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 September 30, 2001
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 Iden-
incorporation or organization) tification No.)
131 West Front Street
Post Office Box 249
Thomasville, AL 36784
(Address of principal executive (Zip Code)
offices)
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 the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest
practicable date.
Class Outstanding at 9/30/01
Common Stock, $0.01 par value 3,376,990 shares
UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION
PAGE
ITEM 1. FINANCIAL STATEMENTS:
Condensed Consolidated Statements of Financial
Condition at September 30, 2001, and December 31,
2000 3
Condensed Consolidated Statements of Income
for the Three and Nine Months Ended September 30,
2001, and 2000 4
Condensed Consolidated Statements of Cash Flows
for the Nine Months Ended September 30, 2001, and
2000 5
Notes to Condensed Consolidated Financial
Statements 6
The Condensed Consolidated Financial Statements
Furnished Have Not Been Audited by Independent
Public Accountants, but Have Been Reviewed by
Our Independent Auditor, and Reflect, in the
Opinion of Management, all Adjustments Necessary
for a Fair Presentation of Financial Condition
and the Results of Operations for the Periods
Presented
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS 14
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K 16
Signature Page 17
UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in Thousands)
ASSETS
Sept. 30, Dec. 31,
2001 2000
(Unaudited)
Cash and Due from Banks $ 12,472 $ 11,593
Interest-Bearing Deposits in Banks 832 20,865
Federal Funds Sold 7,750 0
Trading Securities 0 3,713
Investment Securities Available for
Sale, at fair value 149,097 148,118
Loans, net of allowances for loan
losses of $6,540 and $6,529,
respectively 320,904 296,941
Premises and Equipment, net 9,467 9,201
Other Assets 17,034 18,734
Total Assets $517,556 $509,165
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $346,692 $338,156
Borrowings 97,785 97,238
Other Liabilities 7,347 6,143
Total Liabilities $451,824 $441,537
Shareholders' Equity:
Common stock, par value $0.01 per
share; 10,000,000 shares authorized;
3,640,487 and 3,634,431 shares
issued, respectively 36 36
Surplus 8,875 8,769
Accumulated other comprehensive income,
net 1,869 670
Retained Earnings 60,659 58,405
Less Treasury Stock: 263,497 and 64,000
shares, at cost, respectively (5,707) (252)
Total Shareholders' Equity 65,732 67,628
Total Liabilities and
Shareholders' Equity $517,556 $509,165
The accompanying notes are an integral part of these
consolidated statements.
UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands, Except per Share Data)
Three Months Ended Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
(Unaudited) (Unaudited)
INTEREST INCOME:
Interest and
Fees on Loans $ 9,354 $ 9,323 $27,810 $27,536
Interest on
Securities 2,413 2,839 8,333 8,500
Total Interest
Income 11,767 12,162 36,143 36,036
INTEREST EXPENSE:
Interest on
Deposits 3,293 3,455 10,518 9,656
Interest on
Borrowings 1,213 1,332 3,847 3,726
Total Interest
Expense 4,506 4,787 14,365 13,382
NET INTEREST INCOME 7,261 7,375 21,778 22,654
PROVISION FOR LOAN
LOSSES 1,141 1,631 3,799 4,287
Net Interest Income
After Provision For
Loan Losses 6,120 5,744 17,979 18,367
NONINTEREST INCOME:
Service and Other
Charges on Deposit
Accounts 672 580 2,018 1,658
Other Income 473 240 1,397 1,827
Securities gains
(losses), net 175 71 164 159
Total Noninterest
Income 1,320 891 3,579 3,644
NONINTEREST EXPENSES:
Salaries and Employee
Benefits 2,788 2,819 8,519 8,535
Occupancy Expense 337 344 1,009 991
Furniture and
Equipment Expense 368 397 1,078 1,238
Other Expenses 1,290 869 3,911 3,791
Total Noninterest
Expense 4,783 4,429 14,517 14,555
INCOME BEFORE
INCOME TAXES 2,657 2,206 7,041 7,456
PROVISION FOR INCOME
TAXES 751 391 1,940 1,792
NET INCOME BEFORE
CUMULATIVE EFFECT
OF A CHANGE IN
ACCOUNTING PRINCIPLE 1,906 1,815 5,101 5,664
CUMULATIVE EFFECT OF
A CHANGE IN
ACCOUNTING PRINCIPLE,
net of tax 0 0 200 0
NET INCOME AFTER
CUMULATIVE EFFECT
OF A CHANGE IN
ACCOUNTING
PRINCIPLE $ 1,906 $ 1,815 $ 4,901 $ 5,664
BASIC NET INCOME
PER SHARE BEFORE
CUMULATIVE EFFECT
OF A CHANGE IN
ACCOUNTING
PRINCIPLE $0.55 $0.51 $1.44 $1.59
DILUTED NET INCOME
PER SHARE BEFORE
CUMULATIVE EFFECT
OF A CHANGE IN
ACCOUNTING
PRINCIPLE $0.55 $0.51 $1.44 $1.58
BASIC NET INCOME
PER SHARE AFTER
CUMULATIVE EFFECT
OF A CHANGE IN
ACCOUNTING
PRINCIPLE $0.55 $0.51 $1.39 $1.59
DILUTED NET INCOME
PER SHARE AFTER
CUMULATIVE EFFECT
OF A CHANGE IN
ACCOUNTING
PRINCIPLE $0.55 $0.51 $1.38 $1.58
DIVIDENDS PER SHARE $0.25 $0.23 $0.75 $0.69
The accompanying notes are an integral part of these
Consolidated Statements.
UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
Nine Months Ended
September 30,
2001 2000
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 4,901 $ 5,664
Adjustments:
Depreciation 852 927
Amortization of Premiums and Discounts, net 318 103
Amortization of Intangibles 350 292
Provision for Losses on Loans 3,799 4,287
Loss(gain) on sale of securities, net (164) (159)
Changes in Assets and Liabilities:
Decrease(increase) in Other Assets 1,350 (938)
Increase in Other Liabilities 747 2,400
Total Adjustments 7,252 6,912
Net Cash Provided by Operating
Activities 12,153 12,576
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from Maturities/Call and Paydowns
Of Securities Available for Sale 31,601 10,723
Proceeds from Sales of Securities 19,376 4,330
Purchase of Property and Equipment, Net (1,118) (301)
Purchase of Securities Available for Sale (46,742) (7,620)
Purchase of Federal Funds Sold (7,750) 0
Loan(originations) and Principal Repayments,
Net (27,762) (25,433)
Net Cash Used by Investing Activities (32,395) (18,301)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in Customer Deposits, Net 8,536 7,659
Exercise of Stock Options 106 41
Repurchase of Treasury Stock (5,455) 0
Dividends Paid (2,646) (2,463)
Increase in Borrowings, net 547 6,475
Net Cash Provided by Financing Activities 1,088 11,712
NET DECREASE IN CASH AND CASH EQUIVALENTS (19,154) 5,987
CASH AND CASH EQUIVALENTS, beginning
of period 32,458 12,889
CASH AND CASH EQUIVALENTS, end of period 13,304 18,876
The accompanying notes are an integral part of these
Consolidated statements.
UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands)
1. GENERAL
The accompanying unaudited condensed consolidated financial
statements as of September 30, 2001 and 2000, include the
accounts of United Security Bancshares, Inc. and its
subsidiaries (the "Company"). All significant inter-
company 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 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, 2001. While certain information and footnote
disclosures normally included in financial statements
prepared in accordance with accounting principles generally
accepted in the United States 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
Annual Report on Form 10-K for the year ended December 31,
2000, of United Security Bancshares, Inc. and Subsidiaries.
The accounting policies followed by United Security
Bancshares, Inc. ("USB") are set forth in the summary
of significant accounting policies in USB's December 31,
2000 consolidated financial statements. Certain prior
period amounts have been reclassified to conform to the
current year presentation.
2. NET INCOME PER SHARE
Basic net income per share was computed by dividing net
income by the weighted average number of shares of common
stock outstanding during the three and nine-month periods
ended September 30, 2001 and 2000. Common stock outstanding
consists of issued shares less treasury stock. Diluted net
income per share for the three and nine-month periods ended
September 30, 2001 and 2000, were computed by dividing net
income by the weighted average number of shares of common
stock and the dilutive effects of the shares awarded under
the Company's Stock Option Plan, based on the treasury stock
method using an average fair market value of the stock during
the respective periods.
The following table represents the net income per share
calculations for the three and nine-month periods ended
September 30, 2001 and 2000:
Net
Income
Net Per
For the Three Months Ended Income Shares Share
September 30, 2001:
Net Income after Cumulative
Effect of a Change in
Accounting Principle $1,906
Basic Net Income Per Share:
Income Available to Common
Shareholders 1,906 3,462,880 $0.55
Dilutive Securities:
Stock Options 0 9,521
Dilutive Net Income Per Share:
Income Available to Common
Shareholders Plus Assumed
Conversions $1,906 3,472,401 $0.55
September 30, 2000:
Net Income $1,815
Basic Net Income Per Share:
Income Available to Common
Shareholders 1,815 3,570,331 $0.51
Dilutive Securities:
Stock Options 0 11,174
Dilutive Net Income Per Share:
Income Available to Common
Shareholders Plus Assumed
Conversions $1,815 3,581,705 $0.51
Net
Income
Net Per
For the Nine Months Ended Income Shares Share
September 30, 2001:
Net Income After Cumulative
Effect of a Change in
Accounting Principle $4,901
Basic Net Income Per Share:
Income Available to Common
Shareholders 4,901 3,535,590 $1.39
Dilutive Securities:
Stock Options 0 9,333
Dilutive Net Income Per Share:
Income Available to Common
Shareholders Plus Assumed
Conversions $4,901 3,544,923 $1.38
September 30, 2000:
Net Income $5,664
Basic Net Income Per Share:
Income Available to Common
Shareholders 5,664 3,570,064 $1.59
Dilutive Securities:
Stock options 0 11,159
Dilutive Net Income Per Share:
Income Available to Common
Shareholders Plus Assumed
Conversions 5,664 3,581,223 $1.58
3. COMPREHENSIVE INCOME
Comprehensive income is a measure of all changes in equity
of an enterprise that result from transactions and other
economic events of the period. Pursuant to Statement of
Financial Accounting Standards ("SFAS") No. 115, any
unrealized gain or loss activity of available for sale
securities is to be recorded as an adjustment to a separate
component of shareholders' equity, net of income tax effect.
This change in unrealized gain serves to increase or
decrease comprehensive income. The following table
represents comprehensive income and its changes for
the three- and nine-month periods ended September 30, 2001
and 2000:
Three Months Nine Months
Ended Ended
September 30, September 30,
2001 2000 2001 2000
Net Income $1,906 $1,815 $4,901 $5,664
Other Comprehensive
Income, Net of Tax:
Cumulative Effect
of a Change in
Accounting
Principle 0 0 (224) 0
Unrealized Gain
(Loss) on Securities
and Cash Flow Hedges 342 1,037 1,198 409
Comprehensive Income $2,248 $2,852 $5,875 $6,073
4. MARKET RISK
There have been no material changes in reported market
risks since year-end.
5. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board
("FASB") issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which establishes
accounting and reporting standards requiring that each
derivative instrument (including certain derivative
instruments embedded in other contracts) be recorded in
the balance sheet as either an asset or liability
measured at its fair value. The Statement requires that
changes in a derivative's fair value be recognized
currently in earnings unless specific hedge accounting
criteria are met. Special accounting for qualifying
hedges allows a derivative's gains and losses to offset
related results on the hedged item in the income statement,
and requires that a company must formally document,
designate, and assess the effectiveness of transactions
that receive hedge accounting. In June 2000, the FASB
issued SFAS No. 138, Accounting for Certain Derivative
Instruments and Certain Hedging Activities, which amends
SFAS No. 133 and which addresses a limited number of issues
related to the implementation of SFAS No. 133. The Company
adopted SFAS 133, as amended on January 1, 2001 and recorded
as a cumulative effect of a change in accounting principal
a $200,000 charge to record certain derivatives not
qualifying for hedge accounting. The Company believes that
certain of its interest rate swap agreements qualify under
SFAS No. 133 for cash flow hedge accounting treatment, and
recorded a $24,000 charge to other comprehensive income on
the implementation date.
In July 2001, the FASB issued SFAS No. 141, Business
Combinations, which served to supersede APB Opinion No. 16,
Business Combinations, and SFAS No. 38, Accounting for
Preacquisition Contingencies of Purchased Enterprises.
According to this statement, all business combinations are
to be accounted for using one method, purchase accounting.
The provisions of this statement apply to all business
combinations initiated after June 30, 2001. This statement
also applies to all business combinations accounted for
using the purchase method for which the date of acquistion
is July 1, 2001 or later. The Company does not believe
that the issuance of this new statement will have a material
impact on its consolidated financial position or
consolidated results of operations.
In July 2001, the FASB issued SFAS No. 142, Goodwill and
Other Intangible Assets, which served to supersede APB No.
17, Intangible Assets. This statement addresses how
intangible assets that are acquired individually or with a
group of other assets (but not those acquired in a business
combination) should be accounted for in financial statements
upon their acquisition. This statement also addresses how
goodwill and other intangible assets should be accounted for
after they have been initially recognized in the financial
statements. The provisions of this statement are required
to be applied starting with fiscal years beginning after
December 15, 2001. This statement is required to be
applied at the beginning of an entity's fiscal year and
to be applied to all goodwill and other intangible assets
recognized in its financial statements at that date. Any
impairment losses for goodwill and indefinite-lived
intangible assets that arise due to the initial application
of this statement are to be reported as resulting from a
change in accounting principle. Though the Company is
continuing to evaluate the impact of implementing this
statement, goodwill amortization associated with
indefinite-lived intangible assets for the nine months ended
September 30, 2001 was approximately $288,000.
6. 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, First United Security Bank ("FUSB"),
and Acceptance Loan Company, Inc. ("ALC"). The
reportable segments were determined using the internal
management reporting system. They are composed of the
Company's significant subsidiaries. The accounting
policies for each segment are the same as those used
by the Company as described in Note 2 of the Company's
annual consolidated financial statements, Summary of
Significant Accounting Policies. The segment results
include certain overhead allocations and intercompany
transactions that were recorded at current market
prices. All intercompany transactions have been
eliminated to determine the consolidated balances. The
results for the two reportable segments of the Company
are included in the following table:
All Elimi- Consol-
FUSB ALC Other nations idated
For the Three
Months Ended
September 30,
2001:
Net Interest
Income $ 4,798 $ 2,400 $ 63 $ 0 $7,261
Provision for
Loan Losses 225 916 0 0 1,141
Total Noninterest
Income 1,178 41 2,020 (1,919) 1,320
Total Noninterest
Expense 2,792 1,709 365 (83) 4,783
Income (loss)
Before Income
Taxes (tax
benefit) 2,959 (184) 1,718 (1,836) 2,657
Provision for
Income Taxes
(tax benefit) 792 (52) 11 0 751
Net Income
(loss) $ 2,167 $ (132) $ 1,707 $ (1,836) $ 1,906
For the Nine
Months Ended
September 30,
2001:
Net Interest
Income $ 15,050 $ 6,536 $ 192 $ 0 $ 21,778
Provision for
Loan Losses 601 3,198 0 0 3,799
Total Noninterest
Income 3,171 265 5,510 (5,367) 3,579
Total Noninterest
Expense 8,995 5,099 734 (311) 14,517
Income (loss)
Before Income
Taxes (tax
benefit) 8,625 (1,496) 4,968 (5,056) 7,041
Provision for
Income Taxes
(tax benefit) 2,330 (419) 29 0 1,940
Net Income (loss)
Before Cumulative
Effect of a
Change in
Accounting
Principle $ 6,295 (1,077) 4,939 (5,056) 5,101
Cumulative Effect
of a Change in
Accounting
Principle (200) 0 0 0 (200)
Net Income (loss)
After Cumulative
Effect of a
Change in
Accounting
Principle $ 6,095 $(1,077) $ 4,939 $ (5,056)$ 4,901
Other Significant
Items:
Total Assets $515,837 $76,806 $67,577 $(142,664)$517,556
Total Investment
Securities 145,753 0 3,344 0 149,097
Total Loans 328,134 72,552 0 (79,782) 320,904
Investment in
Wholly Owned
Subsidiaries (716) 0 61,085 (60,369) 0
Total Interest
Income from
External
Customers,
Nine months
Ended Septem-
ber 30, 2001 24,741 11,210 192 0 36,143
Total Interest
Income from
Affiliates,
Nine Months
Ended Septem-
ber 30, 2001 4,674 0 0 (4,674) 0
All Elimi- Consol-
FUSB ALC Other nations idated
For the Three
Months Ended
September 30,
2000:
Net Interest
Income $ 5,429 $ 1,882 $ 885 $ (821) $ 7,375
Provision for
Loan Losses 21 1,610 0 0 1,631
Total Noninterest
Income 1,127 190 1,293 (1,719) 891
Total Noninterest
Expense 2,895 1,755 300 (521) 4,429
Income(loss)
Before Income
Taxes (tax
benefit) 3,640 (1,293) 1,878 (2,019) 2,206
Provision for
Income Taxes
(tax benefit) 889 (504) 6 0 391
Net Income
(loss) $ 2,751 $ (789) $ 1,872 $ (2,019) $ 1,815
For the Nine
Months Ended
September 30,
2000:
Net Interest
Income $ 16,067 $ 6,396 $ 2,655 $ (2,464) $22,654
Provision for
Loan losses 94 4,193 0 0 4,287
Total Noninterest
Income 2,752 609 4,286 (4,003) 3,644
Total Noninterest
Expense 8,793 5,280 1,041 (559) 14,555
Income (loss)
Before Income
Taxes (tax
benefit) 9,932 (2,468) 5,900 (5,908) 7,456
Provision for
Income Taxes
(tax benefit) 2,721 (963) 34 0 1,792
Net Income
(loss) $ 7,211 $(1,505) $ 5,866 $ (5,908) $ 5,664
Other Significant
Items:
Total Assets
September
30, 2000 $491,164 $75,808 $67,103 $(138,354) $495,721
Total Investment
Securities 145,908 0 3,735 0 149,643
Total Loans 302,477 71,199 0 (76,358) 297,318
Total Interest
Income from
External
Customers,
Nine months
Ended
September
30, 2000 23,319 11,751 966 0 36,036
Total Interest
Income from
Affiliates
Nine months
Ended
September
30, 2000 5,355 0 0 (5,355) 0
Investment in
Wholly Owned
Subsidiaries 2,050 0 61,312 (63,362) 0
7. DERIVATIVE FINANCIAL INSTRUMENTS
The Bank's principal objectives in holding derivative
financial instruments is asset-liability management.
The operations of the Bank are subject to a risk of
interest rate fluctuations to the extent that there
is a difference between the amount of the Bank's
interest-earning assets and the amount of interest-
bearing liabilities that mature or reprice in specified
periods. The principal objective of the Bank's asset-
liability management activities is to provide maximum
levels of net interest income while maintaining
acceptable levels of interest rate and liquidity risk
and facilitating the funding needs of the Bank. To
achieve that objective, the Bank uses a combination of
derivative financial instruments, including interest
rate swaps and caps.
All derivatives are recognized on the balance sheet at
their fair value. On the date the derivative contract
is entered into, the Company designates the derivative
as (1) a hedge of the fair value of a recognized asset
or liability or of an unrecognized firm commitment
("fair value" hedge), (2) a hedge of a forecasted
transaction or of the variability of cash flows to be
received or paid related to a recognized asset or
liability ("cash flow" hedge), or (3) "hold for trading"
("trading" instruments). Changes in the fair value of
a derivative that is highly effective as, and that is
designated and qualifies as, a fair value hedge, along
with the loss or gain on the hedged asset or liability
that is attributable to the hedge risk (including losses
or gains on firm commitments), are recorded in current-
period earnings. Changes in the fair value of a derivative
that is highly effective as, and that is designated and
qualified as, a cash flow hedge are recorded in other
comprehensive income, until earnings are affected by the
variability of cash flows (e.g., when periodic settlements
on a variable-rate asset or liability are recorded in
earnings). Changes in the fair value of derivative
trading instruments are reported in current-period
earnings.
The Company formally documents all relationships between
hedging instruments and hedged items, as well as its
risk-management objective and strategy for undertaking
various hedge transactions. This process includes
linking all derivatives that are designated as fair-value
or cash-flow hedges to specific assets and liabilities on
the balance sheet or to specific firm commitments or
forecasted transactions. The Company also formally
assesses, both at the hedge's inception and on an
ongoing basis, whether the derivatives that are used in
hedging transactions are highly effective in offsetting
changes in fair values or cash flows of hedged items.
When it is determined that a derivative is not highly
effective as a hedge or that it has ceased to be a highly
effective hedge, the Company discontinues hedge accounting
prospectively.
An interest rate swap is an agreement in which two parties
agree to exchange, at specified intervals, interest
payment streams calculated on an agreed-upon principal
amount with at least one stream based on a specified
floating-rate index. Interest rate swaps are used by the
Bank to effectively convert floating-rate debt with a
one-month LIBOR rate index to a fixed rate five-year
constant maturity treasury index.
Pursuant to SFAS No. 133, the Company has accounted for
certain interest rate swaps as cash flow hedges, and
recognized a cumulative effect transition adjustment
(net of tax) to decrease other comprehensive income
("OCI") of approximately $24,000 on January 1, 2001.
The transition adjustment to OCI represents net unrealized
losses on derivative instruments. Cumulative gains in
future cash flows associated with these interest rate
swaps are expected to offset unrealized losses included
on OCI. As required under SFAS No. 133, hedge inef-
fectiveness of these cash flow hedges will be
reclassified into earnings based on the extent to which
changes in the value of designated hedge instruments do
not effectively offset changes in the value of hedged
items. The extent of hedge ineffectiveness is influenced
by a number of factors, including interest rate volatility,
hedge performance, and correlation. There were no gains
or losses, which were reclassified from OCI to other
income or expense as a result of the discontinuance of
cash flow hedges related to certain forecasted trans-
actions that are probable of not occurring. The decrease
in the market values of these cash flow hedges amounted to
approximately $688,000 for the nine months ended
September 30,2001, and was recorded in OCI. The maturity
of the interest rate swaps vary between one to five years.
Interest rate caps are option-like contracts that require
the seller to pay the purchaser, at specified future
dates the amount, if any, by which a specified market
interest rate exceeds the fixed cap rate applied to a
notional principal amount. The Bank uses caps purchased
to partially hedge against rising interest rates on
their floating rate short-term borrowings.
Pursuant to SFAS No. 133, the Company has determined
that hedge accounting cannot be attained on its portfolio
of interest rate caps and certain interest rate swaps,
and recognized a cumulative effect transition (net of
tax) adjustment to decrease net income by approximately
$200,000 on January 1, 2001. The increase in the market
value of these interest rate caps and swaps through
September 30, 2001, amounted to approximately $262,000
for the nine months ended September 30, 2001, and was
recorded as an adjustment to investment income.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis are presented to aid
in an understanding of the current financial position and
results of operations of United Security Bancshares, Inc.
("United Security"). United Security is the parent holding
company of First United Security Bank (the "Bank"), and it
has no operations of any consequence other than the owner-
ship of its subsidiaries.
The emphasis of this discussion is a comparison of Assets,
Liabilities, and Capital for the nine months ended September
30, 2001, to December 31, 2000, while comparing income and
expense for the three and nine-month periods ended September
30, 2001, to income for the three and nine-month periods
ended September 30, 2000.
All yields and ratios presented and discussed herein are
based on the cash basis and not on the tax-equivalent
basis.
COMPARING THE THREE MONTHS ENDED SEPTEMBER 30, 2001, TO THE
THREE MONTHS ENDED SEPTEMBER 30, 2000
The decrease in interest income was due to decreases in
interest earned on loans and investments. This decrease is
due to an overall decrease in the average yield, which offset
an increase in the volume of loans outstanding.
The decrease in interest expense was due to an overall
decrease in the average rate paid for both deposits and
borrowing, which offset increases in the volume of both
deposits and borrowings.
The net interest income decreased by $114,000, or 1.5%, due
to the fact that rates paid on interest bearing liabilities
repriced slower than that of interest earning assets.
The loan loss provision decreased compared to the prior year
due to the improved credit quality at the finance company
subsidiary, which was offset somewhat by the bank's
decreased credit quality.
The increase in service and other charges on deposit
accounts was attributable to the implementation of a new
automatic overdraft service, which has increased the fees
charged.
The increase in other income was due to increased
commissions on bond trades created on behalf of existing
bank customers, as well as increased fees on several
peripheral bank programs and services.
The increase in other expense was the result of the increased
costs associated with bankruptcies and other collection
efforts during the quarter, as well as realizing increased
losses on its low income housing properties.
Net income increased $91,000, or 5.0%, resulting in an
increase of basic net income per share to $0.55. As
described above, this was primarily due to a large
decrease in the loan loss provision and an increase in
noninterest income.
COMPARING THE NINE MONTHS ENDED SEPTEMBER 30, 2001, TO THE
NINE MONTHS ENDED SEPTEMBER 30, 2000
The slight increase in interest income was due to increases
in the average volume of loans and investments outstanding
during the nine months ended September 30, 2001, which
offset a decrease in average yield, representative of falling
market interest rates.
The increase in interest expense was due to increases
in the average deposit and borrowing balances outstanding
compared to the prior year, which offset a decrease in
average rate paid.
The net interest income decreased by $876,000, or 3.9%,
due to the fact that rates paid on interest bearing
liabilities repriced slower than that of interest earning
assets.
The loan loss provision decreased compared to the prior
year due to the improved credit quality at the finance
company subsidiary, which was offset somewhat by the
bank's decreased credit quality.
The increase in service and other charges on deposit
accounts was attributable to the implementation of a new
automatic overdraft service, which has increased the fees
charged.
The decrease in other income was a result of the Company
selling its internally developed asset/liability management
software to a regional broker dealer, thus, reducing the
monthly fee income associated with the software.
Net income after the cumulative effect of a change in
accounting principle decreased $763,000, or 13.5%,
resulting in a decrease of basic net income per share to
$1.39. As described above, this was due primarily to a
larger increase in interest expense as compared to the
increase in interest income.
COMPARING THE SEPTEMBER STATEMENT OF FINANCIAL CONDITION
TO DECEMBER 31, 2000
In comparing financial condition at December 31, 2000, to
September 30, 2001, liquidity and capital resources
decreased. Liquidity decreased due to both management's
decision to fund loan growth and to use funds to repurchase
outstanding stock during the period. Total assets increased
$8.4 million to $517.6 million, while liabilities increased
$10.3 million to $451.8 million. These changes were
representative of the increases in loan volume discussed
above, funded by deposit growth of 2.5% and increases in
borrowings of .6%. Accumulated other comprehensive income
increased by $1.2 million, or 177%, due to decreases in
interest rates improving the market value of investment
securities held by the Company. Retained earnings
increased $2.3 million, or 3.9%, due to earnings in
excess of dividends paid during the period. Treasury stock
increased $5.5 million due to initiation of a stock
repurchase program during the current year. The overall
decrease in shareholders' equity of $1.9 million, or 2.8%,
was due to increased treasury stock, which was offset by
increases in retained earnings and accumulated other
comprehensive income.
CAPITAL RESOURCES
FUSB's primary sources of funds are customer deposits,
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 which
are greatly influenced by general interest rates, economic
conditions, and competition. 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 require-
ments.
USB and FUSB are required to maintain certain levels of
regulatory capital. At September 30, 2001, and December 31,
2000, United Security 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 United Security
Bancshares, Inc. 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 financial position of the Company.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) There are no exhibits filed with this report.
SIGNATURE PAGE
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: November 13, 2001
BY: /s/LARRY M. SELLERS
Its Vice-President, Secretary, and Treasurer
(Duly Authorized Officer and Principal Financial
Officer)