10-Q 1 q33103.txt 3/31/03 10-Q 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