UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2003
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 by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the Exchange Act).
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 5/14/03
Common Stock, $0.01 par value 3,216,137 shares
UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION
PAGE
----
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Statements of Financial
Condition at March 31, 2003, and December 31,
2002, and March 31, 2002 3
Condensed Consolidated Statements of Income
for the Three Months Ended March 31, 2003, and
2002 4
Condensed Consolidated Statements of Cash Flows
for the Three Months Ended March 31, 2003, and
2002 5
Notes to Condensed Consolidated Financial
Statements 6
The Condensed Consolidated Financial Statements
Furnished Have Not Been Audited by Independent
Public Accountants, but 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 15
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 20
ITEM 4. CONTROLS AND PROCEDURES 20
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 21
ITEM 6. Exhibits and Reports on Form 8-K 21
Signature 22
CEO Certification 23
CFO Certification 24
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in Thousands)
ASSETS
March 31, December 31, March 31,
2003 2002 2002
--------- --------- -------
(Unaudited)
Cash and Due from Banks $ 12,920 $ 11,576 $11,820
Interest-Bearing Deposits in Banks 1,436 5,166 7,343
Securities Available for Sale 148,240 134,530 150,247
Loans, net of allowances for loan
losses of $6,915, $6,623, and
$6,342 respectively 349,114 351,434 338,223
Premises and Equipment, net 10,998 10,834 10,118
Accrued Interest Receivable 4,332 4,353 4,442
Investment in Limited Partnerships 3,766 3,874 4,669
Other Assets 15,385 13,551 7,741
-------- -------- --------
Total Assets $546,191 $535,318 $534,603
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $364,902 $353,100 $365,820
Short-Term Borrowings 647 2,391 2,236
Long-Term Debt 105,844 105,874 95,962
Other Liabilities 6,689 6,921 6,281
-------- -------- --------
Total Liabilities $478,082 $468,286 $470,299
-------- -------- --------
Shareholders' Equity:
Common Stock, par value $0.01 per
share; 10,000,000 shares
authorized; 3,658,780, 3,656,730
and 3,654,046 shares issued,
respectively $ 37 $ 37 $ 36
Surplus 9,233 9,159 9,112
Accumulated other comprehensive
income 1,585 1,860 820
Retained Earnings 68,003 66,725 62,574
Less Treasury Stock: 442,643,
442,643 and 352,601 shares at
cost, respectively (10,749) (10,749) (8,238)
-------- -------- --------
Total Shareholders' Equity 68,109 67,032 64,304
Total Liabilities and -------- -------- --------
Shareholders' Equity $546,191 $535,318 $534,603
======== ======== ========
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
March 31,
2003 2002
------- -------
(Unaudited)
INTEREST INCOME:
Interest and Fees on Loans $ 9,537 $ 9,145
Interest on Securities 1,568 2,096
------- -------
Total Interest Income 11,105 11,241
INTEREST EXPENSE:
Interest on Deposits 1,965 2,583
Interest on Borrowings 1,083 1,053
------- -------
Total Interest Expense 3,048 3,636
------- -------
NET INTEREST INCOME 8,057 7,605
PROVISION FOR LOAN LOSSES 991 836
------- -------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 7,066 6,769
NONINTEREST INCOME:
Service and Other Charges on Deposit
Accounts 791 641
Other Income 452 325
Securities Gains (Losses), Net 68 91
------- -------
Total Noninterest Income 1,311 1,057
NONINTEREST EXPENSES:
Salaries and Employee Benefits 3,071 3,017
Occupancy Expense 340 334
Furniture and Equipment Expense 337 339
Other Expenses 1,335 1,168
------- -------
Total Noninterest Expense 5,083 4,858
------- -------
INCOME BEFORE INCOME TAXES 3,294 2,968
------- -------
PROVISION FOR INCOME TAXES 955 839
------- -------
NET INCOME $ 2,339 $ 2,129
======= =======
Basic Net Income Per Share $0.73 $0.64
Diluted Net Income Per Share $0.73 $0.64
Dividends Per Share $0.33 $0.30
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)
March 31,
2003 2002
- ----- -----
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 2,339 $ 2,129
Adjustments:
Depreciation 236 266
Amortization (Accretion) of Premiums and
Discounts, Net 300 (2)
Provision for Losses on Loans 991 836
(Gain) on Sale of Securities, Net (68) (91)
Changes in Assets and Liabilities:
(Increase) in Other Assets (1,621) (560)
(Decrease) in Other Liabilities (93) (185)
------- ------
Total Adjustments (255) 264
Net Cash Provided by Operating
Activities 2,084 2,393
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from Maturities/Calls and Paydowns
Of Securities Available for Sale 19,897 20,375
Proceeds from Sales of Securities 16,339 0
Purchase of Insurance (83) 0
Purchase of Property and Equipment, Net (400) (373)
Purchase of Securities Available for Sale (50,593) (32,085)
Net Decrease of Federal Funds Sold 0 1,000
Net Change in Loan Portfolio 1,329 (6,065)
------- -------
Net Cash Used by Investing Activities (13,511) (17,148)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in Customer Deposits, Net 11,802 11,005
Exercise of Stock Options 74 118
Dividends Paid (1,061) (991)
(Decrease) Increase in Borrowings (1,774) 1,852
Purchase of Treasury Stock 0 (2,039)
------- ------
Net Cash Provided by Financing Activities 9,041 9,945
------- ------
NET DECREASE IN CASH AND CASH EQUIVALENTS (2,386) (4,810)
CASH AND CASH EQUIVALENTS, beginning
of period 16,742 23,973
------- ------
CASH AND CASH EQUIVALENTS, end of period $14,356 $19,163
======= =======
The accompanying notes are an integral part of these
Consolidated statements.
UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. GENERAL
The accompanying unaudited condensed consolidated financial
statements as of March 31, 2003, and 2002, 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, 2003. 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,
2002, 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,
2002, 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-month period ended
March 31, 2003, and 2002. Common stock outstanding consists
of issued shares less treasury stock. Diluted net income
per share for the three-month periods ended March 31, 2003,
and 2002, 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-month periods ended March 31,
2003, and 2002:
Net
Income
Net Per
Income Shares Share
------ --------- ------
March 31, 2003(dollars in
Thousands):
Net Income $2,339
Basic Earnings Per Share 2,339 3,214,975 $0.73
Dilutive Securities 0 0
Dilutive Earnings Per Share $2,339 3,214,975 $0.73
March 31, 2002:
Net Income $2,129
Basic Earnings Per Share 2,129 3,314,110 $0.64
Dilutive Securities 0 1,260
Dilutive Earnings Per Share $2,129 3,315,370 $0.64
3. COMPREHENSIVE INCOME
Comprehensive income is a measure of all changes in equity
of an enterprise that results 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-month periods ended March 31, 2003, and
2002:
Three Months
Ended
March 31,
2003 2002
------ ------
(Dollars in Thousands)
Net Income $2,339 $2,129
Other Comprehensive Income, Net of Tax:
Change in Unrealized Gain (Loss) on
Derivative Instruments (Net of
Tax of $9 and $69) (16) 129
Change in Unrealized (Loss) Gain on
Securities Available for Sale
(Net of Tax of $140 and $134) (259) (248)
------ ------
Comprehensive Income $2,064 $2,010
====== ======
4. RECENT ACCOUNTING PRONOUNCEMENTS
In April 2002, the Company adopted FASB Statement of Financials
Accounting Standards No. 145, "Recission of FASB Statements No.
4,44, and 64, Amendment of FASB Statement No. 13 and Technical
Corrections" (Statement 145). Statement 145 rescinds Statement
4, which requires all gains and losses from extinguishment of
debt to be aggregated and, if material, classified as an
extraordinary item, net of related income tax effect. Provisions
of Statement 145 related to the recission of Statement 4 were
effective for financial statements issued after January 1, 2003.
The adoption of the provisions of Statement 145 did not have a
material impact on the results of operations, financial position
or liquidity of the Company.
In July 2002, the FASB issued Statement of Financial Accounting
Standards No. 146, "Accounting for Cost Associated with Exit or
Disposal Activities" (Statement 146). Statement 146 requires
companies to recognize costs associated with the exit or disposal
of activities as they are incurred rather than at the date a plan
of disposal or commitment to exit is initiated. Types of costs
covered by Statement 146 include lease termination costs and
certain employee severance costs that are associated with a
restructuring, discontinued operation, facility closing, or other
exit or disposal activity. Statement 146 will apply to all exit
or disposal activities initiated after December 31, 2002. The
adoption of the provisions of Statement 146 did not have a
material impact on the Company's financial condition or results
of operations.
In November 2002, the FASB issued Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of
Others" (Interpretation 45). Interpretation 45 requires certain
guarantees to be recorded at fair value. In general,
Interpretation 45 applies to contracts or indemnification
agreements that contingently require the guarantor to make
payments to the guaranteed party based on changes in an
underlying that is related to an asset, liability, or an equity
security of the guaranteed party. The initial recognition and
measurement provisions of Interpretation 45 are applicable on a
prospective basis to guarantees issued or modified after December
31, 2002. Interpretation 45 also requires new disclosures, even
when the likelihood of making any payments under the guarantee is
remote. These disclosure requirements are effective for
financial statements of interim or annual periods ending after
December 15, 2002. The adoption of Interpretation No. 45 did not
have a material impact on the Company's financial results. As of
March 31, 2003 the Company had standby letters of credit
outstanding totaling approximately $852,000 compared to $802,000
at December 31, 2002, and commitments to extend credit of
approximately $16 million compared to $19 million at December 31,
2002.
In January 2003, the FASB issued Interpretation No. 46,
"Consolidation of Variable Interest Entities, an Interpretation
of ARB No. 51" (Interpretation 46). Interpretation 46 addresses
consolidation by business enterprises of variable interest
entities which have one or both of the following characteristics:
(1) The equity investment at risk is not sufficient to permit the
entity to finance its activities without additional support from
other parties, which is provided through other interests that
will absorb some or all of the expected losses of the entity.
(2) The equity investors lack one or more of the following
essential characteristics of a controlling financial interest:
(a) the direct or indirect ability to make decisions about the
entity's activities through voting rights or similar rights, (b)
the obligation to absorb the expected losses of the entity if
they occur, which makes it possible for the entity to finance its
activities, or (c) the right to receive the expected residual
returns of the entity if they occur, which is the compensation
for the risk of absorbing expected losses. Interpretation 46
does not require consolidation by transferors to qualifying
special purpose entities. Interpretation 46 applies immediately
to variable interest entities created after January 31, 2003, and
to variable interest entities in which an enterprise obtains an
interest after that date. It applies in the first fiscal year or
interim period beginning after June 15, 2003, to variable
interest entities in which an enterprise holds a variable
interest that it acquired before February 1, 2003. The Company
is currently assessing the impact of Interpretation No. 46 and
has identified limited partnership investments in affordable
housing projects that are considered variable interest. The
company has provided funding as a limited partner and receives
tax credit for any losses incurred by the projects based on
partnership share. At March 31, 2003, the Company has
approximately $3.8 million associated with these investments.
The Company adjusts the carrying value of these investments for
any losses or impairment incurred by the partnerships through
earnings. Although these investments are considered variable
interest entities under Interpretation 46, the Company has not
yet determined how many of these entities, if any, will need to
be consolidated.
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
March 31, 2003:
Net Interest
Income $ 5,278 $ 2,750 $ 29 $ 0 $ 8,057
Provision for
Loan Losses 350 641 0 0 991
Total Noninterest
Income 1,175 98 2,532 (2,494) 1,311
Total Noninterest
Expense 3,324 1,652 200 (93) 5,083
-------- ------- ------ -------- -------
Income(Loss)
Before Income
Taxes 2,779 555 2,361 (2,401) 3,294
Provision
(Benefit) for
Income Taxes 792 161 2 0 955
-------- ------- ------ -------- -------
Net Income(Loss) $1,987 $ 394 $2,359 $ (2,401) $ 2,339
======== ======= ====== ======== =======
Other Significant
Items:
Total Assets $544,068 $92,162 $70,461 $(160,500) $546,191
Total Investment
Securities 146,585 0 1,655 0 148,240
Total Loans 349,817 88,838 0 (89,541) 349,114
Investment in
Wholly-Owned
Subsidiaries 2,654 110 64,622 (67,276) 110
Total Interest
Income from
External
Customers 6,834 4,249 22 0 11,105
Total Interest
Income from
Affiliates 1,499 0 7 (1,506) 0
All Elimi- Consol-
FUSB ALC Other nations idated
------ ----- ------- ------- ------
For the three
months ended
March 31, 2002:
Net Interest
Income $ 5,159 $ 2,395 $ 51 $ 0 $ 7,605
Provision for
Loan Losses 338 498 0 0 836
Total Noninterest
Income 1,067 (33) 2,313 (2,290) 1,057
Total Noninterest
Expense 3,137 1,615 199 (93) 4,858
-------- ------- ------ -------- --------
Income Before
Income Taxes 2,751 249 2,165 (2,197) 2,968
Provision
(Benefit) for
Income Taxes 766 70 3 0 839
-------- ------- ------ -------- --------
Net Income
(Loss) $ 1,985 $ 179 $ 2,162 $ (2,197) $ 2,129
======== ======= ======= ========= ========
Other Significant
Items:
Total Assets,
March 31,
2002 $532,470 $80,874 $66,367 $(145,108) $534,603
Total Investment
Securities 147,387 0 2,860 0 150,247
Total Loans 345,724 76,410 0 (83,911) 338,223
Investment in
Wholly-Owned
Subsidiaries (1,974) 0 60,531 (58,557) 0
Total Interest
Income from
External
Customers 7,356 3,844 41 0 11,241
Total Interest
Income from
Affiliates 1,449 0 9 (1,458) 0
6. 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
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 ceased 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
three-month LIBOR rate index to a fixed rate constant maturity
treasury index.
As required under SFAS No. 133, hedge ineffectiveness 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, 2002, consolidated financial statements.
The emphasis of this discussion is a comparison of Assets,
Liabilities, and Shareholder's Equity for the three months ended
March 31, 2003, to year-end 2002, while comparing income and
expense for the three-month period ended March 31, 2003, and
2002.
All yields and ratios presented and discussed herein are not
presented on a tax-equivalent basis.
COMPARING THE THREE MONTHS ENDED MARCH 31, 2003, TO THE THREE
MONTHS ENDED MARCH 31, 2002
Net income increased $210,000, or 9.9%, resulting in an increase
of basic net income per share to $0.73. Annualized return on
assets was 1.75% compared to 1.63% for the same period during
2002. Average return on stockholders' equity increased to 14.0%
from 13.3%.
Interest income for the first quarter decreased $136,000 or 1.2%
compared to the first quarter of 2002. The decrease in interest
income was primarily due to a decrease in interest earned on
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 for the first quarter decreased $588,000 or
16.2% compared to the first quarter of 2002. 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 the net effect of deposits and
borrowings, during the same period.
Net interest income increased $452,000, or 5.9%, as a result of
an improvement of 12 basis point net yield on earning assets.
The provision for loan losses was $991,000 or 1.12% annualized of
average loans in the first three months of 2003, compared to
$836,000 or .99% annualized of average loans in the first three
months of 2002. Charge-offs exceeded recoveries by $699,000 for
the quarter, a decrease of approximately $385,000 over the same
period in the prior year. The decrease in charge-offs was due to
the continued improvements in the ALC portfolio. Increases in
the first quarter provision are a reflection of the increase in
non-performing loans.
Total non-interest income (excluding security gains and losses)
increased $277,000 or 28.6% compared to the first three months of
2002. This was attributable to an increase in the service
charges on deposits and also reflects the 2002 loss of $131,000
incurred on the sale of loans in conjunction with the closing of
offices at the finance company subsidiary.
Total non-interest expense increased $225,000, or 4.6%, in the
first three months of 2003. This increase was related to an
increase in salaries and employee related benefits as a result of
normal merit increases and higher benefit costs.
Income tax expense increased $116,000 or 13.8% over the first
three months of 2002. The increase during the first quarter of
2003 compared to 2002 resulted from higher levels of taxable
income. United Security's effective tax rates for the first
three months of 2003 and 2002 were 29.0% and 28.3%, respectively
as the Company continues to realize tax benefits primarily from
tax-exempt securities and low-income housing tax credits.
COMPARING THE MARCH 31, 2003, STATEMENT OF FINANCIAL
CONDITION TO DECEMBER 31, 2002
In comparing financial condition at December 31, 2002, to
March 31, 2003, total assets increased $10.9 million to $546.2
million, while liabilities increased $9.8 million to $478.1
million. Shareholders' equity increased $1.1 million as a result
of earnings in excess of dividends during the quarter.
Investment securities increased $13.7 million, or 10.2%, during
the first quarter 2003 as a result of deployment of increased
liquidity from deposits. Investments provide United Security
with a stable form of liquidity while maximizing earnings yield.
Loans, net of unearned income, decreased $2.0 million, or .57%,
during the first quarter of 2003. Deposits increased $11.8
million, or 3.3%, during the first quarter of 2003 as result of
continued competitive interest rates and additional innovative
products and services being offered to new and existing
customers.
CREDIT QUALITY
At March 31, 2003, the allowance for loan losses was $6.9
million, or 1.94%, of loans net of unearned income, compared to
$6.3 million, or 1.84%, of loans net of unearned income at
December 31, 2002 and $6.6 million, or 1.85%, of loans net of
unearned income at December 31, 2002. The coverage ratio of the
allowance for loan losses to non-performing assets increased
slightly to 75.3% at March 31, 2003, compared to 73.9% at
December 31, 2002.
Activity in the allowance for loan losses is summarized as
follows (amounts in thousands):
Three Months
Ended
March 31,
2003 2002
------ ------
Balance at Beginning of Period $6,623 $6,590
Charge-Offs 919 1,308
Recoveries (220) (224)
------ ------
Net Loans Charged-Off 699 1,084
Additions Charged to Operations 991 836
------ ------
Balance at End of Period $6,915 $6,342
====== ======
Net charge-offs for the quarter ended March 31, 2003, were
$699,000 or .78% of average loans, on an annualized basis, a
decrease of 35% or $385,000 from the $1.1 million or 1.29%
annualized of average loans reported a year earlier. The
provision for loan losses for the first quarter of 2003 was
$991,000 compared to $836,000 in the first quarter of 2002.
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 March 31, 2003, 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):
Mar. 31, Dec. 31, Mar. 31,
2003 2002 2002
---- ---- ----
Loans Accounted for on a
Non-Accrual Basis $ 5,196 $ 6,229 $ 2,859
Accruing Loans Past Due
90 Days or More 1,067 1,433 1,337
Real Estate Acquired in
Settlement of Loans 2,924 1,296 1,855
------- ------- -------
Total $ 9,187 $ 8,958 $ 6,051
======= ======= =======
Non-Performing Assets as a
Percentage of Net Loans
and Other Real Estate 2.56% 2.49% 1.75%
Loans accounted for on a non-accrual basis increased $2.3 million
since March 31, 2002 and decreased $1.0 million since December
31, 2002. Accruing loans past due 90 days or more decreased
$270,000, compared to March 31, 2002, and $366,000 since December
31, 2002. 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 $1.1 million since March 31,
2002 and $1.6 million since December 31, 2002, primarily as a
result of one loan foreclosure.
At March 31, 2003, the recorded investment in loans that were
considered impaired was $2,061,681 compared to $3,815,189 at
December 31, 2002, all of which were on a non-accrual basis at
year-end. There was approximately $582,024 and $573,161 at March
31, 2003 and December 31, 2002 respectively, in the allowance for
loan losses specifically allocated to these impaired loans.
LIQUIDITY AND CAPITAL RESOURCES
The Bank's primary sources of funds are customer deposits, the
ability to borrow, 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 is established
Federal Funds Lines.
The Bank is required to maintain certain levels of regulatory
capital. At March 31, 2003, and December 31, 2002, 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 DISCLOSURES 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, 2002, is hereby incorporated
herein by reference.
ITEM 4. CONTROLS AND PROCEDURES
Within the 90 days prior to 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 Financial Officer, of the effectiveness of the design and
operation of the Company's disclosure controls and procedures
pursuant to Exchange Act Rule 13a-14. Based upon that evaluation,
the Chief Executive Officer and Chief Financial Officer concluded
that the Company's disclosure controls and procedures are
effective in timely alerting them to material information
relating to the Company that is required to be included in the
Company's periodic SEC filings. There have been no significant
changes in the Company's internal controls or in other factors
that could significantly affect these controls subsequent to the
date the Company completed its evaluation.
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 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.
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.
(b) Reports on Form 8-K.
Form 8-K (dated April 18, 2003) was filed on April 23,
2003, relating to the press release announcing financial
results of the quarter ended March 31, 2003.
SIGNATURE
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 14, 2003
BY: /s/ Larry M. Sellers
LARRY M. SELLERS
Its Vice-President, Secretary, and Treasurer
(Duly Authorized Officer and Principal Financial
Officer)
CERTIFICATION
I, R. Terry Phillips, certify that:
1. I have reviewed this quarterly report on Form 10-Q of
United Security Bancshares, Inc.;
2. Based on my knowledge, this quarterly report does not
contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements
made, in light of the circumstances under which such
statements were made, not misleading with respect to the
period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within
90 days prior to the filing date of this quarterly
report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls and
procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have
indicated in this quarterly report whether or not there
were significant changes in internal controls or in other
factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: May 14, 2003
/s/ R. Terry Phillips
R. Terry Phillips
President and Chief Executive
Officer
CERTIFICATION
I, Larry M. Sellers, certify that:
1. I have reviewed this quarterly report on Form 10-Q of
United Security Bancshares, Inc.;
2. Based on my knowledge, this quarterly report does not
contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements
made, in light of the circumstances under which such
statements were made, not misleading with respect to the
period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within
90 days prior to the filing date of this quarterly
report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls and
procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have
indicated in this quarterly report whether or not there
were significant changes in internal controls or in other
factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: May 14, 2003
/s/ Larry M. Sellers
Larry M. Sellers
Vice-President, Secretary &
Treasurer