UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2002
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 6/30/02
Common Stock, $0.01 par value 3,220,163 shares
UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION
PAGE
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Statements of Financial
Condition at June 30, 2002, and December 31,
2001 3
Condensed Consolidated Statements of Income
for the Three and Six Months Ended June 30,
2002, and 2001 4
Condensed Consolidated Statements of Cash Flows
for the Six Months Ended June 30, 2002, and
2001 6
Notes to Condensed Consolidated Financial
Statements 7
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 17
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K 22
Signature Page 23
UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in Thousands)
ASSETS
June 30, December 31,
2002 2001
(Unaudited)
Cash and Due from Banks $ 11,781 $ 11,451
Interest-Bearing Deposits in Banks 3,107 12,522
Federal Funds Sold 0 1,000
Securities Available for Sale 145,225 138,842
Loans, net of allowances for loan
losses of $6,036 and $6,590,
respectively 336,362 332,994
Premises and Equipment, net 10,566 10,011
Other Assets 16,612 16,292
Total Assets $523,653 $523,112
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $353,254 $354,815
Borrowings 100,267 96,346
Other Liabilities 5,804 6,744
Total Liabilities $459,325 $457,905
Shareholders' Equity:
Common stock, par value $0.01 per
share; 10,000,000 shares authorized;
3,656,730 and 3,647,330 shares
issued, respectively 37 36
Surplus 9,159 8,995
Accumulated other comprehensive income 1,949 939
Retained Earnings 63,764 61,436
Less Treasury Stock: 436,567 and 280,924
shares, at cost, respectively (10,581) (6,199)
Total Shareholders' Equity 64,328 65,207
Total Liabilities and
Shareholders' Equity $523,653 $523,112
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 Six Months Ended
June 30, June 30,
2002 2001 2002 2001
(Unaudited) (Unaudited)
INTEREST INCOME:
Interest and
Fees on Loans $ 9,317 $ 9,216 $ 18,462 $ 18,456
Interest on
Securities 1,914 2,818 4,010 5,920
Total Interest
Income 11,231 12,034 22,472 24,376
INTEREST EXPENSE:
Interest on
Deposits 2,402 3,578 4,984 7,225
Interest on
Borrowings 1,034 1,273 2,087 2,635
Total Interest
Expense 3,436 4,851 7,071 9,860
NET INTEREST INCOME 7,795 7,183 15,401 14,516
PROVISION FOR LOAN
LOSSES 1,172 1,154 2,008 2,658
Net Interest Income
After Provision For
Loan Losses 6,623 6,029 13,393 11,858
NONINTEREST INCOME:
Service and Other
Charges on Deposit
Accounts 684 669 1,326 1,346
Other Income 539 484 863 924
Securities gains
(losses), net 39 (1) 130 (11)
Total Noninterest
Income 1,262 1,152 2,319 2,259
NONINTEREST EXPENSES:
Salaries and Employee
Benefits 2,819 2,918 5,835 5,731
Occupancy Expense 332 340 666 672
Furniture and
Equipment Expense 336 373 676 710
Other Expenses 1,407 1,391 2,575 2,620
Total Noninterest
Expense 4,894 5,022 9,752 9,733
INCOME BEFORE
INCOME TAXES 2,991 2,159 5,960 4,384
PROVISION FOR INCOME
TAXES 834 599 1,674 1,189
NET INCOME BEFORE
CUMULATIVE EFFECT
OF A CHANGE IN
ACCOUNTING PRINCIPLE 2,157 1,560 4,286 3,195
CUMULATIVE EFFECT OF
A CHANGE IN
ACCOUNTING PRINCIPLE,
net of tax 0 0 0 (200)
NET INCOME AFTER
CUMULATIVE EFFECT
OF A CHANGE IN
ACCOUNTING
PRINCIPLE $ 2,157 $ 1,560 $ 4,286 $ 2,995
BASIC NET INCOME
PER SHARE BEFORE
CUMULATIVE EFFECT
OF A CHANGE IN
ACCOUNTING
PRINCIPLE $0.66 $0.44 $1.30 $0.89
DILUTED NET INCOME
PER SHARE BEFORE
CUMULATIVE EFFECT
OF A CHANGE IN
ACCOUNTING
PRINCIPLE $0.66 $0.44 $1.30 $0.89
BASIC NET INCOME
PER SHARE AFTER
CUMULATIVE EFFECT
OF A CHANGE IN
ACCOUNTING
PRINCIPLE $0.66 $0.44 $1.30 $0.84
DILUTED NET INCOME
PER SHARE AFTER
CUMULATIVE EFFECT
OF A CHANGE IN
ACCOUNTING
PRINCIPLE $0.66 $0.44 $1.30 $0.84
DIVIDENDS PER SHARE $0.30 $0.25 $0.60 $0.50
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)
June 30,
2002 2001
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 4,286 $ 2,995
Adjustments:
Depreciation 526 492
Amortization of Premiums and Discounts, net 85 123
Amortization of Intangibles 0 303
Provision for Losses on Loans 2,008 2,658
(Gain) loss on sale of securities, net (130) 11
Changes in Assets and Liabilities:
(Increase) decrease in Other Assets (320) 718
(Decrease) increase in Other Liabilities (1,238) 12,170
Total Adjustments 931 16,475
Net Cash Provided by Operating
Activities 5,217 19,470
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from Maturities/Call and Paydowns
Of Securities Available for Sale 35,355 2,293
Proceeds from Sales of Securities 0 9,116
Purchase of Property and Equipment, Net (1,081) (696)
Purchase of Securities Available for Sale (40,384) (28,428)
Redemption (purchase) of Federal Funds Sold 1,000 (5,350)
Net Increase in Loans (5,376) (16,515)
Net Cash Used by Investing Activities (10,486) (39,580)
CASH FLOWS FROM FINANCING ACTIVITIES:
(Decrease) increase in Customer Deposits,
Net (1,561) 9,834
Exercise of Stock Options 164 45
Dividends Paid (1,957) (1,786)
Purchase of Treasury Stock (4,383) (78)
Increase in Borrowings, net 3,921 671
Net Cash Provided by Financing Activities (3,816) 8,686
NET DECREASE IN CASH AND CASH EQUIVALENTS (9,085) (11,424)
CASH AND CASH EQUIVALENTS, beginning
of period 23,973 32,458
CASH AND CASH EQUIVALENTS, end of period 14,888 21,034
The accompanying notes are an integral part of these
Consolidated statements.
UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
The accompanying unaudited condensed consolidated financial
statements as of June 30, 2002, and 2001, 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, 2002. 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,
2001, 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,
2001, consolidated financial statements.
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 six-month periods
ended June 30, 2002, and 2001. Common stock outstanding
consists of issued shares less treasury stock. Diluted net
income per share for the three and six-month periods ended
June 30, 2002, and 2001, 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 earnings per share
calculations for the three and six-month periods ended
June 30, 2002, and 2001:
Net
Income
Net Per
For the Three Months Ended Income Shares Share
June 30, 2002(dollars in
thousands):
Net Income $2,157
Basic Net Income Per Share $2,157 3,268,075 $0.66
Dilutive Securities 0 0
Dilutive Earnings Per Share 2,157 3,268,075 $0.66
June 30, 2001:
Net Income $1,560
Basic Net Income Per Share $1,560 3,572,281 $0.44
Dilutive Securities 0 8,844
Dilutive Earnings Per Share 1,560 3,581,125 $0.44
Net
Income
Net Per
For the Six Months Ended Income Shares Share
June 30, 2002(dollars in
thousands):
Net Income $4,286
Basic Net Income Per Share $4,286 3,290,966 $1.30
Dilutive Securities 0 0
Dilutive Earnings Per Share 4,286 3,290,966 $1.30
June 30, 2001:
Before Cumulative Effect of a
Change in Accounting Principle:
Basic Earnings Per Share $3,195 3,571,945 $0.89
Dilutive Securities - 8,884
Dilutive Earnings Per Share $3,195 3,580,829 $0.89
After Cumulative Effect of a
Change in Accounting Principle:
Basic Earnings Per Share
Before Cumulative Effect
of a Change in Accounting
Principle $3,195 3,571,945 $0.89
Cumulative Effect of a Change
In Accounting Principle (200) 3,571,945 (.05)
Basic Earnings Per Share
After Cumulative Effect of
A Change in Accounting
Principle $2,995 3,571,945 $0.84
Dilutive Securities - 8,884
Dilutive Earnings Per Share $2,995 3,580,829 $0.84
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 six-month periods ended June 30, 2002, and
2001:
Three Months Six Months
Ended Ended
June 30, June 30,
2002 2001 2002 2001
Net Income $2,157 $1,560 $4,286 $2,995
Other Comprehensive
Income, Net of Tax:
Cumulative Effect
of a Change in
Accounting
Principle (Net of
Tax of $0, $0,
$0 and $14
respectively) 0 0 0 (24)
Change in Unrealized
Gain (loss) on
Derivative
Instruments (Net of
Tax of $37, $117,
$112, and $290
respectively) 63 (200) 192 (497)
Change in Unrealized
Gain on securities
Available For Sale
(Net of Tax of $622,
$324, $477, and
$783 respectively). 1,066 556 818 1,343
Comprehensive Income $3,286 $1,916 $5,296 $3,817
4. RECENT ACCOUNTING PRONOUNCEMENTS
The Company adopted Financial Accounting Standards Board
("FASB") Statement of Financial Accounting Standards ("SFAS")
No. 133, Accounting for Derivative Instruments and Hedging
Activities, on January 1, 2001. As part of the adoption of the
standard, the Company recorded a net-of-tax cumulative effect
adjustment in accumulated other comprehensive income of $24,000
to recognize at fair value all derivatives that are designated as
cash-flow hedging instruments, and recorded a cumulative effect
adjustment to earnings of $200,000 to recognize at fair value all
derivatives, which did not achieve hedge accounting under this
standard.
In July 2001, the FASB issued Statement No. 141, "Business
Combinations" (SFAS No. 141), and Statement No. 142, "Goodwill
and Other Intangible Assets" (SFAS No. 142). SFAS No. 141
requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001. SFAS No. 141
also specifies the criteria for intangible assets acquired in a
purchase method business combination to be recognized and
reported apart from goodwill. SFAS No. 142 requires companies to
no longer amortize goodwill and intangible assets with indefinite
useful lives, but instead test these assets for impairment at
least annually in accordance with the provisions of SFAS No. 142.
The Company adopted the provisions of SFAS No. 142 effective
January 1, 2002. As of the date of adoption, The Company had
unamortized goodwill in the amount of $4.1 million which was
subject to the transition provisions of SFAS No. 142. As part of
its adoption of SFAS No. 142, the Company has performed a
transitional impairment test on its goodwill assets, which
indicated that no impairment charge was required. The Company
does not currently have any other indefinite-lived intangible
assets recorded in its statement of financial condition. In
addition, no material reclassifications or adjustments to the
useful lives of finite-lived intangible assets were made as a
result of adopting the new guidance. The full impact of adopting
SFAS No. 142 is expected to result in an increase in net income
of approximately $353,000 or approximately $.11 per share in 2002
as a result of the Company no longer having to amortize goodwill
against earnings. Assuming retroactive adoption of SFAS No. 142,
net income for the quarter ended June 30, 2001, six months ended
June 30, 2001 and the year ended December 31, 2001 would have
been $1.6 million, $2.2 million and $6.9 million, respectively,
and diluted earnings per share would have been $.46, $.89 and
$1.98 for the same periods, respectively. The following table
sets forth the reconcilement of net income and earnings per share
excluding goodwill amortization for the quarter ended June 30,
2001, six months ended June 30, 2001 and year ended December 31,
2001:
For the For the For the
Quarter Six Mos. Year
Ended Ended Ended
June 30, June 30, Dec. 31,
2001 2001 2001
(Dollars in Thousands)
Reported Net Income $1,560 $2,995 $6,587
Add: Goodwill Amortization,
Net of Tax 88 176 353
Adjusted Net Income $1,648 $3,171 $6,940
Basic Earnings Per Share:
Reported Earnings Per
Share -- Basic $ 0.44 $ 0.84 $ 1.89
Add: Goodwill Amortization,
Net of Tax .02 .05 0.10
Adjusted Earnings Per
Share -- Basic $ 0.46 0.89 $ 1.99
Diluted Earnings Per Share:
Reported Earnings Per
Share -- Diluted $ 0.44 $ 0.84 $ 1.88
Add: Goodwill Amortization,
Net of Tax .02 .05 0.10
Adjusted Earnings Per
Share -- Diluted $ 0.46 $ 0.89 $ 1.98
5. SEGMENT REPORTING
Under SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information, certain information
is disclosed for the two reportable operating segments
of the Company, 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
June 30, 2002:
Net Interest
Income $ 5,232 $ 2,512 $ 51 $ 0 $ 7,795
Provision for
Loan Losses 515 657 0 0 1,172
Total Noninterest
Income 993 218 2,452 (2,401) 1,262
Total Noninterest
Expense 3,054 1,706 227 (93) 4,894
Income(Loss)
Before Income
Taxes 2,656 367 2,276 (2,308) 2,991
Provision
(Benefit) for
Income Taxes 726 103 5 0 834
Net Income(Loss) $1,930 $ 264 $2,271 $ (2,308) $ 2,157
For the six
months ended
June 30, 2002:
Net Interest
Income $ 10,392 $ 4,907 $ 102 $ 0 $ 15,401
Provision for
Loan Losses 854 1,154 0 0 2,008
Total Noninterest
Income 2,060 185 4,765 (4,691) 2,319
Total Noninterest
Expense 6,191 3,321 426 (186) 9,752
Income(Loss)
Before Income
Taxes 5,407 617 4,441 (4,505) 5,960
Provision
(Benefit) for
Income Taxes 1,492 173 9 0 1,674
Net Income(Loss) $3,915 $ 444 $4,432 $ (4,505) $ 4,286
Other Significant
Items:
Total Assets $521,481 $79,703 $66,503 $(144,034) $523,653
Total Investment
Securities 142,491 0 2,734 0 145,225
Total Loans 343,480 75,366 0 (82,484) 336,362
Investment in
Wholly-Owned
Subsidiaries (1,874) 0 60,642 (58,768) 0
Total Interest
Income from
External
Customers 14,574 7,821 77 0 22,472
Total Interest
Income from
Affiliates 2,914 0 25 (2,939) 0
All Elimi- Consol-
FUSB ALC Other nations idated
For the Three
Months Ended
June 30, 2001:
Net Interest
Income $ 4,951 $ 2,184 $ 48 $ 0 $ 7,183
Provision for
Loan Losses 262 892 0 0 1,154
Total Noninterest
Income 1,015 121 1,864 (1,848) 1,152
Total Noninterest
Expense 3,085 1,719 303 (85) 5,022
Income (loss)
Before Income
Taxes (tax
benefit) 2,619 (306) 1,609 (1,763) 2,159
Provision for
Income Taxes
(tax benefit) 677 (86) 8 0 599
Net Income
(loss) $ 1,942 $ (220) $ 1,601 $ (1,763) $ 1,560
For the Six
Months Ended
June 30, 2001:
Net Interest
Income $ 10,251 $ 4,136 $ 129 $ 0 $ 14,516
Provision for
Loan Losses 376 2,282 0 0 2,658
Total Noninterest
Income 1,993 224 3,490 (3,448) 2,259
Total Noninterest
Expense 6,202 3,389 519 (377) 9,733
Income (loss)
Before Income
Taxes (tax
benefit) 5,666 (1,311) 3,100 (3,071) 4,384
Provision for
Income Taxes
(tax benefit) 1,538 (367) 18 0 1,189
Net Income (loss)
Before Cumulative
Effect of a
Change in
Accounting
Principle $ 4,128 (944) 3,082 (3,071) 3,195
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 $ 3,928 $ (944) $ 3,082 $ (3,071) $ 2,995
Other Significant
Items:
Total Assets,
June 30,
2001 $488,351 $77,630 $71,541 $(115,379)$522,143
Total Investment
Securities 154,250 0 3,593 0 157,843
Total Loans 319,393 73,414 0 (82,009) 310,798
Total Interest
Income from
External
Customers,
Six months
Ended June
30, 2001 16,887 7,383 106 0 24,376
Total Interest
Income from
Affiliates,
Six Months Ended
June 30, 2001 3,247 0 23 (3,270) 0
Investment in
Wholly-Owned
Subsidiaries 1,943 0 64,177 (66,120) 0
6. DERIVATIVE FINANCIAL INSTRUMENTS
The Bank's principal objective in holding derivative
financial instruments is asset/liability management.
The operations of the Bank are subject to a risk of
interest rate fluctuations to the extent that there
is a difference between the amount of the Bank's
interest-earning assets and the amount of interest-
bearing liabilities that mature or reprice in specified
periods. The principal objective of the Bank's asset-
liability management activities is to provide maximum
levels of net interest income while maintaining
acceptable levels of interest rate and liquidity risk
and facilitating the funding needs of the Bank. To
achieve that objective, the Bank uses a combination of
derivative financial instruments, including interest
rate swaps and caps.
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
forcasted 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 caused to be a highly
effective hedge, the Company discontinues hedge accounting.
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 effectiveness 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 maturity of the
interest rate swaps varies from one to two years.
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 ownership of its
subsidiaries.
The accounting principles followed by the Company and the methods
of applying these principles conform with generally accepted
accounting principles in the United States and with general
practices within the banking 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, are set forth in the
summary of significant accounting policies in United Security's
December 31, 2001, consolidated financial statements.
The emphasis of this discussion is a comparison of Assets,
Liabilities, and Capital as of June 30, 2002, to year-end 2001,
while comparing income and expense for the three and six-month
periods ended June 30, 2002, and 2001.
All yields and ratios presented and discussed herein are not
presented on a tax-equivalent basis.
Interest income decreased $803,000, or 6.7% to $11.2 million for
the second quarter of 2002 from $12.0 million for the second
quarter of 2001. Interest income decreased $1.9 million, or 7.8%
to $22.5 million for the first six months of 2002 compared to
$24.4 million for the first six months of 2001. 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.
Interest expense decreased $1.4 million, or 29% to $3.4 million
for the second quarter of 2002 from $4.8 million for the second
quarter of 2001. Interest expense decreased $2.8 million, or
28.3% to $7.1 million for the first six months of 2002 compared
to $9.9 million for the first six months of 2001. The decrease in
interest expense was due to an overall decrease in the average
rate paid for both deposits and borrowings, which offset
increases in the volume of both deposits and borrowings, during
the same period.
Net interest income increased $612,000, or 8.5% for the second
quarter of 2002 and $885,000, or 6.1% for the first six months of
2002 as a result of increased net interest margins and net yield
on earning assets.
The provision for loan losses was $1.17 million or 1.37%
annualized of average loans in the second quarter of 2002,
compared to $1.15 million or 1.49% annualized of average loans in
the second quarter of 2001. The loan loss provision increased
slightly compared to the prior year due to the increased charge-
offs at the bank requiring additional additions to the allowance
partially offset by improved credit quality at the finance
company subsidiary. For the first six months of 2002, the
provision for loan losses was $2.01 million or 1.50% annualized
of average loans, compared to $2.66 million or 1.73% annualized
of average for the first six months of 2001. The loan loss
provision decreased compared to the prior year due primarily to
the improved credit quality at the finance company subsidiary.
Total non-interest income increased $110,000, or 9.5% to $1.3
million for the second quarter of 2002 from $1.2 million for the
second quarter of 2001. Total non-interest income increased
slightly to $2.3 million for the first six months of 2002,
primarily as a result of gains from securities sales and calls.
Total non-interest expense decreased $128,000, or 2.5% for the
second quarter of 2002 to $4.9 million from $5.0 million. The
slight decrease is a result of slightly lower salaries and
benefits costs, occupancy expense, and furniture and equipment
expense. Total non-interest expense increased only slightly for
the first six months of 2002.
Income tax expense increased $235,000 or 39% during the second
quarter of 2002 as compared to the same period a year ago. Income
tax expense increased $485,000 or 41% over the first six months
of 2001. The increase during the first six months of 2002
compared to 2001 resulted from higher levels of taxable income.
United Security's effective tax rate for the first six months of
2002 and 2001 were 28.1% and 27.1%, respectively as the Company
continues to realize tax benefits primarily from tax-exempt
securities and low income housing tax credits.
For the second quarter, net income increased $597,000, or 38%,
resulting in an increase of basic net income per share to $0.66.
For the first six months, net income increased $1.3 million, or
43%, resulting in an increase of basic net income per share to
$1.30. Annualized return on assets was 1.63% compared to 1.16%
for the same period during 2001. Average return on stockholders'
equity increased to 13.36% from 8.74%. United Security
discontinued the amortization of goodwill in accordance with SFAS
142 effective January 1, 2002. As displayed in Note 4, adjusting
for this impact, net income for the first six months of 2001
would have increased $176,000, or $0.05 per share.
COMPARING THE JUNE 30, 2002, STATEMENT OF FINANCIAL CONDITION
TO DECEMBER 31, 2001
In comparing financial condition at December 31, 2001, to
June 30, 2002, total assets increased $541,000 to $523.7 million,
while liabilities increased $1.4 million to $459.3 million.
Shareholders' equity decreased $879,000 as a result of an
additional repurchase of approximately 155,600 shares during the
first six months of 2002 as a part of the stock repurchase plan
United Security initiated during May 2001. This decrease was
partially offset by earnings in excess of dividends during the
periods.
Investment securities increased $6.4 million, or 4.6% during the
first six months of 2002 as a result of deployment of operating
cash flows. Investments provide United Security with a stable
form of liquidity while maximizing earnings yield. Loans, net of
unearned income increased $3.4 million, or 1.0% during the first
six months of 2002 as result of continued construction and real
estate development in the trade areas served by United Security.
Deposits decreased less than 1% during the first six months of
2002 as result of less aggressive pricing of deposits, based on
the current liquidity position of the Company.
CREDIT QUALITY
At June 30, 2002, the allowance for loan losses was $6.0 million,
or 1.76% of loans net of unearned income, compared to $6.6
million, or 2.10% of loans net of unearned income at June 30,
2001 and $6.6 million, or 1.94% of loans net of unearned income
at December 31, 2001. The coverage ratio of the allowance for
loan losses to non-performing assets decreased to 82.84% at June
30, 2002, compared to 104.9% at December 31, 2001, primarily as a
result of an addition of a large commercial loan to non-accrual
status during the second quarter of 2002.
Activity in the allowance for loan losses is summarized as
follows (amounts in thousands):
Six Months
Ended
June 30,
2002 2001
Balance at Beginning of Period $6,590 $6,529
Charge-Offs 3,030 3,168
Recoveries (468) (510)
Net Loans Charged-Off 2,562 2,658
Additions Charged to Operations 2,008 2,658
Balance at End of Period $6,036 $6,529
Net charge-offs for the six months ended June 30, 2002, were $2.6
million or 1.50% of average loans, on an annualized basis, a
decrease of $96,000 from the $2.7 million or 1.73% annualized of
average loans reported a year earlier. The provision for loan
losses for the first six months of 2002 was $2.0 million compared
to $2.7 million in the first six months of 2001, primarily as a
result of improved credit quality at the finance company
subsidiary, offset somewhat by the bank's decreasing credit
quality.
United Security 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: (a) management's estimate of future
economic conditions, (b) management's estimate of the financial
condition and liquidity of certain loan customers, and (c)
management's estimate of collateral values of property securing
certain loans. Because all of 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. At June 30, 2002, it is management's opinion that the
allowance for loan losses is adequate. However, unfavorable
changes in the factors used by management to determine the
adequacy of the allowance, including increased loan delinquencies
and subsequent charge-offs, or the availability of new
information, could require additional provisions, in excess of
normal provisions, to the allowance for loan losses in future
periods.
Non-performing assets were as follows (amounts in thousands):
June 30, Dec. 31, June 30,
2002 2001 2001
Loans Accounted for on a
Non-Accrual Basis $ 4,072 $ 2,595 $ 2,092
Accruing Loans Past Due
90 Days or More 1,614 2,346 1,545
Real Estate Acquired in
Settlement of Loans 1,600 1,342 1,046
Total $ 7,286 $ 6,283 $ 4,683
Non-Performing Assets as a
Percentage of Net Loans
and Other Real Estate 2.12% 1.84% 1.47%
Loans accounted for on a non-accrual basis increased $2.0 million
since June 30, 2001 and $1.5 million since December 31, 2001.
This increase is primarily related to one large commercial loan
which the bank has moved to non-accrual status. The bank has
evaluated the loan in accordance with SFAS 114 and has determined
that no additional specific reserve needs to be provided for at
this time. Accruing loans past due 90 days or more increased
$69,000, compared to June 30, 2001, and decreased $732,000 since
December 31, 2001. This decrease is primarily the result of
decreased past dues at the finance company subsidiary as a result
of improved management of the loan portfolio. Real estate
acquired in settlement of loans increased $554,000 since June 30,
2001 and $258,000 since December 31, 2001 as a result of
increased foreclosures.
LIQUIDITY AND CAPITAL RESOURCES
The Bank'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 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 $130.0 million in borrowing capacity
from the Federal Home Loan Bank and $30 million in established
Federal Funds Lines.
The Bank is required to maintain certain levels of regulatory
capital. At June 30, 2002, and December 31, 2001, 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.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The information set forth under the caption "Item 7.
Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Interest Rate Sensitivity
Management" included in the Corporation's Annual Report on Form
10-K for the year ended December 31, 2001, is hereby incorporated
herein by reference.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is a defendant in other certain claims and legal
actions arising in the normal course of business. In the opinion
of management, the ultimate disposition of these matters is not
expected to have a material adverse effect on the financial
position or results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 7, 2002 the Annual Meeting of Shareholders of the Company
was held at which shares of common stock represented at the
Annual Meeting were voted in favor of the directors listed below
as follows:
Director For Against
1. Dan R. Barlow 2,319,748 29,571
2. Linda H. Breedlove 2,317,243 32,076
3. Gerald P. Corgill 2,349,319 0
4. Wayne C. Curtis 2,323,075 26,244
5. John C. Gordon 2,349,319 0
6. William G. Harrison 2,349,319 0
7. Hardie B. Kimbrough 2,349,319 0
8. Jack W. Meigs 2,349,319 0
9. R. Terry Phillips 2,345,156 4,163
10. Ray Sheffield 2,323,075 26,244
11. James C. Stanley 2,349,319 0
12. Howard M. Whitted 2,349,319 0
13. Bruce N. Wilson 2,323,075 26,244
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 99.1: Certification Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, filed herewith.
Exhibit 99.2: Certification Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, filed herewith.
(b) No reports on Form 8-K were filed by the Company during
the period April 1, 2002 to June 30, 2002.
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: August 13, 2002
BY: LARRY M. SELLERS
LARRY M. SELLERS
Its Vice-President, Secretary, and Treasurer
(Duly Authorized Officer and Principal Financial
Officer)