UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1998
Commission File Number: 0-14549
United Security Bancshares, Inc.
(Exact name of registrant as specified in its charter)
Alabama 63-0843362
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
131 West Front Street
Post Office Box 249
Thomasville, AL 36784
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code: (334)636-5424
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at September 30, 1998
Common Stock, $.01 par value 3,545,345
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UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Page
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ITEM 1. FINANCIAL STATEMENTS:
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
AT SEPTEMBER 30, 1998 (UNAUDITED) AND DECEMBER 31, 1997 3
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998
AND 1997 4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED) FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1998 AND 1997 5
THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FURNISHED HAVE NOT BEEN AUDITED BY INDEPENDENT
CERTIFIED 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 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 10
PART II. OTHER INFORMATION
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 13
SIGNATURE PAGE
SIGNATURES 14
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<TABLE>
UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands, except per share data)
Assets
September 30, December 31,
1998 1997
(Unaudited)
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CASH AND DUE FROM BANKS $ 12,673 $ 14,539
FEDERAL FUNDS SOLD 0 0
INVESTMENT SECURITIES AVAILABLE FOR
SALE, at fair value 177,929 172,499
LOANS, net of allowance for loan
losses of $4,799 and $4,046,
respectively 231,331 215,897
PREMISES AND EQUIPMENT 7,785 6,837
OTHER ASSETS 16,343 16,169
Total assets $446,061 $425,941
LIABILITIES AND SHAREHOLDERS' EQUITY
DEPOSITS $321,327 $322,418
BORROWINGS 58,110 44,879
OTHER LIABILITIES 7,136 5,933
Total liabilities 386,573 373,230
SHAREHOLDERS' EQUITY
Common stock, par value $.01 per
share; 10,000,000 shares authorized;
3,609,345 and 3,601,785 shares issued,
respectively 36 36
Surplus 8,191 8,057
Net unrealized gain on securities
available for sale 2,945 1,013
Retained earnings 48,568 43,859
Less treasury stock--64,000 shares and
64,100 shares, respectively, at cost (252) (254)
Total shareholders' equity 59,488 52,711
Total liabilities and
shareholders' equity $446,061 $425,941
The accompanying notes are an integral part of these statements.
</TABLE>
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<TABLE>
UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
(Unaudited) (Unaudited)
INTEREST INCOME:
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Interest and fees on loans $ 7,687 $ 5,716 $21,449 $16,454
Interest on securities 3,567 3,665 10,530 11,266
Total interest income 11,254 9,381 31,979 27,720
INTEREST EXPENSE:
Interest on deposits 3,191 3,359 9,387 10,060
Interest on borrowings 865 472 2,295 1,493
Total interest expense 4,056 3,831 11,682 11,553
NET INTEREST INCOME 7,198 5,550 20,297 16,167
PROVISION FOR LOAN LOSSES 719 399 1,969 1,166
Net interest income after
provision for loan losses 6,479 5,151 18,328 15,001
NONINTEREST INCOME:
Service and other charges
on deposit accounts 514 471 1,546 1,383
Other income 496 275 1,393 693
Securities gains 55 202 520 359
Total noninterest income 1,065 948 3,459 2,435
NONINTEREST EXPENSES:
Salaries and employee
benefits 2,480 1,819 7,083 5,086
Occupancy expense 290 284 803 642
Furniture and equipment
expense 378 317 1,105 951
Other expenses 1,113 1,859 3,334 4,273
Total noninterest expense 4,261 4,279 12,325 10,952
Income before income taxes 3,283 1,820 9,462 6,484
PROVISION FOR INCOME TAXES 972 632 2,732 1,823
NET INCOME $ 2,311 $ 1,188 $ 6,730 $ 4,661
BASIC NET INCOME PER SHARE $.65 $.34 $1.90 $1.32
DILUTED NET INCOME PER SHARE $.65 $.34 $1.89 $1.32
DIVIDENDS PER SHARE $.19 $.15 $ .57 $ .37
The accompanying notes are an integral part of these statements.
</TABLE>
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<TABLE>
UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands, except per share data)
Nine Months Ended
September 30,
1998 1997
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income $6,730 $ 4,661
Adjustments:
Depreciation 730 462
Amortization of premiums and discounts, net 167 953
Amortization of intangibles 424 254
Provisions for losses on loans 1,969 1,166
(Gain) loss on sale of securities, net (254) (359)
(Gain) loss on sale of fixed assets (7) 0
Changes in assets and liabilities:
Decrease (increase) in other assets (3,378) (5,551)
(Decrease) increase in other liabilities 1,203 6,599
Total adjustments 854 3,524
Net cash provided by operating activities 7,584 8,185
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities/call of securities
available for sale 35,832 3,281
Proceeds from sales of securities 28,455 36,562
(Purchase of) proceeds from sale of property
and equipment, net (1,671) (1,053)
Purchase of securities available for sale (64,918) (39,931)
Loan (originations) and principal repayments, net (17,403) (3,789)
Net cash used by investing activities (19,705) (4,930)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment for fractional shares 0 (3)
Decrease (increase) in customer deposits, net (1,091) (3,058)
Sale of treasury stock 3 0
Exercise of stock options 133 0
Dividends paid (2,021) (1,357)
(Decrease) increase in borrowings 13,231 2,000
Net cash used by financing activities 10,255 (2,418)
Net increase (decrease) in cash and cash
equivalents (1,866) 837
CASH AND CASH EQUIVALENTS, beginning of period 14,539 16,006
CASH AND CASH EQUIVALENTS, end of period $12,673 $16,843
The accompanying notes are an integral part of these statements.
</TABLE>
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UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
The accompanying unaudited condensed consolidated financial
statements as of September 30, 1998 and 1997 and for the
three-month and nine-month periods then ended, include the
accounts of United Security Bancshares, Inc. and its
subsidiaries. All significant intercompany 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 operation of
any interim period are not necessarily indicative of results
expected for the fiscal year ended December 31, 1998. While
certain information and footnote disclosures normally
included in financial statements prepared in accordance with
generally accepted accounting principles 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, 1997, 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, 1997 consolidated
financial statements.
2. MERGER BETWEEN USB AND FBI
On June 30, 1997 First Bancshares, Inc. ("FBI") merged with
and into USB, and USB survived (combined entity the
"Company").
Under the terms of the merger agreement, 1.4 million shares
of the Company's common stock were issued in exchange for
all of the outstanding shares of FBI's common stock (based
on an exchange ratio of 5.83 shares of the Company's common
stock for each share of FBI's common stock). The merger was
accounted for as a pooling-of-interests and, accordingly,
the information included in the financial statements and
consolidated notes of the Company presents the combined
results of USB and FBI as if the merger had been in effect
for all periods presented.
3. NET INCOME PER SHARE
Basic net income per share was computed by dividing net
income by the weighted average number of shares of common
stock outstanding during the three and nine month periods
ended September 30, 1998 and 1997. Common stock outstanding
consists of issued shares less treasury stock. Diluted net
income per share for the three and nine month periods ended
September 30, 1998 and 1997, was computed by dividing net
income by the weighted average number of shares of common
stock and the dilutive effects of the shares awarded under
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the Stock Option plan, based on the treasury stock method
using an average fair market value of the stock during the
respective periods.
In 1997, the Company adopted SFAS No. 128, "Earnings Per
Share". The following table represents the net income per
share calculations for the three and nine months ended
September 30, 1998 and 1997:
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Net Income
For the Three Months Ended Income Shares Per Share
September 30, 1998 ($ in
thousands):
Net income $2,311
Basic net income per share:
Income available to
common shareholders 2,311 3,544,683 $.65
Dilutive securities:
Stock option 0 24,796
Dilutive net income per share:
Income available to common
shareholders plus assumed
conversions 2,311 3,569,479 $.65
September 30, 1997:
Net income $1,188
Basic net income per share:
Income available to
common shareholders 1,188 3,536,748 $.34
Dilutive securities 0 0
Dilutive net income per
share $1,188 3,536,748 $.34
Net Income
For the Nine Months Ended Income Shares Per Share
September 30, 1998 ($ in
thousands):
Net income $6,730
Basic net income per share:
Income available to
common shareholders 6,730 3,542,562 $1.90
Dilutive securities:
Stock option 0 26,917
Dilutive net income per share:
Income available to common
shareholders plus assumed
conversions $6,730 3,569,479 $1.89
September 30, 1997:
Net income $4,661
Basic net income per share:
Income available to
common shareholders 4,661 3,536,748 $1.32
Dilutive securities 0 0
Dilutive net income
per share 4,661 3,536,748 $1.32
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4. COMPREHENSIVE INCOME
The company adopted SFAS No. 130 January 1, 1998. SFAS No.
130 established standards for reporting and display of
comprehensive income and its components.
The Company has classified the majority of its securities as
available for sale in accordance with Financial Accounting
Standards Board Statement No. 115. For the three and nine
month periods ended September 30, 1998, the net unrealized
gain on these securities increased by $1.9 million and
increased by $3.1 million, respectively. For the three and
nine month periods ended September 30, 1997, the net
unrealized gain on these securities increased by $731,000
and $707,000, respectively. Pursuant to Statement 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.
Accordingly, for the three and nine month periods ended
September 30, 1998 and 1997, the Company recognized a
corresponding adjustment in the net unrealized gain
component of equity.
Since comprehensive income is a measure of all changes in
equity of an enterprise that result from transactions and
other economic events of the period, this change in
unrealized gain serves to increase or decrease comprehensive
income. The following table represents comprehensive income
for the three and nine months ended September 30, 1998 and
1997:
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Three Months Nine Months
Ended Ended
September 30, September 30,
1998 1997 1998 1997
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Net income $2,311 $1,188 $6,730 $4,661
Other comprehensive
income(loss), net of
tax:
Unrealized gain(loss)
on securities 1,174 457 1,932 1,030
Comprehensive income $3,485 $1,645 $8,662 $5,691
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5. MARKET RISK
There have been no material changes in reported market risks
since year-end.
6. PENDING ACCOUNTING PRONOUNCEMENTS
The AICPA has issued Statements of Position 98-1, Accounting
for the Costs of Computer Software Developed or Obtained for
Internal Use. This statement requires capitalization of
external direct costs of materials and services; payroll and
payroll-related costs for employees directly associated; and
interests costs during development of computer software for
internal use (planning and preliminary costs should be
expensed). Also, capitalized costs of computer software
developed or obtained for internal use should be amortized
on a straight-line basis unless another systematic and
rational basis is more representative of the software's use.
This statement is effective for financial statements for
fiscal years beginning after December 15, 1998
(prospectively) and is not expected to have a material
effect on the consolidated financial statements.
The Financial Accounting Standards Board ("FASB") has issued
Statement of Financial Accounting Standards No. 133,
Accounting for Derivative Instruments and for Hedging
Activities. The statement requires derivatives to be
recorded in the balance sheet as either an asset or
liability measured at its fair value. The Statement also
requires that changes in the derivatives' fair value be
recognized currently in earnings unless specific hedge
accounting criteria are met. This Statement is effective
for fiscal years beginning after June 15, 1999
(prospectively) and is not expected to have a material
effect on the consolidated financial statements.
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and financial information 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
United Security Bank (the "Bank"), and it has no operations of any
consequence other than the ownership of its subsidiaries. The
Bank's name was changed from United Security Bank to First United
Security Bank on July 9, 1997.
The emphasis of this discussion is a comparison of Assets,
Liabilities, and Capital for the nine months ended September 30,
1998, to year-end 1997; while comparing income for the three and
nine month periods ended September 30, 1998, to income for the
three and nine month periods ended September 30, 1997.
On the close of business, June 30, 1997, United Security
Bancshares, Inc. and United Security Bank completed the merger
with First Bancshares, Inc. and First Bank and Trust. The merger
is considered as a "pooling of interest" for accounting and
financial reporting purposes, therefore all financial information
presented combines the results of both institutions as if the
merger had been in effect for all periods presented.
All yields and ratios presented and discussed herein are based on
the cash basis and not on the tax-equivalent basis.
COMPARING THE THREE MONTHS ENDED SEPTEMBER 30, 1998, TO THE THREE
MONTHS ENDED SEPTEMBER 30, 1997:
Net income increased $1.1 million, or 94.5%, thus increasing basic
net income per share to $.65 from $.34. The increase is primarily
attributable to a $1.8 million, or 19.9%, increase in interest
income and a $117,000, or 12.3%, increase in noninterest income,
which were offset by a $320,000 increase in the provision for loan
losses. The increase in the provision for loan losses was
primarily a result of continued growth in the finance company.
The allowance for loan losses reflects management's estimates,
which take into account historical experience, the amount of
nonperforming assets, and general economic conditions.
The increase in interest income was due to increases in interest
on loans. This increase is due to an increase in the average
loans outstanding and an increase in the average yield.
The $18,000 or (.42)%, decrease in noninterest expense was
primarily attributed to increases in salaries and employee
benefits expenses of $661,000 which were offset by a reduction of
$746,000 in other noninterest expense. A significant portion of
the increase in salaries and employee benefits expenses is
associated with the cost of adding offices to the Acceptance Loan
Company, a wholly owned subsidiary of First United Security Bank.
The resulting offset in other noninterest expense is associated
with the merger expenses recorded during fiscal 1997.
<PAGE>
COMPARING THE NINE MONTHS ENDED SEPTEMBER 30, 1998, TO THE NINE
MONTHS ENDED SEPTEMBER 30, 1997:
Net income increased $2 million, or 44.4%, thus increasing basic
net income per share to $1.90 from $1.32. The increase is
primarily attributable to a $4.2 million, or 15.0%, increase in
interest income and a $1 million, or 42%, increase in noninterest
income, which were offset by a $1.3 million, or 12.5%, increase in
noninterest expense, and a $803,000 increase in the provision for
loan losses. The increase in the provision for loan losses was
primarily a result of continued growth in the finance company.
The allowance for loan losses reflects management's estimates,
which take into account historical experience, the amount of
nonperforming assets, and general economic conditions.
The increase in interest income was due to increases in interest
on loans. This increase is due to an increase in the average
loans outstanding and an increase in the average yield.
The $1.3 million, or 12.5%, increase in noninterest expense was
primarily attributed to increases in salaries and employee
benefits expenses by $1.9 million. A significant portion of this
increase is associated with the cost of adding offices to the
Acceptance Loan Company, a wholly owned subsidiary of First United
Security Bank.
COMPARING THE SEPTEMBER 30, 1998 STATEMENT OF FINANCIAL CONDITION
TO DECEMBER 31, 1997:
In comparing the financial condition at December 31, 1997 to
September 30, 1998, the liquidity and capital resources did not
materially change during the period. Total assets, increased
$20.1 million to $446 million, while liabilities increased $13.3
million to $386 million. Retained earnings increased $4.7
million, or 10.7%, due to earnings in excess of dividends paid
during the period. This change and an increase of $1.9 million in
net unrealized gain on available for sale securities increased
shareholders's equity by $6.7 million to $59.4 million.
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.
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 is required to maintain certain levels of regulatory
capital. At September 30, 1998 and December 31, 1997, 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 any adverse effects 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
<PAGE>
ultimate disposition of these matters is not expected to have a
material adverse effect on the financial position of the Company.
YEAR 2000 PROBLEM
The Year 2000 ("Y2K") problem is the programming problem caused by
some computer software programs and hardware systems using only
two digits to indicate a year and assuming that the first two
digits of any year are "19". Risks to the Company if its computer
systems are not Y2K complaint include the inability to process
customer deposits or checks drawn on the Bank, inaccurate interest
accruals and maturity dates of loans and time deposits, and the
inability to update accounts for daily transactions. Other risks
to the Company exist if certain of its vendors', suppliers', and
customers' computer systems are not Y2K complaint. These risks
include the inability of the Bank to communicate with the
centralized data processing center if phone systems are not
working, the interruption of business in the event of power
outages, the inability of loan customers to comply with repayment
terms if their businesses are interrupted, and the inability to
make payment for checks drawn on the Bank, receive payment for
checks deposited by the Bank's customers, or invest excess funds
if the Federal Reserve Bank's or correspondent banks' are not Y2K
compliant. The Company's most important mission critical system
is the software and hardware responsible for maintaining and
processing general ledger, deposits, and loan accounts. The Bank
will be involved in a test of this system prior to year-end 1998.
Testing of all other systems is scheduled to be completed by the
end of 1998. The Company is in the process of contacting its key
vendors, suppliers, and customers to determine their Y2K
compliance. The Company is also in the process of establishing a
contingency plan, which is scheduled to be completed by the end of
1998. The Company estimates that the cost of testing and updating
its systems for Y2K compliance will be less than $50,000.
<PAGE>
PART II: OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27 is filed with this report.
(b) A report on Form 8-K, dated September 9, 1998, was filed on
September 9, 1998, reporting pursuant to Item 5 of Form 8-K the
passing of Jack M. Wainwright, III, President and Chief Executive
Officer of United Security Bancshares, Inc. and the formation of a
Management Committee to be responsible for the day-to-day
operations of the Company until a new president is hired.
<PAGE>
SIGNATURE PAGE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
UNITED SECURITY BANCSHARES, INC.
DATE: November 16, 1998
BY: /s/ Larry M. Sellers
Its Vice President and Secretary and Treasurer
(Duly Authorized Officer and Principal Financial Officer)
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<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements of United Security Bancshares, Inc. for the nine months
ended September 30, 1998, and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 12673
<INT-BEARING-DEPOSITS> 287
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 177929
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 236130
<ALLOWANCE> 4799
<TOTAL-ASSETS> 446061
<DEPOSITS> 321327
<SHORT-TERM> 2233
<LIABILITIES-OTHER> 7136
<LONG-TERM> 55876
0
0
<COMMON> 36
<OTHER-SE> 59452
<TOTAL-LIABILITIES-AND-EQUITY> 446061
<INTEREST-LOAN> 21449
<INTEREST-INVEST> 10530
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 31979
<INTEREST-DEPOSIT> 9387
<INTEREST-EXPENSE> 11682
<INTEREST-INCOME-NET> 20297
<LOAN-LOSSES> 1969
<SECURITIES-GAINS> 520
<EXPENSE-OTHER> 3334
<INCOME-PRETAX> 9462
<INCOME-PRE-EXTRAORDINARY> 9462
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6730
<EPS-PRIMARY> 1.90
<EPS-DILUTED> 1.89
<YIELD-ACTUAL> 12.36
<LOANS-NON> 3457
<LOANS-PAST> 1229
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 6499
<ALLOWANCE-OPEN> 4046
<CHARGE-OFFS> 1456
<RECOVERIES> 241
<ALLOWANCE-CLOSE> 4799
<ALLOWANCE-DOMESTIC> 4799
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
