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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2010
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 0-14549
United Security Bancshares, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Delaware | 63-0843362 | |
(State or Other Jurisdiction of | (IRS Employer | |
Incorporation or Organization) | Identification No.) |
131 West Front Street | ||
Post Office Box 249 | ||
Thomasville, AL | 36784 | |
(Address of Principal Executive Offices) | (Zip Code) |
(334) 636-5424
(Registrant’s Telephone Number, Including Area Code)
N/A
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.)
Yes ¨ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):
Large accelerated filer ¨ | Accelerated filer x | Non-accelerated filer ¨ | Smaller reporting company ¨ | |||
(Do not check if a smaller reporting company) |
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 May 10, 2010 | |
Common Stock, $0.01 par value | 6,017,394 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. (the “Company” or “USBI”), 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. The words “estimate,” “project,” “intend,” “anticipate,” “expect,” “believe,” and similar expressions are indicative of forward-looking statements. Such forward-looking statements are necessarily estimates reflecting the Company’s 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 the Company’s Securities and Exchange Commission filings and other public announcements, including the factors described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009. With respect to the adequacy of the allowance for loan losses for the Company, these factors include, but are not limited to, the rate of growth (or lack thereof) in the economy, the relative strength and weakness in the consumer and commercial credit sectors and in the real estate markets and collateral values. Forward-looking statements speak only as of the date they are made, and the Company undertakes no obligation to revise forward-looking statements to reflect circumstances or events that occur after the dates on which the forward-looking statements are made, except as required by law.
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PART I. FINANCIAL INFORMATION
ITEM 1. | FINANCIAL STATEMENTS |
UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in Thousands, Except Per Share Data)
March 31, 2010 | December 31, 2009 | |||||||
(Unaudited) | ||||||||
ASSETS | ||||||||
Cash and Due from Banks | $ | 12,014 | $ | 12,323 | ||||
Interest-Bearing Deposits in Other Banks | 126 | 126 | ||||||
Total Cash and Cash Equivalents | 12,140 | 12,449 | ||||||
Federal Funds Sold | 14,850 | 4,545 | ||||||
Investment Securities Available-for-Sale, at fair market value | 164,963 | 194,754 | ||||||
Investment Securities Held-to-Maturity, at cost | 1,250 | 1,250 | ||||||
Federal Home Loan Bank Stock, at cost | 5,700 | 5,700 | ||||||
Loans, net of allowance for loan losses of $10,268 and $10,004, respectively | 403,337 | 402,504 | ||||||
Premises and Equipment, net | 16,905 | 17,253 | ||||||
Cash Surrender Value of Bank-Owned Life Insurance | 12,161 | 12,037 | ||||||
Accrued Interest Receivable | 4,937 | 5,095 | ||||||
Goodwill | 4,098 | 4,098 | ||||||
Investment in Limited Partnerships | 1,854 | 1,925 | ||||||
Other Real Estate Owned | 21,782 | 21,439 | ||||||
Other Assets | 9,797 | 8,705 | ||||||
Total Assets | $ | 673,774 | $ | 691,754 | ||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
Deposits | $ | 521,722 | $ | 513,053 | ||||
Accrued Interest Expense | 2,357 | 2,477 | ||||||
Short-Term Borrowings | 776 | 620 | ||||||
Long-Term Debt | 54,000 | 85,000 | ||||||
Other Liabilities | 10,932 | 9,140 | ||||||
Total Liabilities | 589,787 | 610,290 | ||||||
Commitments and Contingencies (Note 13) | ||||||||
Shareholders’ Equity: | ||||||||
Common Stock, par value $0.01 per share, 10,000,000 shares authorized; 7,317,560 shares issued; 6,017,489 and 6,017,582 shares outstanding, respectively |
| 73 |
|
| 73 |
| ||
Surplus | 9,233 | 9,233 | ||||||
Accumulated Other Comprehensive Income, net of tax | 4,344 | 4,316 | ||||||
Retained Earnings | 92,864 | 90,242 | ||||||
Less Treasury Stock: 1,300,071 and 1,299,978 shares at cost, respectively | (21,129 | ) | (21,127 | ) | ||||
Noncontrolling Interest | (1,398 | ) | (1,273 | ) | ||||
Total Shareholders’ Equity | 83,987 | 81,464 | ||||||
Total Liabilities and Shareholders’ Equity | $ | 673,774 | $ | 691,754 | ||||
The accompanying notes are an integral part of these Condensed Consolidated Statements.
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UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands, Except Per Share Data)
Three Months Ended March 31, | ||||||
2010 | 2009 | |||||
(Unaudited) | ||||||
INTEREST INCOME: | ||||||
Interest and Fees on Loans | $ | 9,305 | $ | 9,735 | ||
Interest on Investment Securities | 1,949 | 2,234 | ||||
Total Interest Income | 11,254 | 11,969 | ||||
INTEREST EXPENSE: | ||||||
Interest on Deposits | 1,983 | 2,654 | ||||
Interest on Borrowings | 940 | 916 | ||||
Total Interest Expense | 2,923 | 3,570 | ||||
NET INTEREST INCOME | 8,331 | 8,399 | ||||
PROVISION FOR LOAN LOSSES | 1,743 | 1,909 | ||||
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES | 6,588 | 6,490 | ||||
NON-INTEREST INCOME: | ||||||
Service and Other Charges on Deposit Accounts | 653 | 661 | ||||
Credit Life Insurance Income | 131 | 158 | ||||
Other Income | 4,590 | 418 | ||||
Total Non-Interest Income | 5,374 | 1,237 | ||||
NON-INTEREST EXPENSE: | ||||||
Salaries and Employee Benefits | 3,461 | 3,151 | ||||
Occupancy Expense | 449 | 454 | ||||
Furniture and Equipment Expense | 300 | 305 | ||||
Other Expense | 2,793 | 2,077 | ||||
Total Non-Interest Expense | 7,003 | 5,987 | ||||
INCOME BEFORE INCOME TAXES | 4,959 | 1,740 | ||||
PROVISION FOR INCOME TAXES | 1,799 | 471 | ||||
NET INCOME | $ | 3,160 | $ | 1,269 | ||
Less: Net Loss Attributable to Noncontrolling Interest | 125 | 0 | ||||
NET INCOME ATTRIBUTABLE TO USBI | $ | 3,285 | $ | 1,269 | ||
BASIC AND DILUTED NET INCOME PER SHARE | $ | 0.55 | $ | 0.21 | ||
DIVIDENDS PER SHARE | $ | 0.11 | $ | 0.27 | ||
The accompanying notes are an integral part of these Condensed Consolidated Statements.
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UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in Thousands)
Three Months Ended March 31, | |||||||
2010 | 2009 | ||||||
(Unaudited) | |||||||
Net income attributable to USBI | $ | 3,285 | $ | 1,269 | |||
Other comprehensive income: | |||||||
Change in unrealized holding gains on available-for-sale securities arising during period, net of tax of $110 and $482, respectively | 183 | 803 | |||||
Reclassification adjustment for net gains realized on available-for-sale securities realized in net income, net of tax of $92 | (155 | ) | 0 | ||||
Other comprehensive income | 28 | 803 | |||||
Comprehensive income attributable to USBI | $ | 3,313 | $ | 2,072 | |||
Net loss attributable to noncontrolling interest | (125 | ) | 0 | ||||
Total comprehensive income | $ | 3,188 | $ | 2,072 | |||
The accompanying notes are an integral part of these Condensed Consolidated Statements.
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UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
Three Months Ended March 31, | ||||||||
2010 | 2009 | |||||||
(Unaudited) | ||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net Income | $ | 3,160 | $ | 1,269 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation | 192 | 210 | ||||||
Amortization (accretion) of premiums and discounts, net | 148 | (39 | ) | |||||
Provision for loan losses | 1,743 | 1,909 | ||||||
(Gain) loss on sale of securities, net | (247 | ) | 0 | |||||
Loss on sale of fixed assets, net | 54 | 0 | ||||||
Net other operating activities | (2,461 | ) | (1,355 | ) | ||||
Net income attributable to noncontrolling interest | 125 | 0 | ||||||
Total adjustments | (446 | ) | 725 | |||||
Net cash provided by operating activities | 2,714 | 1,994 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Proceeds from maturities and prepayments of investment securities | 18,800 | 17,599 | ||||||
Proceeds from sales of securities | 12,172 | 0 | ||||||
Proceeds from sale of other real estate | 1,215 | 0 | ||||||
Purchase of premises and equipment, net | (24 | ) | (42 | ) | ||||
Purchase of Federal Home Loan Bank stock | 0 | (15 | ) | |||||
Purchase of investment securities available-for-sale | (1,036 | ) | (12,123 | ) | ||||
Net increase in federal funds sold | (10,305 | ) | (14,990 | ) | ||||
Net change in loan portfolio | (1,005 | ) | (62 | ) | ||||
Net cash used in investing activities | 19,817 | (9,633 | ) | |||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Net increase in customer deposits | 8,669 | 10,452 | ||||||
Dividends paid | (663 | ) | (1,629 | ) | ||||
Decrease in borrowings | (30,844 | ) | (1,185 | ) | ||||
Purchase of treasury stock | (2 | ) | (4 | ) | ||||
Net cash provided by financing activities | (22,840 | ) | 7,634 | |||||
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | (309 | ) | (5 | ) | ||||
CASH AND CASH EQUIVALENTS, beginning of period | 12,449 | 13,372 | ||||||
CASH AND CASH EQUIVALENTS, end of period | $ | 12,140 | $ | 13,367 | ||||
SUPPLEMENTAL DISCLOSURES: | ||||||||
Cash paid for: | ||||||||
Interest | $ | 3,043 | $ | 3,795 | ||||
Income Taxes | 66 | 65 | ||||||
NON-CASH TRANSACTIONS: | ||||||||
Other real estate acquired in settlement of loans | $ | 1,571 | $ | 2,766 |
The accompanying notes are an integral part of these Condensed Consolidated Statements.
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UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. | GENERAL |
The accompanying unaudited interim condensed consolidated financial statements include the accounts of United Security Bancshares, Inc. and its subsidiaries (the “Company” or “USBI”). All significant intercompany transactions and accounts have been eliminated.
The interim condensed consolidated financial statements are unaudited but, in the opinion of management, reflect all adjustments necessary for a fair presentation of financial position, results of operations and cash flows for the periods presented. Such adjustments are of a normal, recurring nature. The results of operations for any interim period are not necessarily indicative of results expected for the fiscal year ending December 31, 2010. 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 (the “SEC”), management believes that the disclosures herein are adequate to make the information presented not misleading. These condensed consolidated 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, 2009. The accounting policies followed by the Company are set forth in Note 2, “Summary of Significant Accounting Policies,” of the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009. In preparing the condensed consolidated financial statements, management evaluated subsequent events through the date on which the financial statements were issued.
2. | RECENT ACCOUNTING PRONOUNCEMENTS |
The Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) Topic 860 Transfers and Servicingamended previous guidance on accounting for transfers of financial assets. The amended guidance eliminates the concept of qualifying special-purpose entities and requires that these entities be evaluated for consolidation under applicable accounting guidance, and it also removes the exception that permitted sale accounting for certain mortgage securitizations when control over the transferred assets had not been surrendered. Based on this new standard, many types of transferred financial assets that previously would have been derecognized will now remain on the transferor’s financial statements. The guidance also requires enhanced disclosures about transfers of financial assets and the transferor’s continuing involvement with those assets and related risk exposure. The new standard became effective for the Company on January 1, 2010 and did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.
ASC Topic 810 Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entitieswas issued in June 2009 and amended guidance on accounting for variable interest entities (“VIEs”). This guidance replaces the quantitative-based risks and rewards calculation for determining which enterprise might have a controlling financial interest in a VIE. The new, more qualitative evaluation focuses on who has the power to direct the significant economic activities of the VIE and also has the obligation to absorb losses or rights to receive benefits from the VIE. It also requires an ongoing reassessment of whether an enterprise is the primary beneficiary of a VIE and calls for certain expanded disclosures about an enterprise’s involvement with variable interest entities. The new guidance became effective for the Company on January 1, 2010 and did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.
ASC Topic 820-10 Fair Value Measurements and Disclosures –In January 2010, the FASB issued an update (ASU No. 2010-06,Improving Disclosures about Fair Value Measurements) impactingASC 820-10, Fair Value Measurements and Disclosures. The amendments in this update require new disclosures about significant transfers in and out of Level 1 and Level 2 fair value measurements. The amendments also require a reporting entity to provide information about activity for purchases, sales, issuances and settlements in Level 3 fair value measurements and clarify disclosures about the level of disaggregation and disclosures about inputs and valuation techniques. This update became effective for the Company on January 1, 2010 and did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.
3. | NET INCOME PER SHARE |
Basic net income per share is computed by dividing net income attributable to USBI by the weighted average shares during the three-month periods ended March 31, 2010 and 2009. Diluted net income per share for the three-month
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periods ended March 31, 2010 and 2009 is computed based on the weighted average shares outstanding during the period plus the dilutive effect of all potentially dilutive instruments outstanding during the period. There were no outstanding potentially dilutive instruments during the periods ended March 31, 2010 or 2009, and, therefore, basic and diluted weighted average shares outstanding are the same.
The following table represents the basic and diluted net income per share calculations for the three-month periods ended March 31, 2010 and 2009 (dollars in thousands, except per share data):
Net Income Attributable to USBI | Weighted Average Shares Outstanding | Basic and Diluted Net Income Per Share | ||||||
For the Three Months Ended: | ||||||||
March 31, 2010 | $ | 3,285 | 6,017,495 | $ | 0.55 | |||
March 31, 2009 | $ | 1,269 | 6,018,000 | $ | 0.21 |
4. | COMPREHENSIVE INCOME |
Comprehensive income consists of net income, 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, certain reclassification adjustments are made to avoid double counting items that are displayed as part of net income for a period that also had been displayed as part of other comprehensive income in that period or earlier periods.
5. | FAIR VALUE OF FINANCIAL INSTRUMENTS |
On January 1, 2008, the Company adoptedASC Topic 820 Fair Value Measurements and Disclosures, which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. ASC Topic 820 applies to reported balances that are required or permitted to be measured at fair value under existing GAAP; accordingly, ASC Topic 820 does not require any new fair value measurements of reported balances.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In determining fair value, the Company uses various methods, including market, income and cost approaches. Based on these approaches, the Company often utilizes certain assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and/or the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated or generally unobservable inputs. The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Based on the observability of the inputs used in the valuation techniques, the Company is required to provide the following information according to the fair value hierarchy. The fair value hierarchy ranks the quality and reliability of the information used to determine fair values. Financial assets and liabilities carried at fair value will be classified and disclosed in one of the following three categories:
• | Level 1 — Valuations for assets and liabilities traded in active exchange markets, such as the New York Stock Exchange. Level 1 also includes equity securities in banks that are publicly traded. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities. |
• | Level 2 — Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from third party pricing services for identical or similar assets or liabilities. |
• | Level 3 — Valuations for assets and liabilities that are derived from other valuation methodologies, including option pricing models, discounted cash flow models and similar techniques, and not based on market exchange, dealer or broker traded transactions. Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities. |
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Assets Measured at Fair Value on a Recurring Basis
The following is a description of the valuation methodologies used for instruments measured at fair value on a recurring basis and recognized in the accompanying balance sheet, as well as the general classification of such instruments pursuant to the valuation hierarchy.
Available-for-Sale Securities
Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities would include highly liquid government bonds, mortgage products and exchange traded equities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. Level 2 securities include U.S. agency securities, mortgage-backed agency securities, obligations of states and political subdivisions and certain corporate, asset-backed and other securities. In certain cases, where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy. Currently, all of the Company’s available-for-sale securities are considered to be Level 2 securities, except for equity securities that are considered to be Level 1 securities in the amount of $200,635 and $183,409 at March 31, 2010 and December 31, 2009, respectively.
Assets Measured at Fair Value on a Nonrecurring Basis
The following is a description of the valuation methodologies used for instruments measured at fair value on a nonrecurring basis and recognized in the accompanying balance sheet, as well as the general classification of such instruments pursuant to the valuation hierarchy.
Impaired Loans
Loan impairment is reported when full payment under the loan terms is not expected. Impaired loans are carried at the present value of estimated future cash flows using the loan’s existing rate or the fair value of collateral if the loan is collateral dependent. A portion of the allowance for loan losses is allocated to impaired loans if the value of such loans is deemed to be less than the unpaid balance. If these allocations cause the allowance for loan losses to require increase, such increase is reported as a component of the provision for loan losses. Loan losses are charged against the allowance when management believes that the uncollectibility of a loan is confirmed. Loans, net of specific allowances, subject to this evaluation amounted to $12,228,101 and $12,882,218 as of March 31, 2010 and December 31, 2009, respectively. This valuation would be considered Level 3, consisting of appraisals of underlying collateral and discounted cash flow analysis.
Non-Financial Assets and Non-Financial Liabilities
Application of ASC Topic 820 to non-financial assets and non-financial liabilities became effective January 1, 2009. The Company has no non-financial assets or non-financial liabilities measured at fair value on a recurring basis. Certain non-financial assets and non-financial liabilities measured at fair value on a non-recurring basis include foreclosed assets (upon initial recognition or subsequent impairment), non-financial assets and non-financial liabilities measured at fair value in the second step of a goodwill impairment test and intangible assets and other non-financial long-lived assets measured at fair value for impairment assessment.
During 2010, certain foreclosed assets, upon initial recognition, were remeasured and reported at fair value through a charge-off to the allowance for loan losses based upon the fair value of the foreclosed asset. The fair value of a foreclosed asset, upon initial recognition, is estimated using Level 2 inputs based on observable market data or Level 3 inputs based on customized discounting criteria. Foreclosed assets measured at fair value upon initial recognition totaled $1,274,430 (utilizing Level 3 valuation inputs) during 2010. In connection with the measurement and initial recognition of the foregoing foreclosed assets, the Company recognized charge-offs of the allowance for possible loan losses totaling approximately $277,533. There were no foreclosed assets remeasured at fair value subsequent to initial recognition during 2010.
The following methods and assumptions were used by the Company in estimating the fair value of its financial instruments:
Cash, due from banks and federal funds sold:The carrying amount of cash, due from banks and federal funds sold approximates fair value.
Federal Home Loan Bank:The carrying amount of Federal Home Loan Bank (“FHLB”) stock approximates fair value.
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Securities:Fair values of securities are based on quoted market prices where available. If quoted market prices are not available, estimated fair values are based on market prices of comparable instruments.
Accrued interest:The carrying amount of accrued interest approximates fair value.
Loans, net:For variable-rate loans, 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 Company on comparable loans as to credit risk and term.
Derivative instruments:Fair values of the Company’s derivative instruments 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.
Demand and savings deposits:The fair values of demand deposits are equal to the carrying value of such deposits. Demand deposits include non-interest 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 Company 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 FHLB 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 March 31, 2010 and December 31, 2009.
Off-balance sheet instruments: The carrying amount of commitments to extend credit and standby letters of credit approximates fair value. The carrying amount of the off-balance sheet financial instruments is based on fees currently charged to enter into such agreements.
March 31, 2010 | December 31, 2009 | |||||||||||
Carrying Amount | Estimated Fair Value | Carrying Amount | Estimated Fair Value | |||||||||
(Dollars in Thousands) | ||||||||||||
Assets: | ||||||||||||
Cash and cash equivalents | $ | 12,140 | $ | 12,140 | $ | 12,449 | $ | 12,449 | ||||
Investment securities available-for-sale | 164,963 | 164,963 | 194,754 | 194,754 | ||||||||
Investment securities held-to-maturity | 1,250 | 1,250 | 1,250 | 1,248 | ||||||||
Federal funds sold | 14,850 | 14,850 | 4,545 | 4,545 | ||||||||
Federal Home Loan Bank stock | 5,700 | 5,700 | 5,700 | 5,700 | ||||||||
Accrued interest receivable | 4,937 | 4,937 | 5,095 | 5,095 | ||||||||
Loans, net of unearned | 403,337 | 407,398 | 402,504 | 408,152 | ||||||||
Liabilities: | ||||||||||||
Deposits | 521,722 | 524,019 | 513,053 | 515,559 | ||||||||
Short-term borrowings | 776 | 776 | 620 | 620 | ||||||||
Long-term debt | 54,000 | 56,088 | 85,000 | 87,475 | ||||||||
Accrued interest payable | 2,357 | 2,357 | 2,477 | 2,477 |
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6. | INVESTMENT SECURITIES |
Details of investment securities available-for-sale and held-to-maturity at March 31, 2010 and December 31, 2009 are as follows:
Available-for-Sale | |||||||||||||
March 31, 2010 | |||||||||||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | ||||||||||
(Dollars in Thousands) | |||||||||||||
Mortgage-backed securities | $ | 133,365 | $ | 6,125 | $ | (109 | ) | $ | 139,381 | ||||
Obligations of states, counties and political subdivisions | 20,445 | 839 | (1 | ) | 21,283 | ||||||||
U.S. agencies | 3,989 | 29 | 0 | 4,018 | |||||||||
Equity securities | 133 | 68 | 0 | 201 | |||||||||
U.S. treasury securities | 80 | 0 | 0 | 80 | |||||||||
Total | $ | 158,012 | $ | 7,061 | $ | (110 | ) | $ | 164,963 | ||||
Held-to-Maturity | ||||||||||||
March 31, 2010 | ||||||||||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | |||||||||
(Dollars in Thousands) | ||||||||||||
Obligations of states, counties and political subdivisions | $ | 1,250 | $ | 0 | $ | 0 | $ | 1,250 | ||||
Available-for-Sale | |||||||||||||
December 31, 2009 | |||||||||||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | ||||||||||
(Dollars in Thousands) | |||||||||||||
Mortgage-backed securities | $ | 159,739 | $ | 6,343 | $ | (167 | ) | $ | 165,915 | ||||
Obligations of states, counties and political subdivisions | 20,919 | 722 | (6 | ) | 21,635 | ||||||||
Obligations of U.S. government sponsored agencies | 6,978 | 0 | (37 | ) | 6,941 | ||||||||
Equity securities | 132 | 51 | 0 | 183 | |||||||||
U.S. treasury securities | 80 | 0 | 0 | 80 | |||||||||
�� | |||||||||||||
Total | $ | 187,848 | $ | 7,116 | $ | (210 | ) | $ | 194,754 | ||||
Held-to-Maturity | |||||||||||||
December 31, 2009 | |||||||||||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | ||||||||||
(Dollars in Thousands) | |||||||||||||
Obligations of states, counties and political subdivisions | $ | 1,250 | $ | 0 | $ | (2 | ) | $ | 1,248 | ||||
The scheduled maturities of investment securities available-for-sale and held-to-maturity at March 31, 2010 are presented in the following table:
Available-for-Sale | Held-to-Maturity | |||||||||||
Amortized Cost | Estimated Fair Value | Amortized Cost | Estimated Fair Value | |||||||||
(Dollars in Thousands) | ||||||||||||
Maturing within one year | $ | 675 | $ | 681 | $ | 40 | $ | 40 | ||||
Maturing after one to five years | 11,582 | 12,064 | 175 | 175 | ||||||||
Maturing after five to fifteen years | 94,936 | 99,975 | 605 | 605 | ||||||||
Maturing after fifteen years | 50,687 | 52,042 | 430 | 430 | ||||||||
Equity securities and Preferred Stock | 132 | 201 | 0 | 0 | ||||||||
Total | $ | 158,012 | $ | 164,963 | $ | 1,250 | $ | 1,250 | ||||
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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.
The following table reflects the Company’s investments’ gross unrealized losses and market value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at March 31, 2010 and December 31, 2009. Management evaluates securities for other-than-temporary impairment no less frequently than quarterly and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer and (3) whether the Company does not intend to sell these securities, and it is not more likely than not that the Company will be required to sell the securities before recovery of their amortized cost bases.
Available-for-Sale | ||||||||||||||
March 31, 2010 | ||||||||||||||
Less than 12 Months | 12 Months or More | |||||||||||||
Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | |||||||||||
(Dollars in Thousands) | ||||||||||||||
Obligations of states, counties and political subdivisions | $ | 0 | $ | 0 | $ | 283 | $ | (1 | ) | |||||
Mortgage-backed securities | 9,207 | (60 | ) | 671 | (49 | ) | ||||||||
Total | $ | 9,207 | $ | (60 | ) | $ | 954 | $ | (50 | ) | ||||
Held-to-Maturity | ||||||||||||
March 31, 2010 | ||||||||||||
Less than 12 Months | 12 Months or More | |||||||||||
Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | |||||||||
(Dollars in Thousands) | ||||||||||||
Obligations of states, counties and political subdivisions | $ | 125 | $ | 0 | $ | 0 | $ | 0 | ||||
Available-for-Sale | ||||||||||||||
December 31, 2009 | ||||||||||||||
Less than 12 Months | 12 Months or More | |||||||||||||
Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | |||||||||||
(Dollars in Thousands) | ||||||||||||||
Obligations of states, counties and political subdivisions | $ | 1,616 | $ | (3 | ) | $ | 282 | $ | (2 | ) | ||||
U.S. treasury securities and obligations of U.S. government sponsored agencies | 6,941 | (37 | ) | 0 | 0 | |||||||||
Mortgage-backed securities | 10,965 | (109 | ) | 861 | (59 | ) | ||||||||
Total | $ | 19,522 | $ | (149 | ) | $ | 1,143 | $ | (61 | ) | ||||
Held-to-Maturity | |||||||||||||
December 31, 2009 | |||||||||||||
Less than 12 Months | 12 Months or More | ||||||||||||
Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | ||||||||||
(Dollars in Thousands) | |||||||||||||
Obligations of states, counties and political subdivisions | $ | 303 | $ | (2 | ) | $ | 0 | $ | 0 | ||||
Management evaluates securities for other-than-temporary impairment no less frequently than quarterly and more frequently when economic or market concerns warrant such evaluation.
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Investment securities available-for-sale with a carrying amount of $91.0 million and $116.9 million at March 31, 2010 and December 31, 2009, respectively, were pledged to secure public deposits and for other purposes.
The following chart represents the gross gains and losses realized on securities:
Gross Gains | Gross Losses | Net Gains (Losses) | |||||||
Three Months Ended: | |||||||||
March 31, 2010 | $ | 247 | $ | 0 | $ | 247 | |||
March 31, 2009 | $ | 0 | $ | 0 | $ | 0 |
7. | INVESTMENTS IN LIMITED PARTNERSHIPS |
The Company has limited partnership investments in affordable housing projects for which it provides funding as a limited partner and receives tax credits related to its investments in the projects based on its partnership share. The Company has invested in limited partnerships of affordable housing projects, both as direct investments and investments in funds that invest solely in affordable housing projects. The Company has determined that these structures meet the definition of a variable interest entity underASC Topic 810 Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities. The Company consolidates one of the funds in which it is the sole limited partner and one of the affordable housing projects in which the fund invests. The resulting financial impact to the consolidation of the Company of these two entities was a net increase to total assets of approximately $3.1 million as of March 31, 2010. This included $7.4 million in premises and equipment less a loan totaling $5.0 million. This loan, payable by the partnership to the Company, was eliminated as a result of this consolidation. Unconsolidated investments in these partnerships are accounted for as allowed underASC Topic 325 Accounting for Tax Benefits Resulting from Investments in Affordable Housing Projects.
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 Company’s maximum exposure to future loss related to these limited partnerships is limited to the $1.9 million recorded investment. Management has no knowledge of intervening events since the date of the partnerships’ financial statements that would have had a material effect on the financial position or results of operations.
The Bank had no remaining cash commitments to these partnerships at March 31, 2010.
8. | SHORT-TERM BORROWINGS |
Short-term borrowings consist of federal funds purchased, thirty-day FHLB advances, treasury tax and loan deposits and securities sold under repurchase agreements. Federal funds purchased generally mature within one to four days. None were outstanding at March 31, 2010 or December 31, 2009. Treasury tax and loan deposits totaled $492,637 and $506,170 at March 31, 2010 and December 31, 2009, respectively. These deposits are withdrawable on demand.
Securities sold under repurchase agreements, which are secured borrowings, generally are reflected at the amount of cash received in connection with the transaction. The Company may be required to provide additional collateral based on the fair value of the underlying securities. The Company monitors the fair value of the underlying securities on a daily basis. Securities sold under repurchase agreements at March 31, 2010 and December 31, 2009 were $283,334 and $113,527, respectively.
At March 31, 2010, the Bank had $7.8 million in available federal fund lines from correspondent banks.
9. | LONG-TERM BORROWINGS |
The Company uses FHLB 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. At March 31, 2010 and December 31, 2009, investment securities and mortgage loans amounting to $62,783,767 and $89,327,110, respectively, were pledged to secure these borrowings.
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At March 31, 2010, the Bank had $147.8 million in available credit from the FHLB.
10. | INCOME TAXES |
The consolidated tax provision differed from the amount computed by applying the federal statutory income tax rate of 34.0%.
March 31, 2010 | March 31, 2009 | |||||||
Income tax expense at federal statutory rate | $ | 1,738 | $ | 591 | ||||
Increase (decrease) resulting from: | ||||||||
Tax-exempt interest | (99 | ) | (80 | ) | ||||
State income tax expense, net of federal income tax benefit | 202 | 32 | ||||||
Low income housing tax credits | (18 | ) | (41 | ) | ||||
Other | (24 | ) | (31 | ) | ||||
Total | $ | 1,799 | $ | 471 | ||||
11. | SEGMENT REPORTING |
UnderASC Topic 280 Segment Reporting, 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,” of the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the period ended December 31, 2009. 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:
First United Security Bank | Acceptance Loan Company | All Other | Eliminations | Consolidated | ||||||||||||
(Dollars In Thousands) | ||||||||||||||||
For the three months ended March 31, 2010: | ||||||||||||||||
Net interest income | $ | 5,386 | $ | 2,933 | $ | 12 | $ | 0 | $ | 8,331 | ||||||
Provision for loan losses | 1,007 | 736 | 0 | 0 | 1,743 | |||||||||||
Total non-interest income | 1,461 | 3,936 | 3,549 | (3,572 | ) | 5,374 | ||||||||||
Total non-interest expense | 4,682 | 2,109 | 366 | (154 | ) | 7,003 | ||||||||||
Income before income taxes | 1,158 | 4,024 | 3,195 | (3,418 | ) | 4,959 | ||||||||||
Provision for income taxes | 254 | 1,542 | 3 | 0 | 1,799 | |||||||||||
Net income | 904 | 2,482 | 3,192 | (3,418 | ) | 3,160 | ||||||||||
Less: Noncontrolling interest | 0 | 0 | 125 | 0 | 125 | |||||||||||
Net income attributable to USBI | $ | 904 | $ | 2,482 | $ | 3,317 | $ | (3,418 | ) | $ | 3,285 | |||||
Other significant items: | ||||||||||||||||
Total assets | $ | 665,257 | $ | 92,701 | $ | 98,790 | $ | (182,974 | ) | $ | 673,774 | |||||
Total investment securities | 165,942 | 0 | 271 | 0 | 166,213 | |||||||||||
Total loans, net | 405,569 | 82,029 | 0 | (84,261 | ) | 403,337 | ||||||||||
Goodwill | 3,112 | 0 | 986 | 0 | 4,098 | |||||||||||
Investment in subsidiaries | 14,053 | 63 | 84,695 | (98,735 | ) | 76 | ||||||||||
Fixed asset addition | 23 | 1 | 0 | 0 | 24 | |||||||||||
Depreciation and amortization expense | 153 | 39 | 0 | 0 | 192 | |||||||||||
Total interest income from external customers | 6,837 | 4,415 | 2 | 0 | 11,254 | |||||||||||
Total interest income from affiliates | 1,482 | 0 | 10 | (1,492 | ) | 0 |
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First United Security Bank | Acceptance Loan Company | All Other | Eliminations | Consolidated | ||||||||||||
(Dollars In Thousands) | ||||||||||||||||
For the three months ended March 31, 2009: | ||||||||||||||||
Net interest income | $ | 5,300 | $ | 3,084 | $ | 15 | $ | 0 | $ | 8,399 | ||||||
Provision for loan losses | 834 | 1,075 | 0 | 0 | 1,909 | |||||||||||
Total non-interest income | 1,061 | 161 | 1,521 | (1,506 | ) | 1,237 | ||||||||||
Total non-interest expense | 4,168 | 1,779 | 183 | (143 | ) | 5,987 | ||||||||||
Income before income taxes | 1,359 | 391 | 1,353 | (1,363 | ) | 1,740 | ||||||||||
Provision for income taxes | 322 | 145 | 4 | 0 | 471 | |||||||||||
Net income | $ | 1,037 | $ | 246 | $ | 1,349 | $ | (1,363 | ) | $ | 1,269 | |||||
Other significant items: | ||||||||||||||||
Total assets | $ | 679,912 | $ | 101,852 | $ | 93,723 | $ | (197,417 | ) | $ | 678,070 | |||||
Total investment securities | 179,800 | 0 | 261 | 0 | 180,061 | |||||||||||
Total loans, net | 412,431 | 91,047 | 0 | (105,843 | ) | 397,635 | ||||||||||
Goodwill | 3,112 | 0 | 986 | 0 | 4,098 | |||||||||||
Investment in subsidiaries | 9,696 | 63 | 79,544 | (89,226 | ) | 77 | ||||||||||
Fixed asset addition | 36 | 6 | 0 | 0 | 42 | |||||||||||
Depreciation and amortization expense | 171 | 39 | 0 | 0 | 210 | |||||||||||
Total interest income from external customers | 7,123 | 4,841 | 5 | 0 | 11,969 | |||||||||||
Total interest income from affiliates | 1,757 | 0 | 9 | (1,766 | ) | 0 |
12. | 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 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.
Interest rate swaps acquired for other than trading purposes are used to help reduce the risk of interest rate movements for specific categories of assets and liabilities. During the period ended March 31, 2010, no interest rate swaps were outstanding.
13. | GUARANTEES, COMMITMENTS AND CONTINGENCIES |
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 counterparty default. All of the Bank’s financial instruments are held for risk management and not for trading purposes. During the period ended March 31, 2010, there were no credit losses associated with derivative contracts.
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In the normal course of business, there are outstanding commitments and contingent liabilities, such as commitments to extend credit, letters of credit and others, that 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:
March 31, 2010 | December 31, 2009 | ||||
(Dollars in Thousands) | |||||
Standby Letters of Credit | $ | 1,522 | $ 1,527 | ||
Commitments to Extend Credit | $ | 36,128 | $61,096 |
Standby letters of credit are contingent commitments issued by the Bank generally to guarantee the performance of a customer to a third party. The Bank has recourse against the customer for any amount that 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 that the Bank could be required to make under its standby letters of credit at March 31, 2010 was $1.5 million, representing the Bank’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 Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank 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.
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 March 31, 2010, there were no outstanding commitments to purchase and sell securities for delayed delivery.
Litigation
On September 27, 2007, Malcomb Graves Automotive, LLC, Malcomb Graves and Tina Graves (collectively, “Graves”) filed a lawsuit in the Circuit Court of Shelby County, Alabama against the Company, the Bank, the Bank’s subsidiary, Acceptance Loan Company (“ALC”), and their respective directors and officers seeking an unspecified amount of compensatory and punitive damages. A former employee of ALC, Corey Mitchell, has been named as a co-defendant. The complaint alleges that the defendants committed fraud in allegedly misrepresenting to Graves the amounts that Graves owed on certain loans and failing to credit Graves properly for certain loans. The defendants deny the allegations and intend to vigorously defend themselves in this action. The trial court denied the defendants’ motion to compel arbitration, and the defendants elected to appeal the trial court’s ruling with the Alabama Supreme Court. During the appeal, Malcomb Graves filed for bankruptcy, staying the lawsuit in its entirety. Mr. Graves was recently discharged from bankruptcy, and the appeal was returned to the Alabama Supreme Court’s active docket. The parties have fully briefed their positions on the trial court’s arbitration ruling with the Alabama Supreme Court and await its decision. The defendants have not yet responded to the complaint, and no discovery has been exchanged between the parties. For these reasons, it is too early to assess the likelihood of a resolution of this matter or whether this matter will have a material adverse effect on the Company’s financial position, results of operations or cash flows.
On April 1, 2008, E. Mark Ezell, Mark Ezell Family, LLC, Nena M. Morris, Mark Ezell Investment & Property Management, LLC, Patricia W. Ezell, J.W. Ezell, Ranier W. Ezell and Bradley H. Ezell, all shareholders of the Company (collectively, the “Shareholder Plaintiffs”), filed a lawsuit in the Circuit Court of Choctaw County, Alabama against the Company, ALC, Robert Steen and Mauldin & Jenkins, LLC seeking an unspecified amount of compensatory and punitive damages. On October 31, 2008, the Shareholder Plaintiffs amended their complaint to add Terry Phillips, President and Chief Executive Officer of the Company, as a co-defendant. The complaint, as amended, seeks both direct and derivative relief and includes allegations that the defendants committed fraud and various other breaches relating to loans made by ALC, resulting in damage to both the Shareholder Plaintiffs individually and the Company. On January 16, 2009, the trial court granted in part a motion filed by the Company and ALC seeking to dismiss certain of the Shareholder Plaintiffs’ claims. Specifically, the court dismissed the Shareholder Plaintiffs’ derivative and fraud claims and ordered that the Shareholder Plaintiffs re-plead their
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remaining claims with sufficient factual particularity. The court also granted a motion filed by the Company and ALC seeking to have the lawsuit transferred from the Circuit Court of Choctaw County, Alabama to the Circuit Court of Clarke County, Alabama. On January 19, 2009, the lawsuit was transferred to the Circuit County of Clarke County, where it is currently pending. Upon transfer, all circuit court judges of Clarke County recused themselves based on an existing practice that they not hear cases involving a party who is also an attorney practicing within Alabama’s First Judicial Circuit (one of the Shareholder Plaintiffs is an attorney practicing within the First Judicial Circuit). On February 10, 2010, Alabama Supreme Court Chief Justice Sue Bell Cobb appointed Judge Braxton Kittrell to preside over the case. The Shareholder Plaintiffs have not yet amended their complaint to comply with the January 16, 2009 order, and, as such, the parties have not engaged in any discovery. For these reasons, it is too early to assess the likelihood of a resolution of this matter, the possibility of an unfavorable outcome or the potential exposure from any such outcome.
The Company and its subsidiaries also are parties to other litigation, and the Company intends to vigorously defend itself in all such litigation. In the opinion of the Company, based on review and consultation with legal counsel, the outcome of such other litigation should not have a material adverse effect on the Company’s consolidated financial statements, results of operations or cash flows.
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, changes in financial position and results of operations of the Company. The Company is the parent holding company of First United Security Bank (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,” of the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.
The emphasis of this discussion is a comparison of assets, liabilities and shareholders’ equity as of March 31, 2010 to year-end 2009, while comparing income and expenses for the three-month periods ended March 31, 2010 and 2009.
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, 2009.
COMPARING THE THREE MONTHS ENDED MARCH 31, 2010 TO THE THREE MONTHS ENDED MARCH 31, 2009
Net income attributable to USBI during the first quarter of 2010 increased $2.0 million, or 158.9%, as compared to the first quarter of 2009, resulting in an increase of basic net income per share from $0.21 to $0.55. The impact of the settlement from The Cincinnati Insurance Company of $4,150,000 increased net income attributable to USBI per share by $0.41. See Part II, Item 1, “Legal Proceedings,” for a description of the legal settlement. Annualized return on assets, adjusted for the insurance settlement, was 0.84% for the first three months of 2010, compared to 0.76% for the same period during 2009. Average return on shareholders’ equity, also adjusted for the non-recurring insurance settlement, increased to 6.90% for the first three months of 2010 from 6.51% during the first three months of 2009.
Interest income for the 2010 first quarter decreased $715,000, or 6.0%, compared to the first quarter of 2009. The decrease in interest income was primarily due to a decrease in interest earned on loans. This decrease is due to an overall decrease in the average yield on loans and investment securities, as market interest rates remained low.
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Interest expense for the 2010 first quarter decreased $647,000, or 18.1%, compared to the first quarter of 2009. This decrease was the result of lower interest rates paid on certificates of deposit and borrowed funds.
Net interest income decreased $68,000, or 0.8%, for the first quarter of 2010 as a result of a decrease in the yield on loans and investment securities. Asset yields have fallen faster than funding rates, as prime adjustable loans have priced downward much faster than certificates of deposit and borrowed funds.
The provision for loan losses was $1.7 million, or 1.7% annualized of average loans, in the first quarter of 2010, compared to $1.9 million, or 1.9% annualized of average loans, in the first quarter of 2009. Charge-offs exceeded recoveries by $1.5 million for the 2010 first quarter, a decrease of approximately $233,000 over the same period in the prior year.
Total non-interest income increased $4.1 million, or 334.4%, for the first quarter of 2010, primarily as a result of the $4,150,000 settlement from The Cincinnati Insurance Company. Service charges and fees on deposit accounts decreased $8,000. Income on bank-owned life insurance increased $12,000, while commissions on credit insurance decreased $27,000. Letters of credit and commitment fees increased $6,000, and all other fees and charges increased $4.3 million due to the insurance settlement.
Total non-interest expense increased $1.0 million, or 17.0%, in the first quarter of 2010. Salary and employee benefits increased $310,000, primarily as the result of normal merit raises, corresponding increases in payroll taxes and increased health insurance costs. Occupancy expense decreased $5,000; advertising expense decreased $11,000; stationery and supplies expense decreased $7,000; telephone and data circuit expense increased $2,500; legal and attorney fees increased $31,700; and FDIC insurance assessments increased $107,600.
Income tax expense for the first quarter of 2010 increased $1.3 million over the first quarter of 2009. The increase during the first three months of 2010 compared to 2009 resulted from higher levels of taxable income. The increased level of taxable income decreases the effect of permanent differences, such as tax-exempt interest and low income tax credits. Management estimates that the effective tax rate for the Company will be approximately 30.0% of pre-tax income for the remainder of the year. See Note 10 to Item 1, “Income Taxes.”
COMPARING THE MARCH 31, 2010 STATEMENT OF FINANCIAL CONDITION TO DECEMBER 31, 2009
In comparing financial condition at March 31, 2010 to December 31, 2009, total assets decreased $18.0 million to $673.8 million, while liabilities decreased $20.5 million to $589.8 million. Shareholders’ equity increased $2.5 million as a result of an increase in other comprehensive income of $28,000 and retained earnings of $2.6 million in excess of dividends paid of $663,000.
Investment securities decreased $29.8 million, or 15.2%, during the first three months of 2010. Investments provide the Company with a stable form of liquidity while maximizing earnings yield. Loans, net of unearned income, increased $1.1 million from $412.5 million at December 31, 2009 to $413.6 million at March 31, 2010. Demand for loans in all of our markets continues to be depressed, particularly for real estate-related loans. Deposits increased $8.7 million, or 1.7%, during the first three months of 2010.
CREDIT QUALITY
At March 31, 2010, the allowance for loan losses was $10.3 million, or 2.5% of loans net of unearned income, compared to $8.7 million, or 2.2% of loans net of unearned income, at March 31, 2009, and $10.0 million, or 2.4% of loans net of unearned income, at December 31, 2009. The coverage ratio of the allowance for loan losses to non-performing assets decreased to 21.5% at March 31, 2010, compared to 23.6% at December 31, 2009. At March 31, 2010, loans on non-accrual increased $3.1 million, accruing loans past due 90 days or more increased $2.0 million and real estate acquired in settlement of loans increased $343,000, each as compared to December 31, 2009.
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Activity in the allowance for loan losses is summarized as follows (dollars in thousands):
Three Months Ended March 31, | ||||||||
2010 | 2009 | |||||||
Balance at Beginning of Period | $ | 10,004 | $ | 8,532 | ||||
Charge-Offs | (1,745 | ) | (2,125 | ) | ||||
Recoveries | 266 | 413 | ||||||
Net Loans Charged-Off | (1,479 | ) | (1,712 | ) | ||||
Additions Charged to Operations | 1,743 | 1,909 | ||||||
Balance at End of Period | $ | 10,268 | $ | 8,729 | ||||
Net charge-offs for the quarter ended March 31, 2010 were $1.5 million, or 1.4% of average loans on an annualized basis, a decrease of 13.6%, or $233,000, from the charge-offs of $1.7 million, or 1.7% of average loans on an annualized basis, reported a year earlier. The provision for loan losses for the first three months of 2010 was $1.7 million, compared to $1.9 million in the first three months of 2009.
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. There can be no assurance that loan losses in future periods will not exceed the allowance for loan losses or that additions to the allowances will not be required.
Non-performing assets were as follows (dollars in thousands):
March 31, 2010 | December 31, 2009 | March 31, 2009 | ||||||||||
Loans Accounted for on a Non-Accrual Basis | $ | 17,343 | $ | 14,197 | $ | 9,570 | ||||||
Accruing Loans Past Due 90 Days or More | 8,724 | 6,693 | 7,666 | |||||||||
Real Estate Acquired in Settlement of Loans | 21,782 | 21,439 | 20,670 | |||||||||
Total | $ | 47,849 | $ | 42,329 | $ | 37,906 | ||||||
Non-Performing Assets as a Percentage of Net Loans and Other Real Estate | 10.99 | % | 9.75 | % | 8.88 | % |
Non-performing assets as a percentage of net loans and other real estate was 10.99% at March 31, 2010 and 9.75% at December 31, 2009. Loans on non-accrual status increased $3.1 million, accruing loans past due 90 days or more increased $2.0 million and real estate acquired in settlement of loans increased $343,000 from December 31, 2009. The substantial increase in non-accrual loans resulted from placing three commercial construction loans to a single borrower totaling $4.2 million on non-accrual status in the first quarter of 2010. The Company forecasts that adverse economic conditions and the severely depressed real estate market will continue to put downward pressure on real estate collateral values and will impact our ability to reduce non-performing assets. Other real estate acquired as of March 31, 2010 consists of eighteen residential properties totaling $2.7 million and twenty-one commercial properties totaling $11.9 million at the Bank and one hundred forty-four residential properties totaling $6.6 million and twenty commercial properties totaling $468,000 at ALC. Every effort is made to dispose of these properties in a timely manner, but these efforts continue to be hampered by poor economic conditions. Real estate values continue to decline, and the real estate market remains severely depressed in all of our market areas. Management reviews these non-performing assets and reports to the Board of Directors of the Bank monthly. Loans past due 90 days or more and still accruing are reviewed by management and are allowed to continue accruing only when management believes that underlying collateral values and the financial strength of the borrowers are sufficient to protect the Bank from loss. If at any time management determines that there may be a loss of interest or principal, these loans will be changed to non-accrual status and their asset values downgraded.
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Impaired loans totaled $34.5 million, $35.4 million and $20.2 million as of March 31, 2010, December 31, 2009 and March 31, 2009, respectively. There was approximately $2.5 million, $2.6 million and $1.8 million in the allowance for loan losses specifically allocated to these impaired loans at March 31, 2010, December 31, 2009 and March 31, 2009, respectively. Impaired loans totaling $20.0 million have no measurable impairment, and no allowance for loan losses is specifically allocated to these loans.
LIQUIDITY AND CAPITAL RESOURCES
The Bank’s primary sources of funds are customer deposits, FHLB 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 $147.8 million in borrowing capacity from the FHLB and $7.8 million in established federal funds lines.
The Bank is required to maintain certain levels of regulatory capital. At March 31, 2010 and December 31, 2009, 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. See Note 13 to Item 1, “Guarantees, Commitments and Contingencies,” for a discussion of such claims and legal actions.
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 that 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 two sources. These are 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 $190.4 million at December 31, 2009 and $174.0 million at March 31, 2010.
Investment securities forecasted to mature or reprice over the next twelve months totaled $9.4 million, or 5.6%, of the investment portfolio as of March 31, 2010. Principal payments on investment securities totaled $15.3 million, or 9.2%, of the investment portfolio at March 31, 2010.
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 March 31, 2010, the bond portfolio had an expected average maturity of 2.7 years, and approximately 76.1% of the $166.2 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, FHLB advances, securities sold under agreements to repurchase and short-term and long-term borrowings are additional sources of liquidity. Liquidity management involves the continual
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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 March 31, 2010, had long-term debt and short-term borrowings that, on average, represented 10.7% of total liabilities and equity, compared to 10.5% at year-end 2009.
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.
Simple Gap analysis is no longer considered to be as accurate a tool for measuring interest rate risk as pro forma income simulation because it does not make an allowance for how much an item reprices as interest rates change, only that it is possible that the item could reprice. Accordingly, the Bank does not rely on Gap analysis but instead measures changes in net interest income and net interest margin through income simulation over +/- 1%, 2% and 3% interest rate shocks. Our estimates have consistently shown that the Bank has very limited, if any, net interest margin and net interest income risk to rising interest rates.
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 emphasizes and 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 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.
ITEM 4. | CONTROLS AND PROCEDURES |
The Company maintains disclosure controls and procedures designed to provide reasonable assurance of achieving the objective that information in its reports filed with the SEC under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified and pursuant to the requirements of the SEC’s rules and forms. Disclosure controls and procedures (as defined in Rules 13a-15(e) under the Exchange Act) include controls and procedures designed to ensure that information required to be disclosed by the Company in the reports filed or submitted under the Exchange Act is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met.
As of March 31, 2010, 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 Chief
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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 Exchange Act). Based upon that evaluation, the Chief Executive Officer and Chief 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 SEC is recorded, processed, summarized and reported within the time periods specified.
There were no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the quarter ended March 31, 2010 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. | LEGAL PROCEEDINGS |
As reported by the Company on February 24, 2010, the Company, along with the Bank and ALC (collectively referred to as the “USB Companies”), entered into a settlement agreement to resolve all claims alleged against the defendants named in the lawsuit styledAcceptance Loan Company Inc., First United Security Bank and United Security Bancshares, Inc. v. The Cincinnati Insurance Company, et al., filed in the Circuit Court of Clarke County, Alabama on December 18, 2009, Case No. 16-CV-2009-900168.00. The USB Companies filed the lawsuit to seek recovery under a fidelity insurance policy and bond issued by The Cincinnati Insurance Company, which policy provides coverage for losses due to the dishonest or fraudulent conduct of employees of the USB Companies. ALC originally submitted a claim under the policy in connection with the loan irregularities discovered during the second quarter of 2007 resulting from the fraudulent conduct of certain ALC employees. Pursuant to the settlement agreement, The Cincinnati Insurance Company agreed to pay to the USB Companies the sum of $4,150,000. In exchange, the USB Companies agreed to dismiss, with prejudice, each of the defendants from the lawsuit and to release the defendants from all claims asserted or that may have been asserted against the defendants in the lawsuit. The parties agreed to be responsible for their own attorneys’ fees and costs arising from the lawsuit, with the costs of mediation in the proceeding to be shared equally by the USB Companies and The Cincinnati Insurance Company. The settlement agreement concluded the lawsuit. The USB Companies entered into the settlement agreement to avoid the expense and uncertainty of future litigation of the claims alleged in the lawsuit.
See Note 13 to Item 1, “Guarantees, Commitments and Contingencies,” for information regarding certain litigation matters relating to the Company and its subsidiaries.
The Company and its subsidiaries also are parties to litigation other than as described in Note 13 to Item 1, and the Company intends to vigorously defend itself in all such litigation. In the opinion of the Company, based on review and consultation with legal counsel, the outcome of such litigation should not have a material adverse effect on the Company’s consolidated financial statements or results of operations.
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 our Annual Report on Form 10-K for the year ended December 31, 2009 that could materially affect our business, financial condition or future results. The risks described in our 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 our 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 Shares Purchased as Part of Publicly Announced Programs(1) | Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Programs(1) | ||||||
January 1 – January 31 | 3,511 | (2) | $ | 15.92 | 0 | 242,303 | ||||
February 1 – February 28 | 0 | $ | 0.00 | 0 | 242,303 | |||||
March 1 – March 31 | 0 | $ | 0.00 | 0 | 242,303 | |||||
Total | 3,511 | $ | 15.92 | 0 | 242,303 |
(1) | On December 17, 2009, the Board of Directors extended the share repurchase program previously approved by the Board on January 19, 2006. Under the repurchase program, the Company is authorized to repurchase up to 642,785 shares of common stock before December 31, 2010, the expiration date of the extended repurchase program. |
(2) | 3,418 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), and 93 shares were purchased by a trust, which is part of the Company’s general assets, subject to the claims of its creditors, established in connection with the United Security Bancshares, Inc. Non-Employee Directors’ Deferred Compensation Plan. |
ITEM 6. | EXHIBITS |
The exhibits listed in the Index to Exhibits below are filed herewith and are incorporated herein by reference.
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: May 10, 2010
BY: | /s/ Robert Steen | |
Robert Steen | ||
Its Vice President, Treasurer and Assistant Secretary, Chief 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 | Amended and Restated Bylaws of United Security Bancshares, Inc., incorporated by reference to Exhibit 3(ii) to the Current Report on Form 8-K filed August 29, 2007. | |
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 Chief 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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