losses on limited partnerships decreased $118,000 when compared to the same period in 2006.
Income tax expense for the second quarter of 2007 decreased $3.1 million over the second quarter of 2006. Income tax expense for the first six months of 2007 decreased $3.4 million over the first six months of 2006. The decrease during the first six months of 2007 compared to 2006 resulted from lower levels of taxable income, as a result of loan losses caused by the loan irregularities at ALC. Management estimates the effective tax rate for the Company to be approximately 28.0% of pre-tax income for the period ending December 31, 2007.
COMPARING THE JUNE 30, 2007, STATEMENT OF FINANCIAL CONDITION TO DECEMBER 31, 2006
In comparing financial condition at December 31, 2006, to June 30, 2007, total assets increased $13.7 million to $660.0 million, while liabilities increased $22.4 million to $577.1 million. Shareholders’ equity decreased $8.6 million as a result of dividends in excess of earnings of $3.8 million, an increase in other comprehensive loss of $802,000, and an increase in treasury stock of $4.0 million during the first six months of 2007.
Investment securities increased $16.1 million, or 13.5%, during the first six months of 2007. Investments provide United Security with a stable form of liquidity while maximizing earnings yield. Loans, net of unearned income, increased $1.9 million, from $449.2 million at December 31, 2006, to $451.2 million at June 30, 2007, as a result of continued construction and real estate development in the trade areas served by the Company. Deposits increased $35.4 million, or 7.9%, during the first six months of 2007.
CREDIT QUALITY
At June 30, 2007, the allowance for loan losses was $10.4 million, or 2.3%, of loans net of unearned income, compared to $7.8 million, or 1.7%, of loans net of unearned income at June 30, 2006, and $7.7 million, or 1.7%, of loans net of unearned income at December 31, 2006. The coverage ratio of the allowance for loan losses to non-performing assets decreased to 52.6% at June 30, 2007, compared to 71.8% at December 31, 2006, due to an increase in accruing loans past due 90 days or more and other real estate owned, offset by a decrease in non-accrual loans.
Activity in the allowance for loan losses is summarized as follows (amounts in thousands):
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| Six Months Ended June 30, | ||||||||
| 2007 | 2006 | |||||||
Balance at Beginning of Period | $ | 7,664 | $ | 7,694 | ||||
Charge-Offs | (8,740 | ) | (2,218 | ) | ||||
Recoveries | 551 | 513 | ||||||
Net Loans Charged-Off | (8,189 | ) | (1,705 | ) | ||||
Additions Charged to Operations | 10,904 | 1,790 | ||||||
Balance at End of Period | $ | 10,379 | $ | 7,779 | ||||
Net charge-offs for the six months ended June 30, 2007, were $8.2 million, or 3.6%, of average loans, on an annualized basis, an increase of $6.5 million from the charge-offs of $1.7 million, or 0.8%, of average loans, on an annualized basis, reported a year earlier. The provision for loan losses for the first six months of 2007 was $10.9 million compared to $1.8 million in the first six months of 2006. The large increases in net charge-offs and the provision for loan losses are both attributable to losses identified in the investigation of loan irregularities at ALC. The excess of the provision for loan losses over net charge-offs represents loss identified in the investigation of irregularities at ALC, which had not been charged-off as of June 30, 2007.
The Company maintains the allowance for loan losses at a level deemed adequate by management to absorb possible losses from loans in the portfolio. In determining the adequacy of the allowance for loan losses, management considers numerous factors, including but not limited to management’s estimate of: (a) future economic conditions, (b) the financial condition and liquidity of certain loan customers, and (c) collateral values of property securing certain loans. Because these factors and others involve the use of management’s estimation and judgment, the allowance for loan losses is inherently subject to adjustment at future dates. Unfavorable changes in the factors used by management to determine the adequacy of the allowance, including increased loan delinquencies and subsequent charge-offs, or the availability of new information, could require additional provisions, in excess of normal provisions, to the allowance for loan losses in future periods.
Non-performing assets were as follows (amounts in thousands):
| June 30, 2007 | December 31, 2006 | June 30, 2006 | ||||||||||
Loans Accounted for on a Non-Accrual Basis | $ | 4,853 | $ | 7,318 | $ | 8,669 | ||||||
Accruing Loans Past Due 90 Days or More | 6,342 | 2,033 | 1,181 | |||||||||
Real Estate Acquired in Settlement of Loans | 8,520 | 1,318 | 1,023 | |||||||||
Total | $ | 19,715 | $ | 10,669 | $ | 10,873 | ||||||
Non-Performing Assets as a Percentage of Net Loans and Other Real Estate | 4.29 | % | 2.37 | % | 2.44 | % | ||||||
Loans accounted for on a non-accrual basis decreased $3.8 million since June 30, 2006, and $2.5 million since December 31, 2006. These decreases are due to non-accrual loans transferred to real estate acquired in settlement of loans. Transfers from non-accrual status and foreclosures caused real estate acquired in settlement of loans to increase $7.5 million as compared to June 30, 2006, and $7.2 million as compared to December 31, 2006. Other real estate acquired as of June 30, 2007, consists of one residential property and three commercial properties totaling $5.4 million at the Bank and twenty residential properties totaling $2.6 million at ALC. Accruing loans past due 90 days or more increased $5.2 million as of June 30, 2007, compared to June 30, 2006, and $4.3 million compared to December 31, 2006. The majority of this increase was attributable to two commercial real estate loans to one borrower totaling $3.5 million, which were being renewed at June 30, 2007, to add an additional guarantor plus additional collateral. The loans are now current.
Impaired loans totaled $4.9 million and $7.3 million as of June 30, 2007, and December 31, 2006, respectively. There was approximately $450,000 and $848,000 in the allowance for loan losses specifically allocated to these impaired loans at June 30, 2007, and December 31, 2006, respectively.
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INVESTIGATION OF IRREGULARITIES AT ACCEPTANCE LOAN COMPANY, INC.
As a result of internal procedures of the Company, evidence was discovered during the second quarter of 2007 suggesting irregularities in certain loan transactions within ALC, a subsidiary of the Company. The irregularities have been identified to be primarily limited to two out of the twenty-five ALC branches and were largely related to (a) the making of improper or fraudulent loans, (b) techniques used to conceal delinquent loans, and (c) the improper or fraudulent handling of repossessed automobiles. The Company, under the direction of the Audit Committee, is conducting an internal investigation relating to these irregularities with the assistance of outside legal counsel, as well as an outside forensic accounting firm.
As a result of the investigation, the results of operations for the three and six months ended June 30, 2007, include a charge-off of loans relating to the irregularities of $5.2 million in ALC’s loan portfolio. An additional provision for loan losses in the amount of $2.5 million has also been recorded relating to the irregularities, which provision related to loans that were identified in the investigation as having a remote likelihood of collection. These charges to earnings relating to the loan irregularities reduced the net income of the Company by $5.5 million, net of tax, or $0.89 per basic and diluted share for the current quarter and six month period. The Company believes that it will not need to make any additional loan loss provision related to these irregularities; however, no assurance can be given that any additional loss provision will not be required in the future. In addition to these losses, the Company has incurred a substantial amount of legal, accounting and associated expenses relating to the investigation of these irregularities, which expenses are reflected in the Company’s non-interest expense balance for the period ended June 30, 2007. The Company expects to incur additional legal and accounting expenses relating to the investigation in the third quarter of 2007.
It has been determined that the irregularities were limited to one district of the ALC branch system, and were primarily related to two of the branches within that district. The branch managers previously employed at these two branches, and the district manager who had been supervising the district in question, are no longer employed at ALC. Although there is the potential for insurance recovery and recoveries from civil actions, the amounts and timing of such recoveries cannot be estimated at this time. The Company plans to vigorously pursue available avenues of recovery for these losses, including insurance and civil claims.
LIQUIDITY AND CAPITAL RESOURCES
The Bank’s primary sources of funds are customer deposits, Federal Home Loan Bank advances, repayments of loan principal, and interest from loans and investments. While scheduled principal repayments on loans and mortgage-backed securities are a relatively predictable source of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions, and competition, making them less predictable. The Bank manages the pricing of its deposits to maintain a desired deposit balance. In addition, the Bank invests in short-term interest-earning assets, which provide liquidity to meet lending requirements.
The Bank currently has up to $120.1 million in borrowing capacity from the Federal Home Loan Bank and $25.0 million in established federal fund lines.
The Bank is required to maintain certain levels of regulatory capital. At June 30, 2007, and December 31, 2006, the Company and the Bank were in compliance with all regulatory capital requirements.
Management is not aware of any condition that currently exists that would have an adverse effect on the liquidity, capital resources, or operation of the Company. However, the Company is a defendant in certain claims and legal actions arising in the ordinary course of business. In the opinion of management, after consultation with legal counsel, the ultimate disposition of these matters is not expected to have a material adverse effect on the consolidated financial position or results of operations of the Company.
| ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
The primary functions of asset and liability management are to (1) assure adequate liquidity; (2) maintain an appropriate balance between interest-sensitive assets and interest-sensitive liabilities; (3) maximize the profit of the Bank; and (4) reduce risks to the Bank’s capital. Liquidity management involves the ability to meet day-to-day cash-flow requirements of the Bank’s customers, whether they are depositors wishing to withdraw funds or borrowers requiring funds to meet their credit needs. Without proper liquidity management, the Bank 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
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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 principal payments, maturities and sales relating to loans, and maturities and principal 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 $186.1 million at December 31, 2006, and $204.6 million at June 30, 2007.
Investment securities that are forecast to mature or reprice over the next twelve months total $19.3 million, or 14.2%, of the investment portfolio as of June 30, 2007. For comparison, principal payments on investment securities totaled $14.8 million at June 30, 2007.
Although the majority of the securities portfolio has legal final maturities longer than 10 years, the entire portfolio consists of securities that are readily marketable and easily convertible into cash. As of June 30, 2007, the bond portfolio had an expected average maturity of 3.7 years, and approximately 73.0% of the $136.0 million in bonds were expected to be repaid within 5 years. However, management does not rely solely upon the investment portfolio to generate cash flows to fund loans, capital expenditures, dividends, debt repayment, and other cash requirements. Instead, these activities are funded by cash flows from operating activities and increases in deposits and short-term borrowings.
The liability portion of the balance sheet provides liquidity through interest bearing and non-interest bearing deposit accounts. Federal funds purchased, Federal Home Loan Bank advances, securities sold under agreements to repurchase, and 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.
The Bank, at June 30, 2007, had long-term debt and short-term borrowings that, on average, represented 12.6% of total liabilities and equity, compared to 13.7% at year-end 2006.
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.
Measuring Interest Rate Sensitivity: Gap analysis is a technique used to measure interest rate sensitivity at a particular point in time. Assets and liabilities are placed in gap intervals based on their repricing dates. Assets and liabilities for which no specific repricing dates exist are placed in gap intervals based on management’s judgment concerning their most likely repricing behaviors. Interest rate derivatives used in interest rate sensitivity management also are 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 the Bank’s interest rate sensitivity. However, it cannot reveal the impact of factors such as administered rates, pricing strategies on consumer and business deposits, changes in balance sheet mix, or the effect of various options embedded in balance sheet instruments.
On a monthly basis, the Bank simulates how changes in short- and long-term interest rates will impact future profitability as reflected by changes in the Bank’s net interest margin.
Also on a monthly basis, the Bank calculates how changes in interest rates would impact the market value of its assets and liabilities, as well as changes in long-term profitability. The process is similar to assessing short-term risk but is measured over a five-year time period which allows for a more comprehensive assessment of longer-term repricing and cash-flow imbalances that may not be captured by short-term net interest margin simulation. The
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results of these calculations are representative of long-term interest rate risk, both in terms of changes in the present value of the Bank’s assets and liabilities, as well as long-term changes in core profitability.
As part of the ongoing monitoring of interest-sensitive assets and liabilities, the Bank enters into various interest rate contracts (“interest rate protection contracts”) to help manage the Bank’s interest sensitivity. These contracts generally have a fixed notional principal amount and include interest rate swaps where the Bank typically receives or pays a fixed-rate and a counter party pays or receives a floating-rate based on a specified index, and interest rate caps and floors purchased where the Bank 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 ultimately are reflected as adjustments to interest income or expense. Changes in the estimated market value of interest rate protection contracts are reflected in either the Bank’s income statement or balance sheet.
| ITEM 4. | CONTROLS AND PROCEDURES |
As of June 30, 2007, the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of its management, including its Chief Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based upon that evaluation, the Chief Executive Officer and Principal Financial Officer concluded that the Company’s disclosure controls and procedures are effective to ensure that the information required to be disclosed in the Company’s periodic filings with the Securities and Exchange Commission is recorded, processed, summarized, and reported within the time periods specified.
Except as described in this paragraph, there were no changes in the Company’s internal controls over financial reporting that occurred during the Company’s last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. Prior to the end of the quarter ended June 30, 2007, the Company’s Acceptance Loan Company subsidiary (“ALC”) implemented changes in its organizational management structure to increase the number of personnel supervising ALC’s operations. ALC created the new position of Chief Operating Officer, who will report to the Chief Executive Officer of ALC. The Chief Operating Officer will supervise three district managers, who will each oversee approximately one-third of the twenty-five ALC branch offices. Prior to these changes, the district managers reported directly to the ALC Chief Executive Officer, and the Chief Executive Officer had direct supervision of certain ALC branches.
The Company became aware of irregularities related to ALC during the quarter ending June 30, 2007. These irregularities have been reported and disclosed in Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations of the Company’s Form 10-Q for the period ending June 30, 2007. The Company, under the direction of the Company’s Audit Committee, has engaged the external accounting firm currently investigating the loan irregularities at ALC to perform an evaluation on the internal control environment of ALC. The Company anticipates making changes in ALC’s internal controls over financial reporting during the quarter ending September 30, 2007, in addition to those changes described in the preceding paragraph.
| ITEM 1. | LEGAL PROCEEDINGS |
The Company is a defendant in certain claims and legal actions arising in the normal course of business. In the opinion of management, after consultation with legal counsel, the ultimate disposition of these matters is not expected to have a material adverse effect on the consolidated financial position or results of operations of the Company.
| ITEM 1A. | RISK FACTORS |
In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors,” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006, which could materially affect the Company’s business, financial condition, or future results. The risks described in the Company’s Annual Report on Form 10-K are not the only risks facing the Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect the Company’s business, financial condition, and/or operating results.
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| ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
The following table sets forth purchases made by or on behalf of the Company or any “affiliated purchaser,” as defined in Rule 10b-18(a)(3) of the Exchange Act, of shares of the Company’s common stock.
Issuer Purchases of Equity Securities
Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Programs(1) | Maximum Number (or the Programs(1) | |||||||
April 1 – April 30 | 6,300 | (2) | $ | 29.92 | (2) | 0 | 403,150 | ||||
May 1 – May 31 | 14,354 | $ | 29.19 | 14,354 | 388,796 | ||||||
June 1 – June 30 | 0 | $ | 0.00 | 0 | 388,796 | ||||||
Total | 20,654 | $ | 29.42 | 14,354 | 388,796 | ||||||
| (1) | On January 19, 2006, the Board of Directors approved a share repurchase program. Under the repurchase program, the Company is authorized to repurchase up to 642,785 shares of common stock before December 31, 2007, the expiration date of the repurchase program. |
| (2) | 6,300 shares were purchased in open-market transactions by an independent trustee for the United Security Bancshares Inc. Employee Stock Ownership Plan (With 401(k) Provisions). |
| ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
The Company held its Annual Meeting of Shareholders on May 8, 2007. At the meeting, the shareholders of the Company were asked to vote on the election of 13 directors to serve until the next annual meeting of shareholders or until their successors are elected and qualified. The results of the shareholder voting on this matter are summarized as follows:
Proposal 1: The Election of Directors
Director | For | Withheld | ||
Dan R. Barlow | 4,908,200 | 37,286 | ||
Linda H. Breedlove | 4,900,674 | 44,812 | ||
Gerald P. Corgill | 4,936,054 | 9,432 | ||
Wayne C. Curtis | 4,908,200 | 37,286 | ||
John C. Gordon | 4,941,686 | 3,800 | ||
William G. Harrison | 4,920,434 | 25,052 | ||
Hardie B. Kimbrough | 4,854,296 | 91,190 | ||
Jack W. Meigs | 4,941,686 | 3,800 | ||
R. Terry Phillips | 4,940,486 | 5,000 | ||
James C. Stanley | 4,900,674 | 44,812 | ||
Ray Sheffield | 4,941,686 | 3,800 | ||
Howard M. Whitted | 4,941,286 | 4,200 | ||
Bruce N. Wilson | 4,634,066 | 311,420 |
| ITEM 6. | EXHIBITS |
The exhibits listed in the Index to Exhibits on page 21 are filed herewith and are incorporated herein by reference.
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Pursuant to the requirements 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. | ||||||
| DATE: August 14, 2007 | ||||||
| BY: | /s/ Robert Steen | |||||
| Robert Steen | ||||||
Its Assistant Vice President, Assistant Treasurer, Principal Financial Officer, and Principal Accounting Officer (Duly Authorized Officer and Principal Financial Officer) | ||||||
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INDEX TO EXHIBITS
| Exhibit No. | Description | |
| 3.1 | Certificate of Incorporation of United Security Bancshares, Inc. incorporated herein by reference to the Exhibits to Form 10-Q for the quarter ended September 30, 1999. | |
| 3.2(a) | Amended and Restated Bylaws of United Security Bancshares, Inc., incorporated herein by reference to the Exhibits to Form 10-Q for the quarter ended June 30, 2006. | |
| 3.2(b) | First Amendment to the Amended and Restated Bylaws of United Security Bancshares, Inc., incorporated herein by reference to the Exhibits to Form 10-Q for the quarter ended June 30, 2006. | |
| 31.1 | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended. | |
| 31.2 | Certification of Principal Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended. | |
| 32 | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
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