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March 29, 2000
FILED VIA EDGAR
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: United Security Bancshares, Inc.
Annual Report on Form 10-K
(File No., 01-14549)
On behalf of our client, United Security Bancshares, Inc., we are filing
the above-referenced Form 10-K via the EDGAR system.
Please do not hesitate to contact the undersigned if you have any
questions or comments.
Very truly yours,
/s/ J. Michael Savage
______________________
J. Michael Savage
JMS/mrm
Enclosures
cc: R. Terry Phillips
Larry M. Sellers
C. Matthew Lusco
James M. Pool
United Security Bancshares, Inc.
131 West Front Street
P.O. Box 249
Thomasville, Alabama 36784
334-636-5424
March 16, 2000
FILED VIA EDGAR
Securities and Exchange Commission
450 Fifth Street, NW
Washington, D.C. 20549
Gentlemen:
Management of United Security Bancshares, Inc. hereby informs the
Securities and Exchange Commission that the financial statements in its
Annual Report on Form 10-K for the year ended December 31, 1999, transmitted
herewith, do not reflect a change from the preceding year in any accounting
principles or practices or in the method of applying any such principles or
practices.
UNITED SECURITY BANCSHARES, INC.
/s/ R. Terry Phillips
_____________________
By: R. Terry Phillips
Its: President & CEO
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
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, Alabama 36784
________________________________________ __________
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (334) 636-5424
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
___________________ __________________________________________
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $0.01 per share (Title of class)
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 if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. ___
Shares of common stock ($0.01 par value) outstanding as of December 31,
1999: 3,568,081.
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, based on the sales price of shares sold in a private
transaction on January 25, 2000, is $26.00. There is no established public
trading market for the Registrant's voting stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's definitive proxy statement for the 2000 annual
meeting of its shareholders are incorporated by reference into Part III.
UNITED SECURITY BANCSHARES, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1999
TABLE OF CONTENTS
Sequential
Part Item Caption Page No.
I 1 Business 3
2 Properties 8
3 Legal Proceedings 9
4 Submission of Matters to a Vote of Security Holders 9
II 5 Market for Registrant's Common Equity and Related
Stockholder Matters 9
6 Selected Financial Data 11
7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
7A Quantitative and Qualitative Disclosures
About Market Risk 37
8 Financial Statements and Supplementary Data 38
9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 69
III 10 Directors and Executive Officers of the Registrant 70
11 Executive Compensation 70
12 Security Ownership of Certain Beneficial Owners
and Management 70
13 Certain Relationships and Related Transactions 70
IV 14 Exhibits, Financial Statement Schedules
and Reports on Form 8-K 71
Signatures 72
Exhibits 74
PART I
Item 1. Business.
General
United Security Bancshares, Inc. ("Bancshares") is a Delaware
corporation organized in 1999, as a successor by merger to United Security
Bancshares, Inc., an Alabama corporation. Bancshares is a bank holding
company registered under the Bank Holding Company Act of 1956, as amended,
and it operates one banking subsidiary, First United Security Bank (the
"Bank"). The Bank's name was changed from United Security Bank to First
United Security Bank on July 9, 1997. The Bank owns all of the stock of
Acceptance Loan Company, Inc. ("ALC"), a finance company organized for the
purpose of making consumer loans and purchasing consumer loans from vendors.
Bancshares owns all the stock of First Security Courier Corporation ("First
Security"), an Alabama corporation organized for the purpose of providing
certain bank courier services.
The Bank has eighteen banking offices, which are located in Thomasville,
Coffeeville, Fulton, Gilbertown, Grove Hill, Butler, Jackson, Brent,
Centreville, North Bibb, Bucksville and Harpersville, Alabama, and its market
area includes portions of Bibb, Clarke, Choctaw, Jefferson, Marengo, Shelby,
Sumter, Tuscaloosa, Washington, and Wilcox Counties in Alabama, as well as
Clarke, Lauderdale and Wayne Counties in Mississippi.
The Bank conducts a general commercial banking business and offers
banking services such as the receipt of demand, savings and time deposits,
personal and commercial loans, credit card and safe deposit box services, and
the purchase and sale of government securities.
As of December 31, 1999, the Bank had 189 full-time equivalent
employees, ALC had 126 full-time equivalent employees, and Bancshares had no
employees, other than the officers of Bancshares who are indicated in Part
III, Item 10 of this report.
The Bank is in the process of completing the organization of a
wholly-owned subsidiary in the State of Arizona. The subsidiary, FUSB
Reinsurance, Inc. ("FUSB Reinsurance"), will reinsure or "underwrite" credit
life and credit accident and health insurance policies sold to the Bank's
consumer loan customers. FUSB Reinsurance will be responsible for the first
level of risk on these policies up to a specified maximum amount, and the
primary third-party insurer will retain the remaining risk. The third-party
insurer and/or a third-party administrator will be responsible for performing
most of the administrative functions of FUSB Reinsurance on a contact basis.
Competition
The Bank encounters strong competition in making loans, acquiring
deposits and attracting customers for investment services. Competition among
financial institutions is based upon interest rates offered on deposit
accounts, interest rates charged on loans, other credit and service charges
relating to loans, the quality and scope of the services rendered, the
convenience of banking facilities and, in the case of loans to commercial
borrowers, relative lending limits. The Bank competes with other commercial
banks (including at least 10 in its service area), savings and loan
associations, credit unions, finance companies, mutual funds, insurance
companies, brokerage and investment banking companies, and other financial
intermediaries operating in Alabama and elsewhere. Many of these competitors,
some of which are affiliated with large bank holding companies, have
substantially greater resources and lending limits. In addition, many of the
Bank's non-bank competitors are not subject to the same extensive federal
regulations that govern bank holding companies and federally-insured banks.
On November 12, 1999, President Clinton signed into law the
Gramm-Leach-Bliley Act (the "GLB Act"). Effective March 11, 2000, the GLB Act
permits bank holding companies to become financial holding companies and
thereby affiliate with securities firms and insurance companies and engage in
other activities that are financial in nature. See "Supervision and
Regulation." Under the GLB Act, securities firms and insurance companies that
elect to become financial holding companies may acquire banks and other
financial institutions. The GLB Act, which represents the most sweeping
reform of financial services regulation in over sixty years, may
significantly change the competitive environment in which Bancshares and the
Bank conduct business. At this time, however, it is not possible to predict
the full effect that the GLB Act will have on Bancshares. One consequence may
be increased competition from large financial services companies that will be
permitted to provide many types of financial services, including bank
products, to their customers.
The financial services industry is also likely to become more
competitive as further technological advances enable more companies to
provide financial services. These technological advances may diminish the
importance of depository institutions and other financial intermediaries in
the transfer of funds between parties.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
(the "IBBEA") authorized bank holding companies to acquire banks and other
bank holding companies without geographic limitations beginning September 30,
1995. The arrival of interstate banking is expected to increase further the
competitiveness of the banking industry.
In addition, beginning on June 1, 1997, the IBBEA authorized interstate
mergers and consolidations of existing banks, provided that neither bank's
home state had opted out of interstate branching by May 31, 1997. The State
of Alabama opted in with respect to interstate branching. Once a bank has
established branches in a state through an interstate merger, the bank may
establish and acquire additional branches at any location in the state where
any bank involved in the interstate merger could have established or acquired
branches under applicable federal or state law.
Under the IBBEA, Alabama banks may also establish branches or offices in
any other state, any territory of the United States or any foreign country,
provided that the branch or office is established in compliance with federal
law and the law of the proposed location and is approved by the Alabama
Superintendent of Banks. Under former law, Alabama banks could not establish
a branch in any location other than its principal place of business, except
as authorized by local laws or general laws of local application. These more
liberal branching laws are likely to increase competition within the State of
Alabama among banking institutions located in Alabama and from those located
outside of Alabama, many of which are larger than Bancshares. Size gives the
larger banks certain advantages in competing for business from large
corporations. These advantages include higher lending limits and the ability
to offer services in other areas of Alabama and the southeast region.
Supervision and Regulation
Bancshares and the Bank are subject to state and federal banking laws
and regulations which impose specific requirements and restrictions on, and
provide for general regulatory oversight with respect to, virtually all
aspects of operations. These laws and regulations are generally intended to
protect depositors, not stockholders. To the extent that the following
summary describes statutory or regulatory provisions, it is qualified in its
entirety by reference to the particular statutory and regulatory provisions.
Any change in applicable laws or regulations may have a material effect on
the business and prospects of Bancshares.
Beginning with the enactment of the Financial Institutions Reform,
Recovery and Enforcement Act of 1989 and following in December 1991 with the
Federal Deposit Insurance Corporation Act ("FDICIA"), numerous additional
regulatory requirements have been placed on the banking industry in the past
ten years, and additional changes have been proposed. The operations of
Bancshares and the Bank may be affected by legislative changes and the
policies of various regulatory authorities. Bancshares is unable to predict
the nature or the extent of the effect on its business and earnings that
fiscal or monetary policies, economic control or new federal or state
legislation may have in the future.
As a bank holding company, Bancshares is subject to the regulation and
supervision of the Board of Governors of the Federal Reserve System (the
"Board of Governors"). Bancshares is required to file with the Board of
Governors an annual report and such additional information as the Board of
Governors may require. The Board of Governors may also conduct examinations
of Bancshares and each of its subsidiaries.
The Bank Holding Company Act imposes numerous restrictions on
Bancshares. In particular, the Act requires a bank holding company to obtain
the prior approval of the Board of Governors before it may acquire
substantially all of the assets of any bank or control of any voting shares
of any bank, if, after such acquisition, it would own or control, directly or
indirectly, more than 5% of the voting shares of such bank. The Board of
Governors may not approve an acquisition by Bancshares of substantially all
the assets or the voting shares of any bank located outside Alabama unless
such acquisition is specifically authorized by the laws of the state in which
the bank to be acquired is located.
The GLB Act permits bank holding companies to become financial holding
companies and thereby affiliate with securities firms and insurance companies
and engage in other activities that are financial in nature. A bank holding
company may become a financial holding company by filing a declaration if
each of its subsidiary banks is well capitalized under the FDICIA prompt
corrective action provisions, is well managed, and has at least a
satisfactory rating under the Community Reinvestment Act ("CRA"). No
regulatory approval will be required for a financial holding company to
acquire a company, other than a bank or savings association, engaged in
activities that are financial in nature or incidental to activities that are
financial in nature, as determined by the Board of Governors.
The GLB Act defines "financial in nature" to include securities
underwriting, dealing and market making; sponsoring mutual funds and
investment companies; insurance underwriting and agency; and activities that
the Board of Governors has determined to be closely related to banking. A
national bank also may engage, subject to limitations on investment, in
activities that are financial in nature (other than insurance underwriting,
insurance company portfolio investment, merchant banking, real estate
development and real estate investment) through a financial subsidiary of the
bank, if the bank is well capitalized, well managed and has at least a
satisfactory CRA rating. Subsidiary banks of a financial holding company or
national banks with financial subsidiaries must continue to be well
capitalized and well managed in order to continue to engage in activities
that are financial in nature without regulatory actions or restrictions,
which could include divestiture of the financial subsidiary or subsidiaries.
In addition, a financial holding company or a bank may not acquire a company
that is engaged in activities that are financial in nature unless each of the
subsidiary banks of the financial holding company or the bank at issue has a
CRA rating of satisfactory or better.
The GLB Act preserves the role of the Board of Governors as the umbrella
supervisor for holding companies while at the same time incorporating a
system of functional regulation designed to take advantage of the strengths
of the various federal and state regulators. In particular, the GLB Act
replaces the broad exemption from Securities and Exchange Commission
regulation that banks previously enjoyed with more limited exemptions, and it
reaffirms that states are the regulators for the insurance activities of all
persons, including federally-chartered banks.
Subsidiary banks of a bank holding company are subject to certain
restrictions on extensions of credit to the bank holding company or any of
its non-bank subsidiaries, on investments in the stock or other securities
thereof, and on the acceptance of such stocks or securities as collateral for
loans to any borrower. Among other requirements, transactions between a bank
and its affiliates must be on an arm's-length basis.
The Bank is subject to extensive supervision and regulation by the
Alabama State Banking Department and the Federal Deposit Insurance
Corporation (the "FDIC"). Among other things, these agencies have the
authority to prohibit the Bank from engaging in any activity (such as paying
dividends) that, in the opinion of the agency, would constitute an unsafe or
unsound practice. The Bank is also subject to various requirements and
restrictions under federal and state law. Areas subject to regulation include
dividend payments, reserves, investments, loans (including loans to insiders
and significant shareholders), mergers, issuance of securities, establishment
of branches and other aspects of operation, including compliance with
truth-in-lending laws, usury laws and other consumer protection laws. The
recently enacted GLB Act establishes minimum federal standards of financial
privacy pursuant to which financial institutions will be required to
institute written privacy policies that must be disclosed to customers at
certain required intervals. In addition to the impact of regulation,
commercial banks are affected significantly by the actions of the Board of
Governors as it attempts to control the money supply and credit availability
in order to influence the economy.
There are a number of obligations and restrictions imposed on bank
holding companies and their depository institution subsidiaries by federal
law and regulatory policy that are designed to reduce potential loss exposure
to the depositors of such depository institutions and to the FDIC insurance
fund in the event the depository institution becomes in danger of default or
is in default. For example, under a policy of the Board of Governors with
respect to bank holding company operations, a bank holding company is
required to serve as a source of financial strength to its subsidiary
depository institutions and commit resources to support such institutions in
circumstances where it might not do so absent such policy. In addition, the
"cross-guarantee" provisions of federal law require insured depository
institutions under common control to reimburse the FDIC for any loss suffered
or reasonably anticipated as a result of the default of a commonly controlled
insured depository institution or for any assistance provided by the FDIC to
a commonly controlled insured depository institution in danger of default.
Although the FDIC's claim is junior to the claims of non-affiliated
depositors, holders of secured liabilities, general creditors, and
subordinated creditors, it is superior to the claims of shareholders.
The federal banking agencies have broad powers under current federal law
to take prompt corrective action to resolve problems of insured depository
institutions. The extent of these powers depends upon whether the
institutions in question are "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" or"critically
undercapitalized" as such terms are defined under regulations issued by the
federal banking agencies. In general, the agencies measure capital adequacy
within a framework that makes capital requirements sensitive to the risk
profiles of individual banking companies. The guidelines define capital as
either Tier 1 (primarily common shareholders' equity) or Tier 2 (certain debt
instruments and a portion of the allowance for loan losses). Bancshares and
the Bank are subject to a minimum Tier 1 capital ratio (Tier 1 capital to
risk-weighted assets) of 4%, total capital ratio (Tier 1 plus Tier 2 to
risk-weighted assets) of 8% and Tier 1 leverage ratio (Tier 1 to average
quarterly assets) of 3%. To be considered a "well capitalized" institution,
the Tier 1 capital ratio, the total capital ratio, and the Tier 1 leverage
ratio must equal or exceed 6%, 10% and 5%, respectively.
The CRA requires that, in connection with examinations of a financial
institution such as the Bank, the FDIC must evaluate the record of the
financial institution in meeting the credit needs of its local communities,
including low and moderate income neighborhoods, consistent with the safe and
sound operation of those institutions. The CRA does not establish specific
lending requirements or programs for financial institutions nor does it limit
an institution's discretion to develop the types of products and services
that it believes are best suited to its particular community. These factors
are considered in evaluating mergers, acquisitions and applications to open a
branch or facility. The CRA also requires all institutions to make public
disclosure of their CRA ratings. The Bank received a satisfactory rating in
its most recent evaluation.
From time to time, various bills are introduced in the United States
Congress with respect to the regulation of financial institutions. Certain of
these proposals, if adopted, could significantly change the regulation of
banks and the financial services industry. Bancshares cannot predict whether
any of these proposals will be adopted or, if adopted, how these proposals
would affect Bancshares.
FDIC regulations require that management report on its responsibility
for preparing its institution's financial statements and for establishing and
maintaining an internal control structure and procedures for financial
reporting and compliance with designated laws and regulations concerning
safety and soundness.
Supervision, regulation and examination of banks by the bank regulatory
agencies are intended primarily for the protection of depositors rather than
for holders of Bancshares common stock.
Statistical Information
Statistical information concerning the business of Bancshares is set
forth in Part II of this report.
Item 2. Properties.
Bancshares owns no property and does not expect to own any. The business
of Bancshares is conducted from the offices of the Bank. With the exception
of leasing a small facility in Centreville, the Bank owns all of its offices
in fee without encumbrances. ALC leases office space throughout Alabama but
owns no property. The aggregate annual rental payments for office space for
ALC total approximately $338,340.
Item 3. Legal Proceedings.
Bancshares and the Bank, because of the nature of their businesses, are
subject at various times to numerous legal actions, threatened or pending. In
the opinion of Bancshares, based on review and consultation with legal
counsel, the outcome of any litigation presently pending against Bancshares
or the Bank will not have a material effect on Bancshares' consolidated
financial statements or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.
There were 3,634,431 shares of Bancshares common stock issued and
3,570,431 shares outstanding as of March 8, 2000. As of March 8, 2000,
there were approximately 1016 shareholders of Bancshares.
The Bank is authorized by its Articles of Incorporation to issue 25,000
shares of common stock, par value $1.00 per share, all of which are
outstanding. Bancshares is the only shareholder of the Bank.
There is no established public trading market for Bancshares common
stock. Management of Bancshares is aware that from time to time Bancshares
common stock is bought or sold in private transactions or in transactions
directly with a securities broker-dealer making a limited market in
Bancshares' common stock. Management of Bancshares is aware of approximately
50 sales of Bancshares common stock since January 1, 1999 at prices ranging
from $26.00 to $42.00 per share.
Bancshares has paid dividends on its common stock on a quarterly basis
in the past three years as follows:
Dividend paid
on Common Stock
Fiscal Year (per share)
___________ _______________
1997 $.58
1998 $.72
1999 $.82
As a holding company, Bancshares, except under extraordinary
circumstances, will not generate earnings of its own, but will rely solely on
dividends paid to it by the Bank as the source of income to meet its expenses
and pay dividends. Under normal circumstances, Bancshares' ability to pay
dividends will depend entirely on the ability of the Bank to pay dividends to
Bancshares.
The Bank is a state banking corporation, and the payment of dividends by
the Bank is governed by the Alabama Banking Code. The restrictions upon
payment or dividends imposed by the Alabama Banking Code are described in
Part II, Item 5 of Bancshares' Annual Report on Form 10-K for the year ended
December 31, 1984, (file no. 0-14549) and such description is incorporated
herein by reference.
Item 6. Selected Financial Information.
UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES
SELECTED FINANCIAL INFORMATION
Year Ended December 31,
____________________________________________________________
1999 1998 1997 1996 1995
________ _________ ________ ________ ________
(In Thousands of Dollars, Except Per Share Amounts)
RESULTS OF OPERATIONS
Interest Revenue $ 44,919 $ 43,255 $ 37,648 $ 34,551 $ 30,571
Interest Expense 15,365 15,518 15,376 15,081 13,298
________ ________ ________ ________ ________
Net Interest Revenue 29,554 27,737 22,272 19,470 17,273
Provision for Loan Losses 4,305 3,187 1,710 800 255
Non-Interest Revenue 4,747 4,558 4,361 2,725 2,555
Non-Interest Expense 18,534 17,008 15,229 11,765 10,898
________ ________ ________ _______ ________
Income Before Income Taxes 11,462 12,100 9,694 9,630 8,675
Income Taxes 3,302 3,521 2,713 2,659 2,225
________ ________ ________ _______ ________
Net Income $ 8,160 $ 8,579 $ 6,981 $ 6,971 $ 6,450
________ ________ ________ _______
________ ________ ________ _______
Net Income Per Share:
Basic $ 2.29 $ 2.42 $ 1.97 $ 1.97 $ 1.83
Diluted $ 2.28 $ 2.40 $ 1.96 $ 1.97 $ 1.83
Average Number of Shares
Outstanding (000) 3,561 3,543 3,537 3,537 3,520
PERIOD END STATEMENT OF CONDITION
Total Assets $476,599 $450,073 $425,941 $430,383 $377,120
Loans 276,172 235,060 215,897 204,886 182,000
Deposits 326,751 326,645 322,418 346,306 304,381
Shareholders' Equity 61,671 60,568 52,711 47,616 41,795
AVERAGE BALANCES
Total Assets $459,922 $439,080 $434,010 $410,541 $364,330
Average Earning Assets 424,074 408,506 402,271 382,458 337,921
Loans 256,192 231,792 212,570 198,327 172,146
Deposits 328,263 320,958 345,442 327,531 294,063
Shareholders' Equity 61,140 57,409 50,164 44,044 37,588
PERFORMANCE RATIOS
Net Income to:
Average Total Assets 1.77% 1.95% 1.61% 1.70% 1.77%
Average Shareholders' Equity 13.35% 14.94% 13.92% 15.83% 17.16%
Average Shareholders' Equity to
Average Total Assets 13.29% 13.07% 11.55% 10.73% 10.32%
Dividend Payout Ratio 36.67% 31.40% 26.79% 20.21% 18.12%
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Introduction
The following discussion and financial information are presented to aid
in an understanding of the current financial position and results of
operations of Bancshares, Inc. ("United Security"), and should be read in
conjunction with the Audited Financial Statements and Notes thereto included
herein. The emphasis of this discussion will be on the years 1999, 1998, and
1997. All yields presented and discussed herein are based on the accrual
basis and not on the tax-equivalent basis.
On June 30, 1997, First Bancshares, the parent holding company of First
Bank and Trust, merged with and into United Security. The merger was
accounted for as a pooling of interests, and, accordingly, financial
information for all prior periods has been restated to present the combined
financial condition and results of operations of both companies as if the
merger had been in effect for all periods presented.
United Security is the parent holding company of First United Security
Bank (the "Bank"). The Bank operates a finance company, Acceptance Loan
Company, that currently has thirty-three offices in Alabama, Northwest
Florida, and Southeast Mississippi.
United Security also began a courier company as a subsidiary, First
Security Courier Corporation, in 1997 mainly for the purpose of delivering
checks and documents to the Federal Reserve to aid in check clearing. This
courier company performs courier services for First United Security Bank as
well as other companies in our market area.
At December 31, 1999, United Security had consolidated assets of
approximately $476.6 million and operated eighteen banking locations in five
counties. These eighteen locations contributed approximately $7.9 million to
consolidated net income in 1999. First United Security Bank's sole business
is banking; therefore, loans and investments are its principal source of
income.
This discussion contains certain forward looking statements with respect
to the financial condition, results of operation and business of United
Security and the Bank related to, among other things:
(A) trends or uncertainties which will impact future operating results,
liquidity and capital resources, and the relationship between those
trends or uncertainties and nonperforming loans and other loans;
(B) the diversification of product production among timber related
entities and the effect of that diversification on the Bank's
concentration of loans to timber related entities;
(C) the composition of United Security's derivative securities
portfolio and its interest rate hedging strategies and volatility
caused by uncertainty over the economy, inflation and future
interest rate trends;
(D) the effect of the market's perception of future inflation and real
returns and the monetary policies of the Federal Reserve Board
on short and long term interest rates;
(E) the effect of interest rate changes on liquidity and interest rate
sensitivity management;
(F) the amount of anticipated (i) net loan charge offs; (ii) loans on a
non-accrual basis; and (iii) options income and other
off-balance-sheet income; and
(G) the expectations, beliefs, and plans of Management as set forth in
the letter to shareholders contained in this Annual Report.
These forward looking statements involve certain risks and
uncertainties. Factors that may cause actual results to differ materially
from those contemplated by such forward looking statements include, among
other possibilities:
(1) the perceived diversification in product production within the
timber industry fails to protect the Bank from its concentration of
loans to the timber industry as a result of, for example, the
emergence of technological developments or market difficulties that
affect the timber industry as a whole;
(2) periods of lower interest rates continue to accelerate the rate at
which the underlying obligations of mortgage-backed securities and
collateralized mortgage obligations are prepaid, thereby affecting
the yield on such securities held by the Bank;
(3) inflation grows at a greater-than-expected rate with a material
adverse effect on interest rate spreads and the assumptions
management of United Security has used in its interest rate hedging
strategies and interest rate sensitivity gap strategies;
(4) rising interest rates adversely affect the demand for consumer
credit; and
(5) general economic conditions, either nationally or in Alabama, are
less favorable than expected.
Financial Condition
United Security's financial condition depends primarily on the quality
and nature of the Bank's assets, liabilities, capital structure, the quality
of its personnel, and prevailing market and economic conditions.
The majority of the assets and liabilities of a financial institution
are monetary and, therefore, differ greatly from most commercial and
industrial companies that have significant investments in fixed assets and
inventories. Inflation has an important impact on the growth of total assets
in the banking industry, resulting in the need to increase equity capital at
rates greater than the applicable inflation rate in order to maintain an
appropriate equity to asset ratio. Also, the category of other expenses tends
to rise during periods of general inflation.
In conjunction with the First Bancshares merger on June 30, 1997, First
United Security Bank sold the deposits, branch facility and associated assets
of its branch office in Grove Hill effective November 1, 1997 as directed by
the United States Department of Justice as a requirement for the merger
approval. This divestiture reduced deposits by approximately $9.8 million.
The Bank owns all of the stock of Acceptance Loan Company, Inc. ("ALC"),
an Alabama Corporation. ALC is a finance company organized for the purpose of
making consumer loans. The Bank is ALC's only source of funds and ALC's
funding makes up approximately $76 million of the Bank's loans.
Management believes the most significant factor in producing quality
financial results is the Bank's ability to react properly and timely to
changes in interest rates. Management is, therefore, attempting to maintain a
more balanced position between interest-sensitive assets and liabilities in
order to protect against wide interest rate fluctuations. The following table
reflects the distribution of average assets, liabilities, and shareholders'
equity for each of the three years ended December 31, 1999, 1998, and 1997.
Distribution of Assets, Liabilities, and Shareholders' Equity, with
Interest Rates and Interest Differentials
December 31,
_______________________________________________________________________________________________________
1999 1998 1997
_______________________________ ________________________________ _______________________________
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate % Balance Interest Rate % Balance Interest Rate %
________ ________ ______ ________ ________ ______ ________ ________ ______
(In Thousands of Dollars, Except Percentages)
ASSETS
Interest-Earning Assets:
Loans (Note A) $256,192 $33,776 13.18% $231,792 $29,397 12.68% $212,570 $22,964 10.80%
Taxable Investments
(Note B) 140,387 9,498 6.77% 150,678 12,292 8.16% 161,125 12,854 7.98%
Non-Taxable Investments 25,029 1,528 6.10% 24,206 1,469 6.07% 26,704 1,736 6.50%
Federal Funds Sold 2,466 117 4.74% 1,830 97 5.30% 1,872 95 5.07%
________ _______ ______
Total Interest-Earning
Assets 424,074 44,919 10.59% 408,506 43,255 10.59% 402,271 37,649 9.36%
________ _______ _____ ________ _______ _____ ________ _______ _____
Non-Interest Earning Assets:
Other Assets 35,848 30,574 31,739
________ ________ ________
Total $459,922 $439,080 $434,010
________ ________ ________
________ ________ ________
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest-Bearing Liabilities:
Demand Deposits $ 59,885 $ 1,225 2.05% $ 59,794 $ 1,387 2.32% $ 64,607 $ 1,644 2.54%
Savings Deposits 39,896 1,026 2.57% 41,728 1,137 2.72% 43,797 1,218 2.78%
Time Deposits 188,170 9,932 5.28% 180,128 9,971 5.44% 193,738 10,413 5.37%
Other Liabilities 62,700 3,182 5.07% 54,383 3,023 5.56% 34,605 2,101 6.07%
________ _______ _____ ________ _______ _____ ________ _______ _____
Total Interest-Bearing
Liabilities 350,651 15,365 4.38% 336,033 15,518 4.62% 336,747 $15,376 4.57%
Non-Interest Bearing
Liabilities:
Demand Deposits $ 40,312 $ 39,308 $ 43,300
Other Liabilities 7,819 6,330 3,799
Shareholders' Equity 61,140 57,409 50,164
________ ________ ________
Total $459,922 $439,080 $434,010
________ ________ ________
________ ________ ________
Net Interest Income
(Note C) $29,554 $27,737 $22,273
_______ _______ _______
_______ _______ _______
Net Yield on Interest-
Earning Assets 6.97% 6.79% 5.54%
_____ _____ _____
_____ _____ _____
Note A -- For the purpose of these computations, non-accruing loans are
included in the average loan amounts outstanding.
Note B -- Taxable investments include all held-to-maturity,
available-for-sale, and trading account securities.
Note C -- Loan fees of $1,665,872, $1,099,758, and $815,566 for 1999, 1998,
and 1997, respectively, are included in interest income amounts
above.
Loans and Allowances for Loan Losses
Total loans outstanding increased by $41.7 million in 1999 with $281.8
million outstanding at year end. Real estate loans increased by $33.7 million
to $157.0 million outstanding at December 31, 1999. Real estate loans made up
55.7% of total gross loans at year end 1999. Construction activity in the
trade areas continues to be predominately commercial. The Company continues
to offer a home equity loan and a long-term fixed-rate mortgage loan program.
Real estate loans consist of construction loans to both businesses and
individuals. These loans relate to residential and commercial development,
commercial buildings and apartment complexes. Real estate loans also consist
of other loans secured by real estate such as one-to-four family dwellings
including mobile homes, loans on land only, multi-family dwellings, non-farm
non-residential real estate and home equity loans. Acceptance Loan Company
had a total of $15.6 million in real estate loans or 10.5% of total real
estate loans at year end 1999.
Commercial loans totaled $40.0 million at December 31, 1999. These loans
increased $4.5 million or 12.8% from December 31, 1998.
Consumer installment loans totaled $90.6 million at December 31, 1999.
This increase of $4.3 million or 5.0% is almost all attributed to growth in
Acceptance Loan Company. These loans include loans to individuals for
household, family and other personal expenditures including credit cards and
other related credit plans. Consumer installment loans by ALC represent $65.0
million or 71.4% of total consumer installment loans. The yields on these
loans average over 22% A.P.R. and enhance the Bank's net interest margin.
However, these loans carry a higher risk than the average bank loan and
accordingly require a higher loan loss reserve.
Acceptance Loan Company is a wholly-owned subsidiary of First United
Security Bank. ALC was organized in 1995 primarily to make consumer loans. At
December 31, 1995, three offices were in operation with $1.9 million in total
loans outstanding. At December 31, 1996, six offices were open with total
loans outstanding. At December 31, 1997, twenty offices were open with $39.4
million in total loans. There were twenty-five offices open on December 31,
1998, with $71.2 million in gross loans outstanding. Thirty-three offices
were open on December 31, 1999, with twenty-five offices located in Alabama,
three in Mississippi and five in Florida. Combined loans from these offices
total $80.6 million and make up 28.6% of total loans of First United Security
Bank.
The allowance for loan losses is maintained at a level which, in
management's judgment, is adequate to absorb credit losses inherent in the
loan portfolio. The amount of the allowance is based on management's
evaluation of the collectibility of the loan portfolio, including the nature
of the portfolio and changes in its risk profile, credit concentrations,
historical trends, specific impaired loans, and economic conditions. This
evaluation also considers the balance of impaired loans. Losses on
individually identified impaired loans are measured based on the present
value of expected future cash flows discounted at each loan's original
effective market interest rate. As a practical expedient, impairment may be
measured based on the loan's observable market price or the fair value of the
collateral if the loan is collateral dependent. When the measure of the
impaired loan is less than the recorded investment in the loan, the
impairment is recorded through the provision added to the allowance for loan
losses. One-to-four family residential mortgages and consumer installment
loans are subjected to a collective evaluation for impairment, considering
delinquency and repossession statistics, historical loss experience, and
other factors. Though management believes the allowance for loan losses to be
adequate, ultimate losses may vary from their estimates. However, estimates
are reviewed periodically, and as adjustments become necessary, they are
reported in earnings during periods they become known.
The Bank's loan policy requires immediate recognition of a loss if
significant doubt exists as to the repayment of the principal balance of a
loan. Consumer installment loans at the Bank and ALC are generally recognized
as losses if they become 90 days and 120 days or more delinquent,
respectively. The only exception to this policy occurs when the underlying
value of the collateral or the customer's financial position makes a loss
unlikely.
A credit review of the Bank's individual loans is conducted periodically
by branch and by loan officer. A risk rating is assigned to each loan and is
reviewed at least annually. In assigning risk, management takes into
consideration the capacity of the borrower to repay, collateral values,
current economic conditions and other factors.
Loan officers and other personnel handling loan transactions undergo
frequent training dedicated to improving the credit quality as well as the
yield of the loan portfolio. First United Security Bank operates under a
written loan policy which attempts to guide lending personnel in maintaining
a consistent lending function. This policy is intended to aid loan officers
and lending personnel in making sound credit decisions and to assure
compliance with state and federal regulations. In addition, the intent of the
loan policy is to provide lending officers with a guide to making loans which
will provide an adequate return while providing services to the communities
and trade areas in which we are located.
The balance in the allowance for loan losses as of December 31, 1999,
was $5.6 million. This increase of approximately $600,000 over year end 1998
reflects the continuing evaluation of the Bank's portfolio and the growth in
Acceptance Loan Company. Management considers this allowance adequate for
coverage of losses inherent in the loan portfolio. This allowance remains at
2% of total loans.
In order to better manage credit risk, ALC's lending policy requires
credit information for each applicant to determine income, payment
obligations, indebtedness, paying habits, and length and stability of
employment. The information is obtained from the applicants, the applicant's
employers, creditors of the applicants, and credit reporting agencies.
Acceptance Loan Company also carefully oversees its portfolio through
monitoring of customer payments and active follow-up. ALC believes that its
large number of customers, their broad range of occupations, and geographical
distribution minimize any risk to its business, which may be created by
unfavorable local conditions. ALC has an established process to determine the
adequacy of the allowance for loan losses which is conducted on an aggregate
level based upon recent delinquency status. Acceptance Loan Company policy
requires charge off of all loans over a specified delinquent period. The CEO
of the company must approve any exception to this policy.
The following table shows the Bank's loan distribution as of December
31, 1999, 1998, 1997, 1996 and 1995.
December 31,
____________________________________________________________
1999 1998 1997 1996 1995
________ _________ _________ ________ ________
(In Thousands of Dollars)
Commercial, Financial and Agricultural $ 39,996 $ 35,444 $ 35,036 $ 36,387 $ 33,696
Real Estate 156,979 123,264 126,824 126,666 114,985
Installment 90,599 86,282 61,822 49,119 36,301
Less: Unearned Interest, Commissions
& Fees 5,823 4,941 3,738 4,153 1,525
________ ________ ________ ________ ________
Total $281,751 $240,049 $219,944 $208,019 $183,457
________ ________ ________ ________ ________
________ ________ ________ ________ ________
The amounts of total loans (excluding installment loans) outstanding at
December 31, 1999, which, based on the remaining scheduled repayments of
principal, are due in (1) one year or less, (2) more than one year but within
five years, and (3) more than five years, are shown in the following table.
Maturing
________________________________________________
After One
Within But Within
One Year Five Years Five Years Total
________ __________ __________ ________
(In Thousands of Dollars)
Commercial, Financial, and Agricultural $ 25,787 $ 9,387 $ 4,822 $ 39,996
Real Estate - Mortgage 67,982 45,514 43,483 156,979
________ ________ ________ ________
Total $ 93,769 $ 54,901 $ 48,305 $196,975
________ ________ ________ ________
________ ________ ________
Variable rate loans totaled approximately $59.4 million and are included
in the one-year category.
First United Security Bank and Acceptance Loan Company (a wholly owned
subsidiary of First United Security Bank) began the year with a combined
balance in the allowance for loan losses of $5.0 million. Total loans charged
off in 1999 totaled $4.5 million. Recoveries on loans previously charged off
totaled $514,000, resulting in net charge-offs of $4.0 million. Net
charge-offs for 1998 totaled $2.2 million. Management allocated and charged
to operations $4.3 million in 1999 as an addition to the allowance for loan
losses. This compares to $3.2 million charged to operations for 1998. The
balance of $5.6 million at year end 1999 represented 2.0% of total loans
outstanding and is considered adequate for losses inherent in the portfolio.
Total loans outstanding on December 31, 1999 were $281.8 million. Of
this total, loans by ALC amounted to $80.6 million. This represents 28.6% of
total loans outstanding. Of the $5.6 million balance in the allowance for
loan losses account at December 31, 1999, $2.5 million or 44.6% is
represented by reserves maintained for ALC loans.
Non-Performing Assets
The following table presents information on non-performing loans and
real estate acquired in settlement of loans.
December 31,
__________________________________________________
1999 1998 1997 1996 1995
______ ______ ______ ______ ______
(In Thousands of Dollars)
Non-Performing Assets:
Loans Accounted for on a Non-Accrual Basis $1,725 $3,460 $1,488 $1,797 $ 169
Accruing Loans Past Due 90 Days or More 1,347 1,610 1,285 1,122 1,390
Real Estate Acquired in Settlement of Loans 286 215 506 18 63
______ ______ ______ ______ ______
Total $3,358 $5,285 $3,279 $2,937 $1,622
______ ______ ______ ______ ______
______ ______ ______ ______
Percent of Net Loans and Other Real Estate 1.21% 2.25% 1.52% 1.44% 0.90%
______ ______ ______ ______ ______
______ ______ ______ ______
Accruing loans past due 90 days or more at December 31, 1999, totaled
$1.3 million. These loans are well secured and taking into consideration the
collateral value and the financial strength of the borrowers, management
believed there would be no loss in these accounts and allowed the loans to
continue accruing. Those loans 90 days and more past due, whether on accrual
or non-accrual, are reviewed by the Board of Directors each month. Loans past
due 90 days produced by Acceptance Loan Company totaled $1.1 million at
December 31, 1999, or 81.7% of all loans past due 90 days and more and still
accruing.
At December 31, 1999, the Company had one loan considered to be
impaired. The amount of this loan, which is on non-accrual, is $457,468 and
the related allowance is $228,734. The average recorded investment in
impaired loans during the year ended December 31, 1999 was approximately
$472,147. For the year ended December 31, 1999, the Company did not recognize
interest income on the impaired loan during the period the loan was
considered impaired. The Company had approximately $487,000 considered to be
impaired at December 31, 1998.
In the opinion of management, non-performing loans and any other loans
which have been classified for regulatory purposes do not represent or result
from trends or uncertainties which will materially impact future operating
results, liquidity, or capital resources. Management is not aware of
information which would cause serious doubts as to the ability of borrowers
to comply with present repayment terms. Non-performing assets as a percentage
of net loans and other real estate was 1.21% at December, 1999. Loans past
due 90 days or more and still accruing are reviewed closely by management and
are allowed to continue accruing only when underlying collateral values and
management's belief that the financial strength of the borrowers is
sufficient to protect the Bank from loss. If at any time management
determines there may be a loss of interest or principal, these loans will be
changed to non-accrual and their asset value downgraded. Through frequent
training, our lending officers are directed by the Bank's written loan policy
to make loans within our trade area, to obtain adequate down payments on
purchase-money transactions, and to lend within policy guidelines on other
transactions. In addition, the Bank's loan review officer conducts an
independent review of individual loans by branch and officer.
First United Security Bank discontinues the accrual of interest on a
loan when management has reason to believe the financial condition of the
borrower has deteriorated so that the collection of interest is in doubt.
When a loan is placed on non-accrual, all unpaid accrued interest is reversed
against current income unless the collateral securing the loan is sufficient
to cover the accrued interest. Interest received on non-accrual loans is
generally either applied against the principal or cash basis, according to
management's judgement as to whether the borrower can ultimately repay the
loan. A loan may be restored to accrual status if the obligation is brought
current, performs in accordance with the contract for a reasonable period,
and if management determines that the repayment of the total debt is no
longer in doubt.
It is the policy of the Bank to charge-off immediately as loss all
amounts judged to be uncollectible. Management is aware that certain losses
may exist in the loan portfolio which have not been specifically identified.
The allowance for loan losses is established for this reason. This allowance
was $5.6 million at year-end and represented 2% of total loans outstanding.
Management believes this allowance is adequate to absorb any future loan
losses.
Allocation of Allowance for Loan Losses
The following table shows an allocation of the allowance for loan losses
for each of the five years indicated.
December 31,
________________________________________________________________________________________________________________
1999 1998 1997 1996 1995
____________________ ____________________ ____________________ ____________________ ____________________
Percent Percent Percent Percent Percent
of Loans of Loans of Loans of Loans of Loans
in Each in Each in Each in Each in Each
Category Category Category Category Category
Allowance to Total Allowance to Total Allowance to Total Allowance to Total Allowance to Total
Allocation Loans Allocation Loans Allocation Loans Allocation Loans Allocation Loans
__________ ________ __________ ________ __________ ________ __________ ________ __________ ________
(In Thousands of Dollars)
Commercial,
Financial, and
Agricultural $ 837 14% $ 748 15% $1,416 16% $1,097 17% $ 370 18%
Real Estate 558 55 499 50 405 57 313 60 493 62
Installment 4,184 31 3,742 35 2,225 27 1,724 23 1,604 20
______ ___ ______ ___ ______ ___ ______ ___ ______ ___
Totals $5,579 100% $4,989 100% $4,046 100% $3,134 100% $2,467 100%
______ ___ ______ ___ ______ ___ ______ ___ ______ ___
______ ___ ______ ___ ______ ___ ______ ___ ______ ___
Note: First Bank & Trust did not allocate Allowance for Loan Losses by
category. Percentages for United Security Bank were used 1995-1996.
The allowance for loan losses is established by risk group as follows:
Large classified loans and nonaccrual loans are evaluated individually
with specific reserves allocated based on management's review.
Smaller nonaccrual and adversely classified loans are assigned a portion
of the allowance based on loan grading. Smaller past due loans are
assigned a portion of the allowance using a formula that is based on the
severity of the delinquency.
The remainder of the portfolio is also allocated a portion of the
allowance based on past loss experience and the economic conditions for
the particular loan portfolio. Allocation weights are assigned based on
the Company's historical loan loss experience in each category, although
a higher allocation weight may be used if current conditions indicate
that loan losses may exceed historical experience.
The unallocated portion of the allowance is for inherent losses which
probably exist as of the valuation date even though they may not have been
identified by the more objective processes used for the allocated portion of
the allowance. This portion of the allowance is particularly subjective and
requires judgements based upon qualitative factors which do not lend
themselves to exact mathematical calculations. Some of the factors considered
are changes in credit concentrations, loan mix, changes in underwriting
practices, historical loss experience, and the general economic environment
in the Company's markets. While the total allowance is described as
consisting of an allocated and an unallocated portion, these terms are
primarily used to describe a process. Both portions are available to support
inherent losses in the loan portfolio.
The table above is based in part on the loan portfolio make-up, the
Bank's internal risk evaluation, historical charge-offs, past-due loans,
non-accrual loans and management's judgement. The portion of the allowance
that has not been identified by the Company as related to specific loan
categories has been allocated to the individual loan categories on a pro rata
basis for purposes of the table above.
Net charge-offs as shown in the "Summary of Loan Loss Experience" below
indicates the trend for the last five years. Net loan charge-offs as a
percentage of average loans increased from .97% in 1998 to 1.54% in 1999.
Summary of Loan Loss Experience
This table summarizes the Bank's loan loss experience for each of the
five years indicated.
December 31,
____________________________________________________________
1999 1998 1997 1996 1995
________ ________ ________ ________ ________
(In Thousands of Dollars)
Balance at Beginning of Period $ 4,989 $ 4,046 $ 3,134 $ 2,467 $ 1,904
Charge-Offs:
Commercial, Financial, and Agricultural (94) (94) (299) (246) (201)
Real Estate - Mortgage (116) (111) (20) (21) (6)
Installment (4,232) (2,373) (694) (497) (179)
Credit Cards (30) (11) (26) (9) (8)
_______ _______ _______ _______ _______
$(4,472) $(2,589) $(1,039) $ (773) $ (394)
Recoveries:
Commercial, Financial and Agricultural $ 166 $ 120 $ 110 $ 96 $ 52
Real Estate - Mortgage 21 15 18 0 5
Installment 418 305 107 117 62
Credit Cards 9 5 6 4 8
_______ _______ _______ _______ _______
$ 514 $ 345 $ 241 $ 217 $ 127
Net Charge-Offs (Deduction) $(3,958) $(2,244) $ (798) $ (556) $ (267)
Additions Charged to Operations 4,305 3,187 1,710 800 255
Allowances Acquired 243*** 0 0 423** 575*
_______ _______ _______ _______ _______
Balance at End of Period $ 5,579 $ 4,989 $ 4,046 $ 3,134 $ 2,467
_______ _______ _______ _______ _______
_______ _______ _______ _______ _______
Ratio of Net Charge-Offs During Period
to Average Loans Outstanding 1.54% 0.97% 0.38% 0.28% 0.16%
* Acquisition of Bibb County Branches by First Bank and Trust in 1995.
** Acquisition of Brent Banking Company by United Security Bank in 1996.
*** Branch acquisitions by ALC in 1999.
Non-Accruing Loans
Summarized below is information concerning the income on those loans
with deferred interest or principal payments resulting from a deterioration
in the financial condition of the borrower.
December 31,
____________________________
1999 1998 1997
______ ______ ______
(In Thousands of Dollars)
Total Loans Accounted for on a Non-Accrual Basis $1,725 $3,460 $1,488
Interest Income that Would Have Been Recorded
under Original Terms $ 247 $ 340 $ 154
Interest Income Reported and Recorded During
the Year $ 211 $ 298 $ 108
Total loans on non-accrual decreased by $1.7 million from December 31,
1998 to December 31, 1999. The majority of the loans in this category are in
process of liquidation or management has commitments from the principals
involved for reduction during the year. Underlying collateral values support
those loans which are not already in liquidation. Management continues to
emphasize asset quality and expects an increase in non-accrual loans during
the year 2000 as the $1.1 million in loans past due 90 days and more on the
books of ALC are moved to non-accrual or charged to the loan loss reserve.
The Company believes that at December 31, 1999, it has adequate reserves for
losses inherent in this portion of the portfolio.
Lending officers and other personnel involved in the lending process
receive ongoing training in compliance as well as asset quality. The Company
has no foreign loans. The Company does not make loans on commercial property
outside our market area without prior approval of the Board of Directors or
the Directors' Loan Committee. The Company is conservative in its lending
directives.
Industry Concentration Factors
The First United Security Bank trade area includes Clarke, Choctaw,
Bibb, Tuscaloosa, and Shelby Counties in Alabama. In addition, parts of
Chilton, Hale, Jefferson, Marengo, Monroe, Perry, Washington, Sumter and
Wilcox Counties in Alabama as well as parts of Clarke, Lauderdale and Wayne
Counties in Mississippi are included. There are several major paper mills in
our trade area including the Alabama River Companies, Boise Cascade, Fort
James and Weyerhauser. In addition, there are several sawmills, lumber
companies, and pole and piling producers. The table below shows the dollar
amount of loans made to timber and timber related companies as of December
31, 1999. The amount of timber related loans decreased from $41.5 million in
1998 to $31.2 million in 1999. The percentage of timber related loans to
gross loans decreased from 16.9% to 11.07%. The growth in ALC loans of $10.5
million during 1999 helped to reduce the timber industry concentration.
Timber Total Percentage of
Related Loans Gross Loans Total Loans
_____________ ______________ _____________
$31.2 million $281.8 million 11.07%
Management understands the concern about concentration of loans in
timber and timber-related industries. However, we continue to feel these
risks are reduced by the diversification of product production within these
industries. Some of the mills and industries specialize in paper and pulp,
some in lumber and plywood, some in poles and pilings, and others in wood and
veneer. We do not believe that this concentration is excessive or that it
represents a trend which might materially impact future earnings, liquidity,
or capital resources of the Bank. Management realizes that the Company is
heavily dependent on the economic health of the timber related industries.
The Company continues to benefit from the area industries engaged in the
growing, harvesting, processing and marketing of timber and timber-related
products. The majority of the land in our trade area is used to grow pine
and hardwood timber. Agricultural production loans make up less than 1% of
the Company's total loan portfolio.
Investments in Limited Partnerships
First United Security Bank invests in limited partnerships that operate
qualified affordable housing projects to receive tax benefits in the form of
tax deductions from operating losses and tax credits. The Bank accounts for
the investments under either the equity or the cost method based on the
percentage ownership and influence over operations. The Company's interest in
these partnerships was $5.5 million and $4.2 million for 1999 and 1998,
respectively. Costs associated with the partnerships carried under the equity
method amounted to approximately $119,000, $128,000, and $122,000 for 1999,
1998, and 1997, respectively. Management analyzes these investments annually
for potential impairment. The assets and liabilities of these partnerships
consist primarily of apartment complexes and related mortgages. United
Security's carrying value approximates cost or its underlying equity in the
net assets of the partnerships. The Company has remaining cash commitments to
these partnerships at December 31, 1999 in the amount of $36,000. Although
these investments are considered non-earning assets they do contribute to the
bottom line in the form of Federal income tax credits. These credits amounted
to $541,000 in 1998 and are estimated to be approximately $540,000 for 1999.
Also, operating losses related to these partnerships are available as
deductions for taxes on the Company's books.
Deposits
Average total deposits were up a modest amount, with a 2.3% increase in
1999. Management believes this deposit level was affected by the competitive
interest rate environment, and the availability of other low cost funding
sources for the Bank.
Average non-interest bearing demand deposits have decreased 6.9% over
the last three years, while the increase for 1999 was 2.6%. The ratio of
average non-interest bearing deposits to average total deposits remained
relatively steady in 1999 at 12.3% from 12.2% in 1998 and 12.5% in 1997.
Average interest-bearing transaction accounts have decreased 7.3% during
the last three years partly because the Bank reclassified a portion of
interest-bearing transaction accounts to money market savings accounts in
1997. Nevertheless, interest-bearing transaction accounts continue to be an
important source of funds for the Bank, accounting for 18.2% of average total
deposits in 1999.
Average time deposits increased by 4.5% in 1999, compared to a decrease
of 7% in 1998. Time deposits represented 57.3% of the total average deposits
in 1999 compared to 56.1% in 1998 and 56.1% in 1997.
Average savings deposits have declined 8.9% since 1997. Average savings
declined 4.4% in 1999. The ratio of average savings to average total deposits
decreased to 12.2% in 1999 compared to 13.0% in 1998 and 12.7% in 1997.
First United Security Bank's deposit base remains the primary source of
fund. These deposits represented 77.4% of the average earning assets in 1999
and 78.6% of the average earning assets in 1998. As seen in the following
table, overall rates on the deposits decreased to 3.71% in 1999, compared to
3.89% in 1998 and 3.84% in 1997. Emphasis continues to be placed on
attracting consumer deposits.
Management, as part of an overall program to emphasize the growth of
transaction accounts, is now introducing "on-line" banking and a bill paying
program as well as enhancing the telephone banking product and the employee
incentive plan. In addition, an increased effort is being placed on
promotions, direct mail campaigns and cross selling efforts. This is being
accomplished by remaining safe and sound, emphasizing our products and
providing quality service.
Other Interest-Bearing Liabilities - Other interest-bearing liabilities
include all interest-bearing liabilities except deposits, such as: federal
funds purchased and Federal Home Loan Bank advances. This category continues
to be more fully utilized as an alternative source of funds as evidenced by
the $8.3 million or 15.3% increase in average borrowing during 1999. The
increase was representative of both volume increases of long term advances
from the Federal Home Loan Bank (FHLB) and short term federal funds
purchased. The appeal of this alternative funding was further illustrated by
the fact that average rates on the other liabilities declined by 49 basis
points, while total average deposit rates declined by only 18 basis points in
1999.
Average Daily Amount of Deposits and Rates
The average daily amount of deposits and rates paid on such deposits is
summarized for the periods in the following table.
December 31,
________________________________________________________________
1999 1998 1997
__________________ __________________ ____________________
Amount Rate Amount Rate Amount Rate
________ ____ ________ _____ ________ _____
(In Thousands of Dollars, Except Percentages)
Non-Interest Bearing DDA $ 40,312 $ 39,308 $ 43,300
Interest-Bearing DDA 59,885 2.05% 59,794 2.32% 64,607 2.54%
Savings Deposits 39,896 2.57 41,728 2.72 43,797 2.78
Time Deposits 188,170 5.28 180,128 5.44 193,738 5.37
________ ____ ________ ____ ________ ____
Total $328,263 3.71% $320,958 3.89% $345,442 3.84%
________ ____ ________ ____ ________ ____
________ ____ ________ ____ ________ ____
Maturities of Time Certificates of Deposits and Other Time Deposits of
$100,000 or more outstanding at December 31, 1999, are summarized as follows:
Time Other
Certificates Time
Maturities of Deposits Deposits Total
__________ ____________ ___________ ___________
(In Thousands of Dollars)
3 Months or Less $20,155,468 $16,303,081 $26,458,549
Over 3 Through 6 Months 8,391,139 0 8,391,139
Over 6 Through 12 Months 3,781,780 0 3,781,780
Over 12 Months 13,722,161 0 13,722,161
___________ ___________ ___________
Total $46,053,294 $16,303,081 $52,356,375
___________ ___________ ___________
___________ ___________ ___________
Investment Securities and Securities Available for Sale
Investment securities available for sale included Mortgage-Backed
Securities of $127.1 million, U.S. treasury and agency securities of $2.8
million, state, county and municipal securities of $24.4 million, and other
securities of $3.5 million. The securities portfolio is carried at fair value
and it decreased $6.1 million from December 1998 to December 1999 as a result
of unrealized losses due to changes in the rate environment.
At December 1999, approximately $33.4 million in CMOs had floating
interest rates which reprice monthly and $54.5 million had fixed interest
rates.
Because of their liquidity, credit quality and yield characteristics,
the majority of the purchases of taxable securities have been purchases of
agency guaranteed mortgage-backed obligations and collateralized mortgage
obligations. The mortgage-backed obligations in which United Security invests
represent an undivided interest in a pool of residential mortgages or may be
collateralized by a pool of residential mortgages ("mortgage-backed
securities"). Mortgage-backed securities have yield and maturity
characteristics corresponding to the underlying mortgages and are subject to
any prepayments of principal due to prepayment, refinancing, or foreclosure
of the underlying mortgages. Although maturities of the underlying mortgage
loans may range up to 30 years, amortization and prepayments substantially
shorten the effective maturities of mortgage-backed securities. Transactions
in these securities have focused on the three to seven year average maturity
range. Principal and interest payments also add significant liquidity to the
balance sheet. In 1999, there was a continuing emphasis in CMOs, all of which
are collateralized by U. S. Government and Agency Mortgage Pools. The CMO
market in existence since 1983 was created to add liquidity to the
mortgage-backed security ("MBS") market by furnishing better distribution of
risk/reward profiles. Since CMOs are derived from MBS pools, they are labeled
mortgage derivatives.
Although the Federal Financial Institution Examination Council no longer
requires that all MBS derivatives be tested for suitability as an investment
in the portfolio of financial institutions, First United Security Bank
continues to run these tests at purchase and periodically thereafter. The
three tests being performed are as follows:
#1 -- Average Life Test --
The expected average life of the security must be less than or equal to
10 years.
#2 -- Average Life Sensitivity Test --
The average life of the security will not extend by more than 4 years
or shorten by more than 6 years for immediate Treasury curve shifts of
+/- 300 basis points (3%).
#3 -- Price Sensitivity Test --
The estimated price of the security will not change by more than 17%
for immediate Treasury curve shifts of +/- 300 basis points.
Securities that do not pass all three tests are designated "high risk".
United Security held $17 million in securities which, at December 31,
1999, were designated high risk. $7 million of these securities were floating
rate, $9.4 million were inverse floating rate securities and $.6 million were
fixed rate securities. These securities were purchased and/or are being held
to hedge certain areas of interest rate risk in the portfolio and balance
sheet. There were unrealized losses in this portion of the portfolio at
December 31, 1999 of $918,224.
The overall securities portfolio is formally monitored on a monthly
basis, and assessments are made continually relative to United Security's
exposure to fluctuations in interest rates. Changes in the level of earnings
and fair values of securities are generally attributable to fluctuations in
interest rates, as well as volatility caused by general uncertainty over the
economy, inflation, and future interest rate trends. MBS and CMOs present
some degree of additional risk s collateralizing these securities can be
prepaid, thereby affecting the yield and market value of the portfolio.
The composition of United Security's investment portfolio reflects
United Security's investment strategy of maximizing portfolio yields
commensurate with risk and liquidity considerations. The primary objectives
of United Security's investment strategy are to maintain an appropriate level
of liquidity and provide a tool to assist in controlling United Security's
interest rate position while at the same time producing adequate levels of
interest income.
Fair market values of securities vary significantly as interest rates
change. The gross unrealized gains and losses in the securities portfolio are
not expected to have a material impact on future income, liquidity or other
funding needs. There were unrealized losses (net of taxes) of $1.8 million in
the securities portfolio on December 31, 1999 versus net unrealized gains
(net of taxes) of $2.8 million one year ago.
United Security uses other off balance sheet derivative products for
hedging purposes. These include interest rate swaps and caps. The use and
detail regarding these products are fully discussed under "Liquidity and
Interest Rate Sensitivity Management" and in Note 19 in the "Notes to
Consolidated Financial Statements".
Investment Securities Available-for-Sale
The following table sets forth the amortized costs of investment
securities as well as their fair value and related unrealized gains or loss
at the dates indicated.
December 31,
__________________________________
1999 1998 1997
_________ ________ ________
(In Thousands of Dollars)
Investment Securities Available for Sale:
U.S. Treasury and Agencies Securities $ 2,891 $ 2,090 $ 2,096
Obligations of States, Counties, and Political Subdivisions 24,550 23,841 22,228
Mortgage-Backed Securities 129,737 132,588 144,310
Other Securities 3,501 3,076 2,245
Total Book Value 160,679 159,505 170,879
Net Unrealized Gains/Losses (2,805) 4,514 1,620
________ ________ ________
Total Market Value $157,874 $164,019 $172,499
________ ________ ________
________ ________ ________
Investment Securities Available-for-Sale Maturity Schedule
Maturing
__________________________________________________________________________________
After One After Five
Within But Within But Within After
One Year Five Years 10 Years 10 Years
________________ ________________ _________________ __________________
Amount Yield Amount Yield Amount Yield Amount Yield
______ _____ ______ _____ ______ _____ ________ _____
(In Thousands of Dollars, Except Yields)
Investment Securities Available for Sale:
U.S. Treasury and Agency
Securities $ 500 0.00% $ 0 0.00% $ 2,844 7.12% $ 1,560 0.00%
State, County and Municipal
Obligations 3,046 6.63% 5,211 7.15% 3,192 6.26% 12,923 5.59%
Mortgage-Backed
Securities 7 0% 1,275 7.18% 10,504 6.78% 115,340 7.13%
Corporate Bank Notes 0 0.00% 11 7.87% 0 0.00% 0 0.00%
______ ____ ______ ____ _______ ____ ________ ____
Total $3,053 6.61% $6,497 7.16% $16,540 6.73% $128,263 6.98%
______ ____ ______ ____ _______ ____ ________ ____
______ ____ ______ ____ _______ ____ ________ ____
154,353 6.95%
Equity Securities 3,521 7.38%
TOTAL $157,874 6.96%
*Available for Sale Securities are stated at Market Value and Market Yield
The maturities and weighted average yields of investment securities
available-for-sale at the end of 1999 are presented in the preceding table
based on stated maturity. While the average stated maturity of the Mortgage
Backed Securities (excluding CMO's) was 24.01 years, the average life
expected is 9.87 years. The average stated maturity of the CMO portion of the
portfolio was 21.24 years, and the average expected life was 7.33 years. The
average expected life of investment securities available-for-sale was 8.40
years with an average yield of 6.96 percent.
Condensed Portfolio Maturity Schedule
Dollar Portfolio
Maturity Summary Amount Percentage
________________ ____________ __________
Maturing in 3 months or less $ 1,966,564 0.63%
Maturing in 3 months to 1 year 2,086,219 1.35
Maturing in 1 to 3 years 4,741,992 3.07
Maturing in 3 to 5 years 1,753,901 1.14
Maturing in 5 to 15 years 24,537,786 15.89
Maturing in over 15 years 120,266,910 77.92
____________ ______
Total $154,353,372 100.00%
____________ ______
____________ ______
The following Marketable Equity Securities have been excluded from the above
Maturity Summary due to no stated maturity date.
Federal Home Loan Bank Stock $3,289,500
Mutual Funds $ 9,618
Other Marketable Equity Securities $ 221,453
Condensed Portfolio Repricing Schedule
Dollar Portfolio
Repricing Summary Amount Percentage
_________________ ____________ __________
Repricing in 30 days or less $131,244,405 20.24%
Repricing in 31 days to 1 year 2,086,219 1.35
Repricing in 1 to 3 years 4,589,794 2.97
Repricing in 3 to 5 years 1,753,901 1.14
Repricing in 5 to 15 years 21,868,799 14.17
Repricing in over 15 years 92,810,254 60.13
____________ ______
Total $154,353,372 100.00%
____________ ______
____________ ______
Repricing in 30 days or less does not include:
Mutual Funds $ 9,618
Repricing in 31 days to 1 year does not include:
Federal Home Loan Bank Stock $3,289,500
Other Marketable Equity Securities $ 221,453
The tables above reflect all securities at market value on December 31, 1999.
Securities Gains and Losses
Non-interest income from securities transactions, trading account
transactions, and associated option premium income increased in 1999 compared
to 1998, as can be seen in the table below. The majority of the profits
realized in 1999 were generated through the sale of securities. Gains in this
area occurred in connection with United Security's asset and liability
management activities and strategies. Option income and other off-balance
sheet income declined 34.87% from $319,918 to $208,377. Although this income
should be considered non-recurring, it is expected that $90,902 will be
recognized in 2000. This income which will be received in 2000 is the result
of early termination of interest rate contracts and deferred gains and losses
associated with these interest rate risk management tools, and is being
amortized over the original life of the hedge.
During 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. This statement replaces existing
pronouncements and practices with a single, integrated accounting framework
for derivatives and hedging activities requiring companies to formally
document, designate, and assess the effectiveness of transactions that
receive hedge accounting. During 1999, the FASB issued SFAS No. 137, which
deferred the effective date of SFAS No. 133 to fiscal years beginning after
June 15, 2000. Presently, the Company has not yet quantified the effect
adoption will have on the consolidated financial statements.
The table below shows the associated net gains or (losses) for the
periods 1999, 1998, and 1997:
1999 1998 1997
_________ _________ _________
Investment Securities $ 533,806 $ 410,987 $ 105,254
Trading Account 0 0 10,187
Options & Off Balance Sheet Transactions 208,377 310,918 396,772
_________ _________ _________
Total $ 742,183 $ 721,905 $ 512,213
_________ _________ _________
_________ _________ _________
Gains in 1999 from sales of investment securities were net of losses of
$578,768. Volume of sales as well as other information on securities is
further discussed in Note 4 to the financial statements.
Short-Term Borrowings
Purchased funds can be used to satisfy daily funding needs, and when
advantageous, for arbitrage. The following table shows information for the
last three years regarding the Bank's short- and long-term borrowings
consisting of U. S. Treasury demand notes included in its Treasury, Tax, and
Loan Account, securities sold under repurchase agreements, Federal Fund
purchases (one day purchases), and other borrowings from the Federal Home
Loan Bank.
Short-Term Borrowings Long-Term Borrowings
Maturity Less Than One Year Maturity One Year or Greater
___________________________ ____________________________
(In Thousands of Dollars)
Year Ended December 31,:
1999 $17,045 $65,729
1998 12 55,847
1997 3,913 40,966
Weighted Average Interest Rate at Year-end:
1999 5.34% 5.80%
1998 4.41% 5.04%
1997 5.23% 5.83%
Maximum Amount Outstanding at Any Month's End:
1999 $17,105 $65,788
1998 11,620 55,906
1997 11,936 40,973
Average Amount Outstanding During the Year:
1999 $ 4,919 $57,781
1998 3,929 55,454
1997 3,210 30,296
Weighted Average Interest Rate During the Year:
1999 5.19% 5.07%
1998 5.87% 5.53%
1997 5.80% 5.83%
During January of 1997, United Security converted Federal Home Loan Bank
short-term borrowings to long-term borrowings.
Balances in these accounts fluctuate dramatically on a day-to-day basis.
Rates on these balances also fluctuate daily, but as reflected in the chart
above, they generally depict the current interest rate environment.
Shareholders' Equity
United Security has always placed great emphasis on maintaining its
strong capital base. At December 31, 1999, shareholders' equity totaled $61.7
million, or 12.9% of total assets compared to 13.5% and 12.4% for the same
periods in 1998 and 1997, respectively. This level of equity indicates to
United Security's shareholders, customers and regulators that United Security
is financially sound and offers the ability to sustain an appropriate degree
of leverage to provide a desirable level of profitability and growth.
Over the last three years shareholders' equity grew from $47.6 million
at the beginning of 1997 to $61.7 million at the end of 1999. All of this
growth was the result of internally generated retained earnings, with the
exception of approximately $700,000 from stock options being exercised.
Shareholders' equity was also impacted by the market value adjustment of
$(4.6) million made for the available for sale investments as required by
Statement of Accounting Standards No. 115. The internal capital generation
rate (net income less cash dividends as a percentage of average shareholders'
equity) was 8.5% in 1999, 10.3% in 1998 and 10.2% in 1997.
United Security is required to comply with capital adequacy standards
established by the Federal Reserve and FDIC. Currently, there are two basic
measures of capital adequacy: a risk-based measure and a leverage measure.
The risk-based capital standards are designed to make regulatory capital
requirements more sensitive to differences in risk profile among banks and
bank holding companies, to account for off-balance sheet exposure, and to
minimize disincentives for holding liquid assets. Assets and off-balance
sheet items are assigned to risk categories, each with a specified risk
weighting factor. The resulting capital ratios represent capital as a
percentage of total risk weighted assets and off-balance sheet items. The
banking regulatory agencies have also adopted regulations which supplement
the risk based guidelines to include a minimum leverage ratio of 3% of Tier l
Capital to total assets less goodwill (the "leverage ratio"). Depending upon
the risk profile of the institution and other factors, the regulatory
agencies may require a leverage ratio of 1% or 2% higher than the minimum 3%
level.
The minimum standard for the ratio of total capital to risk-weighted
assets is 8%. At least 50% of that capital level must consist of common
equity, undivided profits, and non-cumulative perpetual preferred stock, less
goodwill and certain other intangibles ("Tier l Capital"). The remainder
("Tier II Capital") may consist of a limited amount of other preferred stock,
mandatory convertible securities, subordinated debt, and a limited amount of
the allowance for loan losses. The sum of Tier l Capital and Tier II Capital
is "total risk-based capital".
The following chart summarizes the applicable regulatory capital
requirements. United Security's capital ratios at December 31, 1999,
substantially exceeded all regulatory requirements.
Risk-Based Capital Requirements
Minimum United Security's
Regulatory Ratio at
Requirement December 31, 1999
___________ _________________
Tier I Capital to sets 8.00% 19.05%
Total Capital to Risk-Adjusted Assets 4.00% 17.79%
Tier I Leverage Ratio 3.00% 12.47%
Total capital also has an important effect on the amount of FDIC
insurance premiums paid. Lower capital ratios can cause the rates paid for
FDIC insurance to increase. United Security plans to maintain the capital
necessary to keep FDIC insurance rates at a minimum.
United Security attempts to balance the return to shareholders through
the payment of dividends with the need to maintain strong capital levels for
future growth opportunities. Total cash dividends declared were $3.0 million
or $.84 per share in 1999 compared to $.76 per share in 1998 and $.53 per
share in 1997. The total cash dividends represented a payout ratio of 36.7%
in 1999 with payout ratio of 31.4% and 26.8% in 1998 and 1997 respectively.
This is the eleventh consecutive year that United Security has increased cash
dividends.
Ratio Analysis
The following table presents operating and capital ratios for each of
the last three years.
Year Ended December 31,
____________________________
1999 1998 1997
______ ______ ______
Return on Average Assets 1.77% 1.95% 1.61%
Return on Average Equity 13.35% 14.94% 13.92%
Cash Dividend Payout Ratio 36.67% 31.40% 26.79%
Average Equity to Average Assets Ratio 13.29% 13.07% 11.55%
Liquidity and Interest Rate Sensitivity Management
The primary function of asset and liability management is to assure
adequate liquidity and to maintain an appropriate balance between
interest-sensitive assets and interest-sensitive liabilities. Liquidity
management involves the ability to meet day-to-day cash flow requirements of
United Security's customers, whether they are depositors wishing to withdraw
funds or borrowers requiring funds to meet their credit needs. Without proper
liquidity management, United Security would not be able to perform the
primary function of a financial intermediary and would, therefore, not be
able to meet the needs of the communities it serves. Interest rate risk
management focuses on the maturity structure of assets and liabilities and
their repricing characteristics during changes in market interest rates.
Effective interest rate sensitivity management seeks to ensure that both
assets and liabilities respond to changes in interest rates within an
acceptable time frame, thereby minimizing the effect of such interest rate
movements on the net interest margin.
The asset portion of the balance sheet provides liquidity primarily from
loan principal payments and maturities and through sales, maturities, and
payments from the investment portfolio. Other short-term investments such as
Federal Funds Sold are additional sources of liquidity. Loans maturing or
repricing in one year or less amounted to $126.8 million at December 31,
1999.
Investment securities maturing or repricing in the same time frame
totaled $36.4 million or 23.6% of the investment portfolio at year-end 1999.
In addition, principal payments on mortgage-backed securities totaled $8
million in 1999.
The liability portion of the balance sheet provides liquidity through
interest-bearing and non-interest bearing deposit accounts. Federal Funds
purchased, securities sold under agreements to repurchase, short-term and
long-term borrowings are additional sources of liquidity. Liquidity
management involves the continual monitoring of the sources and uses of funds
to maintain an acceptable cash position. Long-term liquidity management
focuses on considerations related to the total balance sheet structure.
Although the majority of the securities portfolio has stated maturities
in excess of ten years, the entire portfolio consists of securities that are
readily marketable and which are easily convertible into cash. However,
management does not necessarily rely upon the investment portfolio to
generate cash flows to fund loans, capital expenditures, dividends, debt
repayment, etc. Instead, these activities are funded by cash flows from
operating activities and increases in deposits and short-term borrowings. The
proceeds from sales and maturities of investments have been used either to
purchase additional investments or to fund loan growth.
United Security, at December 31, 1999, had long-term debt and short-term
borrowings that on average represent 13.9 percent of total liabilities and
equity.
United Security currently has up to $85 million in borrowing capacity
from the Federal Home Loan Bank and $38 million in established Federal Funds
Lines.
Interest rate sensitivity is a function of the repricing characteristics
of the portfolio of assets and liabilities. These repricing characteristics
are the time frames during which the interest-bearing assets and liabilities
are subject to changes in interest rates, either at replacement or maturity,
during the life of the instruments. Sensitivity is measured as the difference
between the volume of assets and the volume of liabilities in the current
portfolio that are subject to repricing in future time periods. These
differences are known as interest sensitivity gaps and are usually calculated
for segments of time and on a cumulative basis.
Changes in the mix of earning assets or supporting liabilities can
either increase or decrease the net interest margin without affecting
interest rate sensitivity. In addition, the interest rate spread between an
asset and its supporting liability can vary significantly, while the timing
of repricing for both the asset and the liability remains the same, thus
affecting net interest income. It should be noted, therefore, that a matched
interest-sensitive position by itself will not ensure maximum net interest
income. Management continually evaluates the condition of the economy, the
pattern of market interest rates, and other economic data to determine the
types of investments that should be made and at what maturities. Using this
analysis, management from time to time assumes calculated interest
sensitivity gap positions to maximize net interest income based upon
anticipated movements in general levels of interest rates.
Measuring Interest Rate Sensitivity: Gap analysis is a technique used to
measure interest rate sensitivity, an example of which is presented below.
Assets and liabilities are placed in gap intervals based on their repricing
dates. Assets and liabilities for which no specific repricing dates exist are
placed in gap intervals based on management's judgment concerning their most
likely repricing behaviors. Derivatives used in interest rate sensitivity
management are also included in the applicable gap intervals.
A net gap for each time period is calculated by subtracting the
liabilities repricing in that interval from the assets repricing. A positive
gap - more assets repricing than liabilities - will benefit net interest
income if rates are rising and will detract from net interest income in a
falling rate environment. Conversely, a negative gap - more liabilities
repricing than assets - will benefit net interest income in a declining
interest rate environment and will detract from net interest income in a
rising interest rate environment.
Gap analysis is the simplest representation of United Security's
interest rate sensitivity. However, it cannot reveal the impact of factors
such as ad (e.g., the prime lending rate), pricing strategies on consumer and
business deposits, changes in balance sheet mix, or the effect of various
options embedded in balance sheet instruments.
The accompanying table shows United Security's rate sensitive position
at December 31, 1999, as measured by gap analysis. Over the next 12 months
approximately $92.9 million more interest earning assets than interest
bearing liabilities can be repriced to current market rates at least once.
This analysis indicates that United Security has a negative gap within the
next 12 month range. Therefore, net interest income would benefit slightly
from a falling interest rate environment and would be adversely impacted
slightly by a rising rate environment according to the table.
Interest Rate Sensitivity Analysis
December 31, 1999
_____________________________________________________________________________________________
(In Thousands of Dollars)
Total
0-3 4-12 1 Year 1-5 Over 5 Non-Rate
Months Months or Less Years Years Sensitive Total
_________ _________ _________ ________ ________ _________ ________
Earning Assets:
Loans (Net of Unearned
Income) $ 86,083 $ 40,741 $ 126,824 $108,477 $ 46,450 $ 0 $281,751
Investment Securities 35,850 6,115 41,965 39,874 76,035 0 157,874
Interest Bearing Deposits
in Other Banks 365 0 365 0 0 365
_________ _________ _________ ________ ________ ________ ________
Total Earning Assets $ 122,298 $ 46,856 $ 169,154 $148,351 $122,485 $ 0 $439,990
Percent of Total
Earning Assets 27.8% 10.6% 38.4% 33.7% 27.8% 100.0%
Interest-Bearing Liabilities:
Interest-Bearing Deposits
and Liabilities
Demand Deposits (1) $ 48,248 $ 0 $ 48,248 $ 12,062 $ 0 $ 0 $ 60,310
Savings Deposits (1) 19,551 0 19,551 19,551 0 0 39,102
Time Deposits 80,049 64,119 144,168 44,113 0 0 188,281
Other Liabilities 43,982 5,087 49,069 32,964 149 0 82,182
Non-Interest-Bearing
Liabilities
Demand Deposits 981 0 981 0 0 38,254 39,235
Equity 0 0 0 0 0 30,880 30,880
_________ _________ _________ ________ ________ ________ ________
Total Funding Sources $ 192,811 $ 69,206 $ 262,017 $108,690 $ 149 $ 69,134 $439,990
Percent of Total
Funding Sources 43.8% 15.7% 59.6% 24.7% 0.0% 15.7% 100.0%
Interest Sensitivity Gap
(Balance Sheet) $ (70,513) $ (22,350) $ (92,863) $ 39,661 $122,336 $(69,134) $ 0
Off-Balance Sheet $ (40,000) $ 0 $ (40,000) $ 0 $ 0 $ 0 $(40,000)
Interest Sensitive Gap $(110,513) $ (22,350) $(132,863) $ 39,661 $122,336 $(69,134) $(40,000)
Cumulative Interest-Sensitive
Gap $(110,513) $(132,863) $ N/A $(93,202) $ 29,134 $(40,000) $ 0
Over 5
Total Years
0-3 4-12 1 Year 1-5 Non-Rate
Months Months or Less Years Sensitive Total
______ ______ _______ _____ _________ _____
Ratio of Earning Assets to Funding
Sources and Off-Balance Sheet 0.53% 0.68% 0.56% 1.36% 1.77% 1.10%
Cumulative Ratio 0.53% 0.56% N/A 0.77% 0.92% 0.92%
(1) Management adjustments reflect the Company's anticipated
repricing sensitivity of non-maturity deposit products. Historically,
balances on non-maturity deposit accounts have remained relatively stable
despite changes in market interest rates. Management has classified certain
of these accounts as non-rate sensitive based on management's historical
pricing practices and runoff experience. Approximately 20% of the interest-
bearing demand deposit account balances and 50% of the savings account
balances are classified as over one year.
Certain interest-sensitive assets and liabilities are included in
the table based on historical repricing experience and expected prepayments
in the case of Mortgage Backed Securities rather than contractual maturities.
Non-accruing loans are included in loans at the contractual maturity.
United Security also uses additional tools to monitor and manage
interest rate risk sensitivity. These tools include income simulation
analysis and duration analysis. Both analyses are methods of estimating
earnings at risk and capital at risk under varying interest rate conditions.
They are used to test the sensitivity of net interest income and
stockholders' equity to changing levels of interest rates and include
adjustments for the expected timing and the magnitude of assets and liability
cash flows. Also, these measures capture adjustments for the lag between
movements in market interest rates and the movement of administered rates on
prime rate loans, interest bearing transaction accounts, regular savings, and
money market savings accounts. Income simulation analysis indicates that
United Security is slightly liability sensitive.
Condensed Balance Sheet Duration Analysis
Estimated
Book Modified Duration
Value Down 1% Up 1%
_________ _______ ______
ASSETS
Cash and Due From Banks $ 12,223 4.36% 4.36%
Investment Securities Available-for-Sale 157,874 3.65 4.67
Interest Bearing Deposits in Other Banks 666 0.01 0.01
Loans 276,172 1.95 1.99
Premises