-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RJY5fPKN8FcobwTxU6lZsc2k1LfPOyJizf8I1NiyYNBfSDeUjag3xOLjrbC2hJkF vBfx5zQWN81KxwMkHTOtHw== 0000717806-04-000006.txt : 20040806 0000717806-04-000006.hdr.sgml : 20040806 20040805184902 ACCESSION NUMBER: 0000717806-04-000006 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20040630 FILED AS OF DATE: 20040806 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNITED SECURITY BANCSHARES INC CENTRAL INDEX KEY: 0000717806 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 630843362 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-14549 FILM NUMBER: 04955902 BUSINESS ADDRESS: STREET 1: P O BOX 249 STREET 2: 131 WEST FRONT STREET CITY: THOMASVILLE STATE: AL ZIP: 36784 BUSINESS PHONE: 3346365424 MAIL ADDRESS: STREET 1: P O BOX 249 STREET 2: 131 WEST FRONT STREET CITY: THOMASVILLE STATE: AL ZIP: 36784 10-Q 1 q63004t.txt 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, 2004 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 8/5/04 Common Stock, $0.01 par value 6,430,454 shares UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES PART I. FINANCIAL INFORMATION
PAGE ITEM 1. FINANCIAL STATEMENTS Condensed Consolidated Statements of Financial Condition at June 30, 2004, and December 31, 2003 4 Condensed Consolidated Statements of Income for the Three and Six Months Ended June 30, 2004, and 2003 5 Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2004, and 2003 6 Notes to Condensed Consolidated Financial Statements 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 15 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 19 ITEM 4. CONTROLS AND PROCEDURES 19 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS 20 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 20 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 21 SIGNATURE PAGE 22
FORWARD-LOOKING STATEMENTS Statements contained in this Quarterly Report on Form 10-Q that are not historical facts are forward-looking statements (as defined in the Private Securities Litigation Reform Act of 1995). In addition, United Security Bancshares, Inc. ("Bancshares"), through its senior management, from time to time makes forward-looking public statements (as defined in the Private Securities Litigation Reform Act of 1995) concerning its expected future operations and performance and other developments. Such forward-looking statements are necessarily estimates reflecting Bancshares' best judgment based upon current information and involve a number of risks and uncertainties, and various factors could cause results to differ materially from those contemplated by such forward-looking statements. Such factors could include those identified from time to time in Bancshares' Securities and Exchange Commission filings and other public announcements, including the factors described in Bancshares' Annual Report on Form 10-K for the year ended December 31, 2003. With respect to the adequacy of the allowance for loan losses for Bancshares, these factors include, but are not limited to, the rate of growth in the economy and the relative strength and weakness in the consumer and commercial credit sectors and in the real estate markets. Forward-looking statements speak only as of the date they are made, and Bancshares undertakes no obligation to revise forward-looking statements to reflect circumstances or events that occur after the dates the forward-looking statements are made. PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Dollars in Thousands) ASSETS
June 30, December 31, 2004 2003 (Unaudited) Cash and Due from Banks $ 10,748 $ 12,596 Interest-Bearing Deposits in Banks 31 48 Securities Available for Sale 141,132 139,104 Loans, net of allowances for loan losses of $6,998 and $6,842 respectively 381,672 379,736 Premises and Equipment, net 20,334 11,363 Cash Surrender Value of Bank Owned Life Insurance 8,636 6,840 Accrued Interest Receivable 4,504 4,972 Investment in Limited Partnerships 2,803 2,980 Other Assets 10,214 9,548 Total Assets $580,074 $567,187 LIABILITIES AND SHAREHOLDERS' EQUITY Deposits $388,333 $387,680 Short-Term Borrowings 3,565 2,587 Long-Term Debt 99,696 95,755 Other Liabilities 11,251 7,836 Total Liabilities $502,845 $493,858 Shareholders' Equity: Minority Interest 482 0 Common stock, par value $0.01 per share; 10,000,000 shares authorized; 7,317,560 issued 73 73 Surplus 9,233 9,233 Accumulated other comprehensive Income 190 977 Retained Earnings 78,050 73,794 Less Treasury Stock: 887,106 and 885,286 shares, at cost, respectively (10,799) (10,748) Total Shareholders' Equity 77,229 73,329 Total Liabilities and Shareholders' Equity $580,074 $567,187 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, 2004 2003 2004 2003 (Unaudited) (Unaudited) INTEREST INCOME: Interest and Fees on Loans $10,657 $ 9,844 $21,201 $ 19,382 Interest on Securities 1,491 1,562 3,016 3,130 Total Interest Income 12,148 11,406 24,217 22,512 INTEREST EXPENSE: Interest on Deposits 1,557 1,858 3,135 3,823 Interest on Borrowings 936 1,020 1,857 2,103 Total Interest Expense 2,493 2,878 4,992 5,926 NET INTEREST INCOME 9,655 8,528 19,225 16,586 PROVISION FOR LOAN LOSSES 789 1,007 1,450 1,998 NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 8,866 7,521 17,775 14,588 NONINTEREST INCOME: Service and Other Charges on Deposit Accounts 852 817 1,661 1,608 Other Income 581 564 1,116 1,016 Securities Gains (Losses), net (43) 3 (72) 72 Total Noninterest Income 1,390 1,384 2,705 2,696 NONINTEREST EXPENSES: Salaries and Employee Benefits 3,242 3,192 6,396 6,263 Occupancy Expense 344 331 707 671 Furniture and Equipment Expense 347 328 671 665 Other Expenses 1,728 1,434 3,106 2,770 Total Noninterest Expense 5,661 5,285 10,880 10,369 INCOME BEFORE INCOME TAXES 4,595 3,620 9,600 6,915 PROVISION FOR INCOME TAXES 1,453 1,110 3,029 2,065 NET INCOME 3,142 2,510 6,571 4,850 BASIC NET INCOME PER SHARE $0.49 $0.39 $1.02 $0.75 DILUTED NET INCOME PER SHARE $0.49 $0.39 $1.02 $0.75 DIVIDENDS PER SHARE $0.18 $0.17 $0.36 $0.33 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, 2004 2003 (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $6,571 $ 4,850 Adjustments: Depreciation 442 464 Amortization of Premiums and Discounts, net 289 554 Provision for Losses on Loans 1,450 1,998 Gain(loss)on sale of securities, net 72 (72) Gain on sale of fixed assets, net 54 0 Changes in Assets and Liabilities: (Increase) in Other Assets (43) (2,682) Increase (Decrease) in Other Liabilities 1,457 (81) Total Adjustments 3,721 181 Net Cash Provided by Operating Activities 10,292 5,031 CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from Maturities/Call and Paydowns Of Securities Available for Sale 16,765 40,554 Proceeds from Sales of Securities 9,558 16,339 Purchase of Bank-Owned Life Insurance (1,500) (168) Purchase of Property and Equipment, Net (435) (899) Purchase of Securities Available for Sale (30,561) (58,426) Redemption of Federal Funds Sold 0 829 Net Cash Acquired in Consolidation of Limited Partnership 133 Net Increase in Loans (9,335) (4,560) Net Cash Used in Investing Activities (15,375) (6,331) CASH FLOWS FROM FINANCING ACTIVITIES: Increase in Customer Deposits,Net 665 14,508 Exercise of Stock Options 0 74 Dividends Paid (2,316) (2,123) Purchase of Treasury Stock (50) 0 Increase(decrease)in Borrowings, net 4,919 (10,101) Net Cash (Used in) Provided by Financing Activities 3,218 2,358 NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (1,865) 1,058 CASH AND CASH EQUIVALENTS, beginning of period 12,644 16,742 CASH AND CASH EQUIVALENTS, end of period 10,779 17,800 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, 2004, and 2003, 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, 2004. 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, 2003, 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, 2003, 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, 2004, and 2003. 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, 2004, and 2003, 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, 2004, and 2003:
Net Income Net Per For the Three Months Ended Income Shares Share June 30, 2004(dollars in thousands): Net Income $3,142 Basic Net Income Per Share $3,142 6,430,545 $0.49 Dilutive Securities 0 0 Diluted Earnings Per Share 3,142 6,430,545 $0.49 June 30, 2003: Net Income $2,510 Basic Net Income Per Share $2,510 6,432,274 $0.39 Dilutive Securities 0 0 Diluted Earnings Per Share 2,510 6,432,274 $0.39 Net Income Net Per For the Six Months Ended Income Shares Share June 30, 2004(dollars in thousands): Net Income $6,571 Basic Net Income Per Share $6,571 6,431,083 $1.02 Dilutive Securities 0 0 Diluted Earnings Per Share 6,571 6,431,083 $1.02 June 30, 2003: Net Income $4,850 Basic Net Income Per Share $4,850 6,431,119 $0.75 Dilutive Securities 0 0 Diluted Earnings Per Share 4,850 6,431,119 $0.75
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, 2004, and 2003: Three Months Six Months Ended Ended June 30, June 30, 2004 2003 2004 2003 Net Income $3,142 $2,510 $6,571 $4,850 Other Comprehensive Income, Net of Tax: Change in Unrealized Gain (Loss) on Derivative Instruments (Net of Tax of $328, $45, $221, and $53 respectively) 547 (83) 369 (99) Change in Unrealized Gain on Securities Available For Sale (Net of Tax of $1,041, $72, $694, and $211 respectively). (1,733) (133) (1,155) (392) Comprehensive Income $ 1,956 $2,294 $ 5,785 $4,359
4. RECENT ACCOUNTING PRONOUNCEMENTS The financial accounting standards board issued a revised version of Interpretation No. 46 "Consolidation of Variable Interest Entities" (Interpretation 46), in December of 2003. This revised interpretation 46 is effective no later than the end of the first interim or annual period ending after December 15, 2003, for entities created after January 31, 2003, and for entities created before February 1, 2003, no later than the end of the first interim or annual period ending after March 15, 2004. As required, the Bank adopted the guidance of Interpretation 46 for all entities. The Bank has limited partnership investments in affordable housing projects, for which it provides funding as a limited partner and receives tax credits related to its investments in the projects based on its partnership share. The Bank has invested in limited partnerships of affordable housing projects, both as direct investments and investments in funds that invest solely in affordable housing projects. The bank has determined that these structures meet the definition of a variable interest entity. The bank has determined that it needs to con- solidate one of the funds in which it is the sole limited partner. The Bank has also determined that this fund is required to consolidate one of the affordable housing projects the fund invests in. The resulting financial impact to the consolidation of the Bank is an increase to total assets of approximately $10.0 million, including $9.0 million in premises and equipment. Loans payable by the partnership, payable to the Bank, totaling $6.0 million were eliminated as a result of this consolidation. Unconsolidated investments in these limited partnerships are accounted for under the equity method of accounting. The Bank's maximum exposure to future loss related to these limited partnerships is limited to the $2.2 million recorded investment. In March, 2004, the SEC issued Staff Accounting Bulletin 105 "Application of Accounting Principles to Loan Commitments," (SAB 105) to inform registrants of the Staff's view that the fair value of the recorded loan commitments should not consider the expected future cash flows related to the associated servicing of the future loan. The provisions of SAB 105 must be applied to loan commitments accounted for as derivatives that are entered into after March 31, 2004. The Bank carries all loan commitments at fair value, and does not include the value of its servicing or any of internally developed intangible asset in the valuation of its commitments. Thus, the adoption of SAB 105 did not have an impact on the Bank's financial condition or results of operations. In March 2004, the Emerging Issues Task Force reached a consensus on Issue 03-1, "Meaning of Other Than Temporary Impairment" (Issue 03-1) for debt and equity securities accounted for under Statement of Financial Accounting Standards No. 115 and cost method investments. The basic model developed by the Task Force in evaluating whether an investment within the scope of Issue 03-1 is other-than-temporarily impaired is as follows: 1) Determine whether the investment is impaired. An investment is impaired if its fair value is less than its cost. 2) Evaluate whether the impairment is other-than-temporary. 3) If the impairment is other-than-temporary, recognize an impairment loss equal to the difference between the investment's cost and its fair value. The model shall be applied prospectively to all current and future investments in interim or annual reporting periods beginning after June 15, 2004. The Bank does not anticipate the adoption of Issue 03-1 will have a material impact on its financial condition or results of operations. 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, 2004: Net Interest Income $ 6,017 $ 3,625 $ 13 $ 0 $ 9,655 Provision for Loan Losses 217 572 0 0 789 Total Noninterest Income 1,088 109 3,487 (3,294) 1,390 Total Noninterest Expense 3,662 1,811 275 (87) 5,661 Income(Loss) Before Income Taxes 3,226 1,351 3,225 (3,207) 4,595 Provision (Benefit) for Income Taxes 965 486 2 0 1,453 Net Income(Loss) $ 2,261 $ 865 $ 3,223 $ (3,207) $ 3,142 For the six months ended June 30, 2004: Net Interest Income $12,121 $7,073 $ 31 $ 0 $19,225 Provision for Loan Losses 262 1,188 0 0 1,450 Total Noninterest Income 2,185 254 7,168 (6,902) 2,705 Total Noninterest Expense 7,116 3,463 506 (205) 10,880 Income(Loss) Before Income Taxes 6,928 2,676 6,693 (6,697) 9,600 Provision (Benefit) for Income Taxes 2,074 950 5 0 3,029 Net Income(Loss) $ 4,854 $1,726 $6,688 $(6,697) $ 6,571 Other Significant Items: Total Assets $571,913 $118,146 $89,869 $(199,854) $580,074 Total Investment Securities 140,231 0 901 0 141,132 Total Loans 384,547 114,832 0 (117,707) 381,672 Investment in Subsidiaries 5,391 103 73,636 (79,022) 108 Total Interest Income from External Customers 13,341 10,858 18 0 24,217 Total Interest Income from Affiliates 3,785 0 12 (3,797) 0
All Elimi- Consol- FUSB ALC Other nations idated For the Three Months Ended June 30, 2003: Net Interest Income $ 5,514 $ 2,986 $ 28 $ 0 $ 8,528 Provision for Loan Losses 420 587 0 0 1,007 Total Noninterest Income 1,170 120 2,829 (2,735) 1,384 Total Noninterest Expense 3,405 1,703 279 (102) 5,285 Income(Loss) Before Income Taxes 2,859 816 2,578 (2,633) 3,620 Provision (Benefit) for Income Taxes 853 253 4 0 1,110 Net Income(Loss) $ 2,006 $ 563 $ 2,574 $ (2,633) $ 2,510 For the Six Months Ended June 30, 2003: Net Interest Income $ 10,792 $5,736 $ 58 $ 0 $ 16,586 Provision for Loan Losses 769 1,229 0 0 1,998 Total Noninterest Income 2,345 219 5,361 (5,229) 2,696 Total Noninterest Expense 6,729 3,355 480 (195) 10,369 Income (Loss) Before Income Taxes 5,639 1,371 4,939 (5,034) 6,915 Provision (Benefit)for Income Taxes 1,646 414 5 0 2,065 Net Income(Loss) $ 3,993 $ 957 $ 4,934 $ (5,034) $ 4,850 Other Significant Items: Total Assets $537,938 $99,867 $71,736 $(167,725) $541,816 Total Investment Securities 132,747 0 1,376 0 134,123 Total Loans 354,844 94,232 0 (95,079) 353,997 Investment in Subsidiaries 2,718 110 65,886 (68,604) 110 Total Interest Income from External Customers 13,638 8,835 39 0 22,512 Total Interest Income from Affiliates 3,099 0 19 (3,118) 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 forecasted transactions. The Company also formally assesses, both at the hedge's inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items. When it is determined that a derivative is not highly effective as a hedge or that it has ceased to be a highly effective hedge, the Company discontinues hedge accounting. 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 transactions that are probable of not occurring. The maturity of the interest rate swaps varies from one to two years. 7. GUARANTEES, COMMITMENTS AND CONTINGENCIES In the normal course of business there are outstanding commitments and contingent liabilities, such as commitments to extend credit, letters of credit, and others. The financial instruments involve, to varying degrees, elements of credit and interest rate risk in excess of amounts recognized in the financial statements. A summary of these commitments and contingent liabilities is presented below. June 30, December 31, 2004 2003 Standby Letters of Credit $ 1,028 $ 523 Commitments to Extend Credit $26,987 $25,792
Standby letters of credit are contingent commitments issued by the Company generally to guarantee the performance of a customer to a third party. The Company has recourse against the customer for any amount it is required to pay to a third party under a standby letter of credit. Revenues are recognized over the life of the standby letter of credit. The potential amount of future payments the Company could be required to make under its standby letter of credit at June 30, 2004, is $1,027,868 and represents the Company's total credit risk. At June 30, 2004, the Company had $834,888 of liabilities and $834,888 of receivables associated with standby letter of credit agreements entered into subsequent to December 31, 2002, as a result of the Company's adoption of Interpretation 45 at January 1, 2003. Standby letter of credit agreements entered into prior to January 1, 2003, have a carrying value of zero. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management's credit evaluation of the counter party. Collateral held varies but may include accounts receivable, inventory, property, plant, and equipment, and income-producing commercial properties. 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" or the "Company"). United Security is the parent holding company of First United Security Bank (the "Bank"). The Bank operates a finance company, Acceptance Loan Company ("ALC"). United Security 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, 2003, consolidated financial statements. The emphasis of this discussion is a comparison of Assets, Liabilities, and Stockholders' Equity as of June 30, 2004, to year-end 2003, while comparing income and expense for the three and six-month periods ended June 30, 2004, and 2003. All yields and ratios presented and discussed herein are not presented on a tax-equivalent basis. Interest income increased $741,000, or 6.5%, to $12.1 million for the second quarter of 2004 from $11.4 million for the second quarter of 2003. Interest income increased $1,705,000, or 7.6% to $24.2 million for the first six months of 2004 compared to $22.5 million for the first six months of 2003. This increase in interest income was primarily due to an increase in interest earned on loans offset somewhat by a decrease in interest earned on investment securities. This increase in loan income is due to both increases in volume and also increases in yield. Interest expense decreased $385,000, or 13.4%, to $2.5 million for the second quarter of 2004 from $2.9 million for the second quarter of 2003. Interest expense decreased $934,000 million, or 15.7%, to $5.0 million for the first six months of 2004 compared to $5.9 million for the first six months of 2003. 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 $1.1 million, or 13.2%, for the second quarter of 2004 and $2.6 million, or 15.9% for the first six months of 2004 as a result of an improvement of a 79 basis point net yield on earning assets, resulting from a decrease in the cost of interest-bearing deposits and a decrease in the cost of borrowed funds, offset by an increase in the volume of borrowed funds. The provision for loan losses was $789,000 or .83% annualized of average loans in the second quarter of 2004, compared to $1.0 million or 1.13% annualized of average loans in the second quarter of 2003. The loan loss provision decreased slightly compared to the prior year due to decreased charge-offs. For the first six months of 2004, the provision for loan losses decreased to $1.5 million or .76% annualized of average loans, compared to $2.0 million or 1.12% annualized of average loans for the first six months of 2003. Total non-interest income (excluding security gains and losses) increased $52,000 or 3.8% for the second quarter and $153,000 or 5.8% for the first six months of 2004. These increases are all attributable to increases in service charges on deposit accounts and other income. Total non-interest expense increased $376,000, or 7.1% for the second quarter of 2004 to $5.7 million. Total non-interest expense increased $511,000 or 4.9% for the first six months of 2004 compared to 2003. This increase was related to an increase in salaries and employee benefits as a result of normal merit increases and higher benefits costs. Income tax expense increased $334,000 or 30.9% during the second quarter of 2004 as compared to the same period a year ago. Income tax expense increased $964,000 or 46.7% over the first six months of 2003. The increase during the first six months of 2004 compared to 2003 resulted from higher levels of taxable income. United Security's effective tax rate for the first six months of 2004 and 2003 were 31.6% and 29.9%, respectively. The Company continues to realize tax benefits primarily from tax-exempt securities and low income housing tax credits; however, these tax benefits have not increased as rapidly as taxable income. For the second quarter, net income increased $632,000, or 25.2%, resulting in an increase of basic net income per share to $0.49. For the first six months, net income increased $1,721,000, or 35.5%, resulting in an increase of basic net income per share to $1.02. Annualized return on assets was 2.30% compared to 1.79% for the same period during 2003. Average return on stockholders' equity increased to 17.52% from 14.32%. COMPARING THE JUNE 30, 2004, STATEMENT OF FINANCIAL CONDITION TO DECEMBER 31, 2003 In comparing financial condition at December 31, 2003, to June 30, 2004, total assets increased $12.9 million to $580.1 million, while liabilities increased $9.0 million to $502.8 million. Shareholders' equity increased $3.4 million as a result of earnings in excess of dividends during the first six months of 2004. Investment securities increased $2.0 million, or 1.5% during the first six months of 2004 as a result of deployment of increased liquidity from deposits and modest loan growth. Investments provide United Security with a stable form of liquidity while maximizing earnings yield. Loans net of unearned income increased $2.1 million from $386,578 at December 31, 2003, to $388,670 at June 30, 2004. This increase of less than 1% is impacted by the elimination of $6.0 million in loans eliminated in the consolidation of a variable interest entity. Deposits increased $653,000 or 0.2% for the first six months of 2004. CREDIT QUALITY At June 30, 2004, the allowance for loan losses was $7.0 million, or 1.80% of loans net of unearned income, compared to $6.5 million, or 1.83% of loans net of unearned income at June 30, 2003 and $6.8 million, or 1.77% of loans net of unearned income at December 31, 2003. The coverage ratio of the allowance for loan losses to non-performing assets decreased to 90.17% at June 30, 2004, compared to 140.5% at December 31, 2003, primarily as a result of an increase in non-accrual loans during the first six months of 2004. Activity in the allowance for loan losses is summarized as follows (amounts in thousands): Six Months Ended June 30, 2004 2003 Balance at Beginning of Period $6,842 $6,623 Charge-Offs 1,739 2,495 Recoveries (445) (410) Net Loans Charged-Off 1,294 2,085 Additions Charged to Operations 1,450 1,998 Balance at End of Period $6,998 $6,536
Net charge-offs for the six months ended June 30, 2004, were $1.3 million or 0.68% of average loans, on an annualized basis, a decrease of $791,000 from the $2.1 million or 1.17% annualized of average loans reported a year earlier. The provision for loan losses for the first six months of 2004 was $1.5 million compared to $2.0 million in the first six months of 2003. United Security maintains the allowance for loan losses at a level deemed adequate by management to absorb probable 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, 2004, 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, 2004 2003 2003 Loans Accounted for on a Non-Accrual Basis $4,935 $1,879 $ 4,956 Accruing Loans Past Due 90 Days or More 2,058 382 461 Real Estate Acquired in Settlement of Loans 768 2,608 2,859 Total $7,761 $4,869 $ 8,276 Non-Performing Assets as a Percentage of Net Loans and Other Real Estate 1.99% 1.26% 2.28%
Loans accounted for on a non-accrual basis increased $3.1 million since December 31, 2003. Of this increase $.5 million is a commercial real estate loan which has adequate collateral, with no loss of principal anticipated. The remaining $2.4 million is made up of 2 commercial real estate loans which are considered impaired as discussed below. Accruing loans past due 90 days or more increased $1.7 million from December 31, 2003. Two large commercial real estate loans account for this increase. These loans are in the process of collection, and management is confident they will be paid soon with no loss of principal or interest. Real estate acquired in settlement of loans decreased $2.1 million since June 30, 2003, and $1.8 million since December 31, 2003, through sales of foreclosed property. At June 30, 2004, the recorded investment in loans that were considered impaired was $2,445,914 compared to $1,320,822 at December 31, 2003, all of which were on a non-accrual basis. There was approximately $658,489 and $198,123 at June 30, 2004, and December 31, 2003, 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, 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 $129.9 million in borrowing capacity from the Federal Home Loan Bank and $40 million in established Federal Funds Lines. The Bank is required to maintain certain levels of regulatory capital. At June 30, 2004, and December 31, 2003, 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, 2003, is hereby incorporated herein by reference. ITEM 4. CONTROLS AND PROCEDURES As of June 30, 2004, the end of the quarter covered by this report, the Company carried out an evaluation, under the supervision and with the participation of management, including the Chief Executive Officer and the Principal Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Based upon that eval- uation, the Chief Executive Officer and the Principal Financial Officer concluded that the Company's disclosure controls and procedures were effective in timely alerting them to material information relating to the Company required to be included in the Company's periodic SEC filings. There have been no significant changes in the Company's internal controls over financial reporting during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal controls over financial reporting. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is a defendant in 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 The Company held its Annual Meeting of Shareholders on May 13, 2004. At the meeting, the shareholders of the Company were asked to vote on the election of 13 directors to serve until the next annual meeting of shareholders or until their successors are elected and qualified and to ratify the adoption of the United Security Bancshares, Inc. Non-Employee Directors' Deferred Compensation Plan. The results of the shareholder voting on both matters are summarized as follows: Proposal 1: The Election of Directors Director For Withheld 1. Dan R. Barlow 4,300,926 92,700 2. Linda H. Breedlove 4,281,802 111,824 3. Gerald P. Corgill 4,327,316 66,310 4. Wayne C. Curtis 4,277,721 115,905 5. John C. Gordon 4,327,316 66,310 6. William G. Harrison 4,327,212 66,414 7. Hardie B. Kimbrough 4,202,890 190,736 8. Jack W. Meigs 4,327,316 66,310 9. R. Terry Phillips 4,318,990 74,636 10. Ray Sheffield 4,290,128 103,498 11. James C. Stanley 4,327,316 66,310 12. Howard M. Whitted 4,327,316 66,310 13. Bruce N. Wilson 4,148,088 245,538 Proposal 2: The Ratification of the Adoption of the United Security Bancshares, Inc. Non-Employee Directors' Deferred Compensation Plan For Against Abstain 4,176,801 163,492 53,333 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibit 31.1: Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Exhibit 31.2: Certification of the Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Exhibit 32: Certification of the Chief Executive Officer and the Principal Financial Officer 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. A report on Form 8-K was filed on April 27, 2004, relating to the press release dated April 26, 2004, announcing financial results for the quarter ended March 31, 2004. SIGNATURES 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 5, 2004 BY: /s/ROBERT STEEN ROBERT STEEN Its Assistant Vice President, Assistant Treasurer & Principal Financial Officer (Duly Authorized Officer and Principal Financial Officer) EX-31.1 2 exh311t.txt EXHIBIT 31.1 CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 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 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 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-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 5, 2004 By: /s/ R. Terry Phillips R. Terry Phillips President and Chief Executive Officer EX-31.2 3 exh312t.txt EXHIBIT 31.2 CERTIFICATION OF THE PRINCIPAL FINANCIAL OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Robert Steen, certify that: 1. I have reviewed this Quarterly Report on Form 10-Q of United Security Bancshares, Inc. 2. Based on my knowledge, this 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 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-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 5, 2004 /s/ Robert Steen Robert Steen Assistant Vice President, Assistant Treasurer, and Principal Financial Officer EX-32 4 exh32t.txt EXHIBIT 32 CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER AND THE PRINCIPAL FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, R. Terry Phillips, President and Chief Executive Officer of United Security Bancshares, Inc., and Robert Steen, Assistant Vice President, Assistant Treasurer and Principal Financial Officer of United Security Bancshares, Inc., certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report on Form 10-Q of United Security Bancshares, Inc. for the fiscal quarter ended June 30, 2004 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Quarterly Report on Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of United Security Bancshares, Inc. /s/ R. Terry Phillips R. Terry Phillips President and Chief Executive Officer August 5, 2004 /s/ Robert Steen Robert Steen Assistant Vice President, Assistant Treasurer and Principal Financial Officer August 5, 2004 -----END PRIVACY-ENHANCED MESSAGE-----