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MAYNARD, COOPER & GALE, P.C.
ATTORNEYS AT LAW
1901 SIXTH AVENUE NORTH
2400 AMSOUTH/HARBERT PLAZA
BIRMINGHAM, ALABAMA 35203-2602
(205) 254-100
FACSIMILE (205) 254-1999
MONTGOMERY OFFICE:
ONE COMMERCE STREET
SUITE 302
MONTGOMERY, ALABAMA 36104
(334) 262-2001
Writer's Direct Dial No.: (205) 254-1055
March 29, 1996
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. 0-14549)
On behalf of our client, United Security Bancshares, Inc.,
we are filing the above-referenced Form 10-K via the EDGAR
system.
The filing fee of $250 associated with this filing has been
deposited previously.
Please do not hesitate to contact the undersigned if you have
any questions or comments.
Very truly yours,
J. Michael Savage
JMS/ead
Enclosures
cc: Jack M. Wainwright, III
Larry M. Sellers
Kevin M. Rittelmeyer
James M. Pool
United Security Bank
P.O. Box 249
Thomasville, Alabama 36784
334-636-5424
March 19, 1995
Securities and Exchange Commission
Division of Corporation Finance
Washington, D.C. 20549
RE: United Security Bancshares, Inc.
Form 10-K for the Fiscal Year Ended
December 31, 995
File Number 0-14549
Dear Sir:
Your comments on United Security Bancshares, Inc.'s Annual Report
on Form 10-K for the fiscal year ended December 31, 1994 have been
carefully considered and incorporated in the 1995 10-K. I refer you
to the "Management's Discussion and Analysis" section of the 10-K
as well as the "Notes to Consolidated Financial Statements" for the
disclosure recommended in your letter dated September 29, 1995. A
brief review of our actions is outlined below.
In the "Management's Discussion and Analysis" of the 1995 10-K
specific factors that influence management's decision to lower the
percentage of total loans to be allocated toward possible loan loss
are discussed in "Loans and Allowances for Possible Loan Losses".
Additionally, the underlying reasons for the decline in
non-performing assets is discussed in "Non-Performing Assets/Loan
Losses".
Under the management discussion section "Investment Securities and
Securities Available for Sale", a sub-section was added detailing
the Company's activities in the derivative market. This section
discusses the "high-risk" investments and how these investments are
managed.
The frequency and methodology used to evaluate impairment of
intangible assets have been disclosed in Note A of the "Notes to
Consolidated Financial Statements" under the sub-section
"Amortization of Intangibles".
The disclosure in Note C of the "Notes to Consolidated Financial
Statements" has been expanded to further explain the reasons for
the transfer of securities, and the disclosure has been made in the
"Statement of Cash Flows".
Please note that Notes R and S of the "Notes to Consolidated
Financial Statements" have been significantly expanded to adopt the
additional disclosures requested concerning the Company's
derivative instruments.
I trust the attached 10-K filing, particularly the management
discussion and the "Notes to Consolidated Financial Statements",
sufficiently addresses the disclosures recommended in your letter
of September 29, 1995. Management assures you that future filings
will address all of the areas noted.
If you have additional comments or need additional information,
please contact me at (334) 636-5424.
Sincerely,
/s/ Larry M. Sellers
Larry M. Sellers
Senior Executive Vice President
FORM 10-K
(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
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 .
Shares of common stock ($0.01 par value) outstanding as of
December 31, 1995: 2,137,960.
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 26, 1996, is
$21,256,066. (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
1996 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, 1995
TABLE OF CONTENTS
Part Item Caption
I 1 Business...................................
2 Properties.................................
3 Pending Legal Proceedings..................
4 Submission of Matters to a Vote of
Security Holders...........................
II 5 Market for Registrant's Common Equity
and Related Stockholder Matters.............
6 Selected Financial Data.....................
7 Management's Discussion and Analysis of
Financial Condition and Results of
Operations..................................
8 Financial Statements and
Supplementary Data..........................
9 Disagreements on Accounting and
Financial Disclosure........................
III 10 Directors and Executive Officers
of the Registrant...........................
11 Executive Compensation......................
12 Security Ownership of Certain
Beneficial Owners and Management............
13 Certain Relationships and
Related Transactions........................
IV 14 Exhibits, Financial Statement Schedules
and Reports on Form 8-K.....................
Signatures...................................................
Exhibits.....................................................
PART I
Item 1. Business.
General
United Security Bancshares, Inc. ("Bancshares") is an Alabama
corporation organized in 1984. Bancshares is a bank holding company
registered under the Bank Holding Company Act of 1956, as amended,
and it operates one banking subsidiary, United Security Bank (the
"Bank").
The Bank has eight banking offices which are located in
Thomasville, Coffeeville, Fulton, Gilbertown, Grove Hill, Butler,
and Jackson, Alabama, and its market area includes portions of
Clarke, Choctaw, Marengo, Sumter, 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.
The Bank encounters vigorous competition from 10 banks and one
savings and loan association located in its service area for, among
other things, new deposits, loans, savings deposits, certificates
of deposit, interest-bearing transaction (NOW) accounts, and other
banking and financial services.
As of December 31, 1995, the Bank had 90 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.
Legislation
A regional reciprocal interstate banking bill permits Alabama
banks to acquire banks located in 13 designated jurisdictions if
such jurisdictions have adopted similar statutes. The 13 designated
jurisdictions are Arkansas, Florida, Georgia, Kentucky, Louisiana,
Maryland, Mississippi, North Carolina, South Carolina, Tennessee,
Virginia, West Virginia, and the District of Columbia, and all such
jurisdictions have adopted varying forms of reciprocal statutes.
The effect of this legislation is likely to increase competition
within the State of Alabama among banking institutions located in
Alabama and from banking institutions, many of which are larger
than Bancshares, located in the area affected by the legislation.
Supervision, Regulation and Governmental Policy
Bank Holding Company Regulation. As a registered bank holding
company, Bancshares is subject to supervision and regulation by the
Board of Governors of the Federal Reserve System ("Board of
Governors") under the Bank Holding Company Act of 1956, as amended.
As a bank holding company, Bancshares is required to furnish the
Board of Governors an annual report of its operations at the end of
each fiscal year and to furnish such additional information as the
Board of Governors may require pursuant to the Bank Holding Company
Act. The Board of Governors may also make examinations of
Bancshares.
The Bank Holding Company Act requires every bank holding
company to obtain the prior approval of the Board of Governors (i)
before it may acquire direct or indirect ownership or control of
any voting shares of any bank if, after such acquisition, such bank
holding company will directly or indirectly own or control more
than five percent of the voting shares of such bank; (ii) before it
or any of its subsidiaries, other than a bank, may acquire all or
substantially all of the assets of a bank; or (iii) before it may
merge or consolidate with any other bank holding company. In
reviewing a proposed acquisition, the Board of Governors considers
financial, managerial and competitive aspects, and must take into
consideration the future prospects of the companies and banks
concerned and the convenience and needs of the community to be
served. As part of its review, the Board of Governors concentrates
on the pro forma capital position of the bank holding company and
reviews the indebtedness to be incurred by a bank holding company
in connection with the proposed acquisition to ensure that the bank
holding company can service such indebtedness in a manner that does
not adversely affect the capital requirements of the holding
company or its subsidiaries. The Bank Holding Company Act further
requires that consummation of approved acquisitions or mergers be
delayed for a period of not less than 30 days following the date of
such approval. During the 30 day period, complaining parties with
respect to competitive issues may obtain a review of the Board of
Governors' order granting its approval by filing a petition in the
appropriate United States Court of Appeals petitioning that the
order be set aside. The Board of Governors may not approve the
acquisition by Bancshares of any voting shares of, or substantially
all the assets of, any bank located outside Alabama unless such
acquisition is specifically authorized by the statutes of the state
in which the bank to be acquired is located.
The Bank Holding Company Act prohibits (with specific
exceptions) Bancshares from engaging in nonbanking activities or
from acquiring or retaining direct or indirect control of any
company engaged in nonbanking activities. The Board of Governors by
regulation or order may make exceptions for activities determined
to be so closely related to banking or managing or controlling
banks as to be a proper incident thereto. In determining whether a
particular activity is permissible, the Board of Governors
considers whether the performance of such an activity can
reasonably be expected to produce benefits to the public, such as
greater convenience, increased competition or gains in efficiency
that outweigh possible adverse effects, such as undue concentration
of resources, decreased or unfair competition, conflicts of
interest or unsound banking practices. For example, making,
acquiring or servicing loans, leasing personal property, providing
certain investment or financial advice, performing certain data
processing services, acting as agent or broker in selling credit
life insurance and certain other types of insurance in connection
with credit transactions by the bank holding company and certain
limited insurance underwriting activities have all been determined
by regulations of the Board of Governors to be permissible
activities. The Bank Holding Company Act does not place territorial
limitations on permissible bank-related activities of bank holding
companies. However, despite prior approval, the Board of Governors
has the power to order a holding company or its subsidiaries to
terminate any activity, or terminate its ownership or control of
any subsidiary, when it has reasonable cause to believe that
continuation of such activity or such ownership or control
constitutes a serious risk to the financial safety, soundness or
stability of any bank subsidiary of that holding company.
Federal Reserve policy requires a bank holding company to act
as a source of financial strength to each of its bank subsidiaries
and to take measures, including possible loans to its subsidiaries
in the form of capital notes or other instruments, to preserve and
protect bank subsidiaries in situations where additional
investments in a troubled bank may not otherwise be warranted.
However, any loans from the holding company to a subsidiary
depository institution likely would be unsecured and subordinated
to such institution's depositors and certain other creditors.
Bank Regulation. The Bank's deposits are insured by the
Federal Deposit Insurance Corporation ("FDIC") to the extent
provided by law. The major responsibility of the FDIC with respect
to insured banks is to protect depositors as provided by law in the
event a bank is closed without adequate provision having been made
to pay claims of depositors. It also acts to prevent the
development or continuation of unsafe or unsound banking practices.
The FDIC is authorized to examine the Bank in order to determine
its condition for insurance purposes. The FDIC must approve any
merger or consolidation involving the Bank where the resulting bank
is a state-chartered, non-Federal Reserve member bank. The Bank is
not a member of the Federal Reserve System. The FDIC is also
authorized to approve conversions, mergers, consolidations, and
assumption of deposit liability transactions between insured and
noninsured banks or institutions, and to prevent capital or surplus
diminution in such transactions where the resulting, continuing or
assumed bank is an insured bank that is not a member of the Federal
Reserve System.
Since the Bank is chartered under the laws of the State of
Alabama, it is also subject to supervision and examination by the
Alabama State Banking Department ("Department") and is subject to
regulation by the Department of all areas of its operations.
Alabama law and the regulations of the Department restrict the
payment of dividends by state chartered banks. Under applicable law
and regulations, cash dividends may not be paid without the
approval of the Department if the total of all dividends declared
by a bank in any calendar year exceeds the total of its net
earnings of that year combined with the net retained earnings of
the preceding two years, less any required transfers to surplus.
Cash dividends in excess of 90% of the earnings of a bank may not
be declared or paid at any time unless the surplus of such bank
shall be equal to at least 20% of the bank's capital.
In accordance with regulatory restrictions, the Bank had at
December 31, 1995, $7,441,820 of undistributed earnings included in
consolidated retained earnings available for distribution to
Bancshares as dividends without prior regulatory approval.
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.
Other Applicable Regulatory Provisions. Banks are also subject
to the provisions of the Community Reinvestment Act of 1977, which
require the appropriate federal bank regulatory agency, in
connection with its regular examination of a bank, to assess the
bank's record in meeting the credit needs of the community serviced
by the bank, including low and moderate-income neighborhoods. The
regulatory agency's assessment of the bank's record is made
available to the public. Further, such assessment is required of
any bank that has applied to, among other things, establish a new
branch office that will accept deposits, relocate an existing
office or merge or consolidate with, or acquire the assets or
assume the liabilities of, a federally regulated financial
institution.
In August 1989, the Financial Institutions Reform, Recovery,
and Enforcement Act of 1989 ("FIRREA") was enacted. FIRREA, among
other things, abolished the Federal Savings and Loan Insurance
Corporation and established two new insurance funds under the
jurisdiction of the Federal Deposit Insurance Corporation: the
Savings Association Insurance Fund (the "SAIF") and the Bank
Insurance Fund ("BIF"). The Bank's deposits are insured by the BIF.
Effective January 1, 1996, the FDIC has adopted a new risk-based
premium schedule of rates for annual insurance assessments paid by
banks whose deposits are insured by the BIF. The new schedule will
reduce assessments for all but the riskiest institutions. Under the
new schedule, annual assessments range from $.00 to $.27 for every
$100.00 of the Bank's assessment base (which is the sum of all
demand and savings deposits plus accrued interest less unposted
debits, pass through reserve balances, and other items) with a
minimum assessment of $1,000.00 per institution per semi-annual
period. The FDIC may adjust the assessment rates semiannually as
necessary to maintain BIF reserves of at least 1.25% of total
deposits insured ($1.25 per $100.00 of deposits insured) but cannot
increase or decrease the rates by any more than 5 basis points
(.05%) in the aggregate without opportunity for notice and comment.
The actual assessment rate applicable to a particular
institution depends upon a risk assessment classification assigned
to the institution by the FDIC. The FDIC will assign each financial
institution to one of three capital groups--well capitalized,
adequately capitalized, or undercapitalized, as defined in the
regulations implementing the prompt corrective action provisions of
FDICIA--and to one of three subgroups within a capital group on the
basis of supervisory evaluations by the institution's primary
federal, and, if applicable, state supervisors and other
information relevant to the institution's financial condition and
the risk posed to the applicable insurance fund. The Bank's current
risk assessment classification is "well-capitalized," for which the
current assessment rate is $.04 per $100 of its assessment base.
Legislation has been introduced in the House of Representatives
that would merge the BIF with the SAIF to create a single federal
insurance program for all depository institutions. This
legislation, if passed, could impose a material increase in
assessment rates for BIF insured institutions.
FIRREA also imposes, with certain limited exceptions, a "cross
guarantee" on the part of commonly-controlled depository
institutions. Under this provision, if one depository institution's
subsidiary of a multi-unit holding company fails or requires FDIC
assistance, the FDIC may assess a commonly-controlled depository
institution for the estimated losses suffered by the FDIC. Although
the FDIC's claim is junior to the claims of nonaffiliated
depositors, holders of secured liabilities, general creditors, and
subordinated creditors, it is superior to the claims of
shareholders.
In 1992, the Federal Deposit Insurance Corporation Improvement
Act of 1991 ("FDICIA") was enacted. FDICIA authorizes the Bank
Insurance Fund ("BIF") to borrow up to $30 billion from the United
States Treasury to be repaid by the banking industry through
deposit insurance assessments. FDICIA required the federal banking
agencies and the FDIC, as insurer, to take prompt action to resolve
the problems of insured depository institutions. All depository
institutions will be classified into one of five categories ranging
from well-capitalized to critically undercapitalized. As an
institution's capital level declines, it would become subject to
increasing regulatory scrutiny and tighter restrictions. FDICIA
further requires an increase in the frequency of "fullscope,
on-site" examinations and expands the current audit requirements.
In addition, federal banking agencies are mandated to review and
prescribe uniform accounting standards that are at least as
stringent as Generally Accepted Accounting Principles. FDICIA
permits the merger or acquisition of any depository institutions
with any other, provided that the transaction is approved by the
resulting entity's appropriate federal banking agency. This would
permit, for the first time, direct mergers between banks and thrift
institutions.
Among other things, FDICIA requires the federal banking
agencies to take "prompt corrective action" in respect of banks
that do not meet minimum capital requirements, as defined by the
regulations implementing FDICIA. If a depository institution fails
to meet regulatory capital requirements, regulatory agencies can
require submission and funding of a capital restoration plan by the
institution to limit growth, require the raising of additional
capital and, ultimately, require the appointment of a conservator
or receiver for the institution. Under FDICIA, a bank holding
company must guarantee that an undercapitalized subsidiary bank
meets its capital restoration plan, subject to certain limitations.
Because of concerns relating to the competiveness and the
safety and soundness of the industry, the Congress is considering,
even after the enactment of FIRREA and FDICIA, a number of
wide-ranging proposals for altering the structure, regulation and
competitive relationships of the nation's financial institutions.
Among such bills are proposals to prohibit banks and bank holding
companies from conducting certain types of activities, to subject
banks to increased disclosure and reporting requirements, to
eliminate the present restriction on interstate branching by banks,
to alter the statutory separation of commercial and investment
banking and to further expand the powers of banks, bank holding
companies and competitors of banks.
Federal law and regulations adopted by the Board of Governors
and the FDIC (the "Agencies") require banks to define the
geographic areas they serve and the services provided in these
geographic areas. These agencies are required to consider
compliance with these regulations and the services made available
to geographic areas served in ruling on applications by banks for
branches and other deposit facilities, relocation of banking
offices and approval of mergers, consolidations, acquisitions of
assets or assumptions of liabilities. The Board of Governors is
also required to consider compliance with these regulations in
ruling on applications under the Bank Holding Company Act for,
among other things, the approval of the acquisition of shares of a
bank.
Under federal law, restrictions are placed on extensions of
credit by the Bank to insiders of Bancshares, to insiders of the
Bank and to insiders of correspondent banks and on extensions of
credit by such correspondent banks to insiders of Bancshares or the
Bank.
Recent legislation reduced substantially the limitations
against branching by Alabama banks. Effective September 29, 1995,
Alabama banks may establish a branch or office in any location
within Alabama upon prior approval of the Superintendent of Banks.
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. This legislation is
likely to increase competition within the State of Alabama among
banking institutions located in Alabama and from banking
institutions outside of Alabama, many of which are larger than
Bancshares.
Dividend Restrictions. In addition to the Alabama statutory
dividend restrictions discussed above under the caption "Bank
Regulation," federal banking regulators are authorized to prohibit
banks and bank holding companies from paying dividends which would
constitute an unsafe and unsound banking practice. The Board of
Governors has indicated that it would generally be an unsafe and
unsound practice to pay dividends except out of operating earnings.
Effect of Governmental Policies. The earnings and business of
Bancshares and the Bank are and will be affected by the policies of
various regulatory authorities of the United States, especially the
Board of Governors. Important functions of the Board of Governors,
in addition to those enumerated above, are to regulate the supply
of credit and to deal with general economic conditions within the
United States. The instruments of monetary policy employed by the
Board of Governors for these purposes influence in various ways the
overall level of investments, loans, other extensions of credit and
deposits, and the interest rates paid on liabilities and received
on assets.
In view of the changing conditions in the national economy, in
the money markets, in the federal government's fiscal policies and
in the relationships of international currencies, as well as the
effect of actions by the Board of Governors, no predictions can be
made as to how these external variables, over which Bancshares'
management has no control, may in the future affect possible
interest rates, deposit levels, loan demand or the business and
earnings of Bancshares and the Bank.
Capital Adequacy Requirements. In July of 1988, the Basle
Committee on Banking Regulations and Supervisory Practices (which
included representatives of the United States and eleven other
countries) issued proposals for the international convergence of
capital measurement and capital standards for international banks.
Each of the three agencies responsible for risk-based capital
requirements, the Comptroller of the Currency (the "Comptroller"),
the Board of Governors and the FDIC, have issued their final
risk-based capital guidelines (the "Capital Guidelines").
Generally, the Capital Guidelines significantly revise the
definition of capital and establish minimum capital standards in
relation to assets and off-balance sheet exposures as adjusted for
credit risks. Capital is classified into two tiers. The first tier
("Tier I") consists primarily of equity stock, as reduced by
goodwill. The supplementary or second tier ("Tier II") consists of
allowances for loan losses and other forms of capital, such as,
among other things, specific types of preferred stock, mandatory
convertible securities and term subordinated debt. Subordinated and
intermediate-term preferred stock debt included in Tier II capital
is limited to a maximum of 50 percent of Tier I capital. Also, Tier
II capital cannot exceed 100 percent of Tier I capital, which
places more emphasis on tangible equity than does the present
primary capital test. The Capital Guidelines also assign
risk-weightings to various types of bank assets to take into
account different risks associated with different activities. Banks
must have a capital to risk-weighted asset ratio of 8 percent, 4
percent of that amount to consist of Tier I capital.
The foregoing is a brief summary of certain statutes, rules
and regulations affecting Bancshares and the Bank. Numerous other
statutes and regulations have an impact on the operations of these
entities.
Tax Considerations. The Revenue Reconciliation Act of 1993
(the "Act") revised the federal income tax provisions respecting
the taxation of corporations by increasing the top marginal federal
income tax rate from 34% to 35% beginning January 1, 1993.
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.
The Bank has operated from its main office at 131 West Front
Street since 1959. It is in a two-story building with approximately
17,000 square feet. During 1986, construction upon Bancshares' and
the Bank's main offices at 131 West Front Street, Thomasville, was
completed. Approximately 10,000 square feet of office space was
added as a result of this construction.
The Bank operates seven branches in addition to its main
office. The Highway 43 branch is located at the intersection of
State Highway 43 and Nichol Avenue and is in a one-story brick
building with approximately 3,500 square feet. The Coffeeville
branch is located on Highway 84 in Coffeeville, approximately 33
miles from Thomasville, and it is in a one-story brick building of
approximately 2,000 square feet. The Fulton branch is located on
State Highway 178, approximately eight miles from Thomasville, in
a one-story frame building of approximately 2,000 square feet. The
Butler branch is located at 305 South Mulberry Street, Butler,
Alabama in a one-story brick building of approximately 12,000
square feet. There are four drive-in teller facilities at this
location. The Gilbertown branch, which consists of a one-story
brick building of approximately 2,000 square feet, is located at
the intersection of High Street and Highway 17 in Gilbertown,
Alabama. There is one drive-in facility at this location. The Grove
Hill branch is located at 131 Main Street in Grove Hill, Alabama.
This branch is in a one-story brick building with approximately
2,700 square feet and two drive-in facilities. The Jackson Branch
opened on November 19, 1990, and is located at the intersection of
Highway 69 and College Avenue in Jackson, Alabama. The building is
a one-story brick building of approximately 2,800 square feet with
two drive-in facilities. All of the Bank's offices are owned in fee
by the Bank without encumbrance.
Item 3. Pending 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.
At the 1995 Annual meeting of Bancshares, the shareholders of
Bancshares approved an amendment to the Amended Articles of
Incorporation of Bancshares increasing its authorized shares from
600,000 shares, with a par value of $.25 per share, to 2,400,000
shares, with a par value of $.01 per share and authorizing a split
of each issued and outstanding share of Bancshares common stock
into four shares of common stock, each with a par value of $.01
(the "Stock Split"). There are currently 2,202,060 shares of
Bancshares common stock issued and 2,137,960 shares outstanding. As
of December 31, 1995, there were approximately 564 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 sold in private transactions.
Management of Bancshares is aware of approximately 19 sales of
Bancshares common stock since January 1, 1995 at prices ranging
from $10.00 to $11.50 per share (adjusted for the stock split).
Bancshares has paid dividends on its common stock on a
quarterly basis in the past three years. On December 21, 1993,
Bancshares declared a ten percent stock dividend payable to
shareholders of record on that date. As a result, Bancshares
distributed 50,047 shares before January 31, 1994. The dividends
retroactively adjusted for the 10% stock dividend in 1993 and the
stock split are as follows:
Dividend paid
on Common Stock
Fiscal Year (per share)
1993 $.3625
1994 $.42
1995 $.44
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, and such
description is incorporated herein by reference.
Item 6. Selected Financial Information.
UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARY
SELECTED FINANCIAL INFORMATION
Year Ended December 31,
1995 1994 1993 1992 1991
(In Thousands of Dollars, Except Per Share Amounts)
Total Interest Income $ 16,167 $ 14,025 $ 12,154 $ 12,384 $ 12,698
Total Interest Expense 7,002 5,420 4,642 5,434 6,810
Net Interest Income $ 9,165 $ 8,605 $ 7,512 $ 6,914 $ 5,888
Provision for Possible Loan Losses 0 29 51 135 328
Net Interest Income After Provision
for Possible Loan Losses $ 9,165 $ 8,576 $ 7,461 $ 6,779 $ 5,560
Other Non-Interest Income 1,111 1,041 2,240 2,599 2,146
Other Non-Interest Expense (5,229) (5,231) (5,137) (5,187) (4,624)
Income Before Income Taxes $ 5,047 $ 4,386 $ 4,564 $ 4,191 $ 3,082
Applicable Income Taxes 1,432 1,161 1,374 1,134 948
Net Income $ 3,615 $ 3,225 $ 3,190 $ 3,057 $ 2,134
Per Common Share:
Net Income $ 1.69 $ 1.51 $ 1.49 $ 1.43 $ 1.00
Cash Dividends Declared $ 0.44 $ 0.42 $ 0.36 $ 0.33 $ 0.28
At December 31,
1995 1994 1993 1992 1991
Total Loans, Net $ 54,203 $ 56,733 $ 52,945 $ 49,590 $ 52,769
Total Assets $197,468 $186,441 $168,782 $149,848 $144,182
Total Deposits $146,515 $142,284 $132,519 $130,816 $122,005
Long-Term Debt $ 681 $ 764 $ 5,847 $ 0 $ 0
Total Shareholders' Equity $ 25,229 $ 18,721 $ 19,611 $ 17,159 $ 14,551
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
The following discussion and financial information are
presented to aid in an understanding of the current financial
position and results of operations of United Security Bancshares,
Inc. ("United Security"), and should be read in conjunction with
the Audited Financial Statements and Notes thereto included herein.
United Security is the parent holding company of United Security
Bank (the "Bank"), and it has no operations of consequence other
than the ownership of its subsidiary. The emphasis of this
discussion will be on the years 1995, 1994, and 1993. All yields
presented and discussed herein are based on the cash basis and not
on the tax-equivalent basis.
At December 31, 1995, United Security had consolidated assets
of approximately $197.5 million and operated eight banking
locations in a two-county area. These eight locations contributed
over $3.6 million to consolidated net income in 1995. United
Security Bank's sole business is banking; therefore, loans and
investments are the 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; and
(E) the effect of interest rate changes on liquidity and
interest rate sensitivity management.
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 others, the following 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 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) United Security encounters difficulty in integrating the
operations of Brent Banking Company;
(5) rising interest rates adversely affect the demand for the
new consumer home equity line of credit to be introduced
in 1996; and
(6) 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 and 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.
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 attempting
to maintain a 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 the three
years ended December 31, 1995, 1994, and 1993.
Distribution of Assets, Liabilities, and Shareholders' Equity, with
Interest Rates and Interest Differentials
December 31,
1995 1994 1993
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-Domestic
(Note A) $ 56,956 $ 5,528 9.71% $ 55,842 $ 4,835 8.66% $ 51,603 $ 4,540 8.80%
Taxable Investments
(Note B) 109,288 9,673 8.85% 96,931 8,345 8.61% 84,905 6,811 8.02%
Non-Taxable 13,381 917 6.85% 12,308 835 6.78% 10,572 755 7.14%
Federal Funds Sold 792 49 6.19% 228 10 4.39% 1,530 48 3.14%
Total Interest-
Earning Assets $180,417 $16,167 8.96% $165,309 $14,025 8.48% $148,610 $12,154 8.18%
Non-Interest Earning
Assets:
Cash and Due
from Banks 5,148 5,192 4,624
Premises 3,730 3,832 3,823
Other Assets 4,359 4,031 2,256
Allowance for Loan
Losses (Deduction) (786) (765) (729)
Total $192,868 $177,599 $158,584
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest-Bearing
Liabilities:
Demand Deposits $ 23,907 $ 627 2.62% $ 27,080 $ 712 2.63% $ 25,569 $ 734 2.87%
Savings Deposits 15,247 453 2.97% 14,898 443 2.97% 13,545 404 2.98%
Time Deposits 82,412 4,489 5.45% 76,248 3,458 4.54% 73,824 3,296 4.46%
Other Liabilities 23,457 1,433 6.11% 16,828 807 4.80% 6,778 208 3.07%
Total Interest-
Bearing
Liabilities $145,023 $ 7,002 4.83% $135,054 $ 5,420 4.01% $119,716 $ 4,642 3.88%
Non-Interest Bearing
Liabilities:
Demand Deposits 23,079 21,898 18,716
Other 1,785 1,533 1,728
Shareholders' Equity 22,981 19,114 18,424
Total $192,868 $177,599 $158,584
Net Interest Earnings $ 9,165 $ 8,605 $ 7,512
Net Yield on Interest-
Earning Assets 5.08% 5.21% 5.05%
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 accounting securities.
Loans and Allowances for Possible Loan Losses
Net loans decreased in 1995 to $54,203,166, primarily as a
result of several large lines of credit paying out or paying down
in the fourth quarter. The total decrease in the loan portfolio
amounted to $2.5 million or 4.46% of gross loans outstanding.
Commercial loans decreased 1.64% to $34,107,901, and real estate
loans decreased 5.64% to $16,267,120. Construction activity in the
trade area tends to be predominantly commercial. During the year,
the Bank has been able to secure some of the construction loan
business in this area.
Consumer installment loans continued to decline in 1995. The
decrease of 17.11% in this area left $5,094,531 in total consumer
installment loans outstanding on December 31, 1995. The Bank
intends to market a new home equity line for consumer loans tied to
our credit card program in the spring of 1996. This new product
should help to retain some of the consumer loans and generate
additional loans as well.
An allowance for loan losses is maintained by the Bank to
provide for the coverage of potential losses in the loan portfolio.
The level of this reserve is based on management's combined
evaluation of the credit risk of each loan. A risk rating is
assigned to each loan, and this rating is reviewed at least
annually. In assigning risk, management takes into consideration
the capacity of the borrower to repay the loan, the collateral
value, recent loan loss experience, current economic conditions and
other factors.
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 are
generally recognized as losses if they become 90 days or more
delinquent. 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 individual loans is conducted periodically
by branch and by officer. Gross and net charge-offs in the current
year are analyzed when determining the amount of the reserve. The
current level of the allowance in relation to the total loans
outstanding and to historical loss levels is included in this
calculation.
Loan officers and other personnel handling loan transactions
undergo continuous training dedicated to improving the credit
quality as well as the yield of the loan portfolio. United Security
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 of $778,391 in the allowance for loan loss account
as of December 31, 1995, is considered by management to be
adequate. The allowance is 1.40% of total loans.
The following table shows the Bank's loan distribution as of
December 31, 1995, 1994, and 1993.
December 31,
1995 1994 1993
(In Thousands of Dollars)
Commercial, Financial, and Agricultural $34,108 $34,676 $29,962
Real Estate 16,267 17,240 16,224
Installment 5,095 6,146 8,295
Total $55,470 $58,062 $54,481
The amounts of total loans (excluding installment loans)
outstanding at December 31, 1995, 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 After
One Year Five Years Five Years Total
(In Thousands of Dollars)
Commercial, Financial, and Agricultural $25,351 $ 8,305 $ 452 $34,108
Real Estate -- Mortgage 3,281 9,585 3,401 16,267
Total $28,632 $17,890 $ 3,853 $50,375
Variable rate loans totaled approximately $11.1 million and
are included in the one-year category.
Gross charge-offs for the year totaled $84,786. This is
approximately equal to the gross charge-offs for 1994. The Bank was
in a net recovered position for the year as recoveries on prior
charge-offs exceeded current gross charge-offs by $6,391.
Non-performing assets as a percentage of total loans and other real
estate was .59% which is not a significant change from the previous
year. Accruing loans past due 90 days or more at year-end increased
from $79,000 in 1994 to $150,000 in 1995. These loans are reviewed
closely by management and are allowed to continue accruing only
because of underlying collateral values or due to the financial
strength of the borrowers. 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 down graded.
NOTE: The Bank had no loans considered to be impaired as
defined by Statement of Financial Accounting Standards
Number 114 "Accounting by Creditors for Impairment of a
Loan" which was adopted in 1995.
Non-Performing Assets
The following table presents information on non-performing
loans and real estate acquired in settlement of loans.
December 31,
1995 1994 1993
(In Thousands of Dollars)
Non-Performing Loans:
Loans Accounted for on a Non-Accrual Basis $ 169 $ 270 $ 785
Accruing Loans Past Due 90 Days or More 150 79 22
Real Estate Acquired in Settlement of Loans 0 55 145
Total $ 319 $ 404 $ 952
Percent of Net Loans and Other Real Estate 0.59% 0.71% 1.79%
NOTE: The Bank had no restructured loans as defined by
Financial Accounting Standards Board ("FASB") Statement
Number 15, "Accounting by Debtors and Creditors for
Troubled Debt Restructurings."
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. Total
non-performing loans decreased during 1995 by 21% and represent
only .59% of net loans. Non-performing loans continue to decline
for several reasons. Through continuous training, our lending
officers are directed by the Bank's conservative 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.
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 reported as interest
income, 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 United Security Bank to immediately
charge-off 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. The
provision was $778,391 at year-end and represented 1.40% of total
loans outstanding. Management believes this allowance is adequate
to absorb any future loan losses.
Allocation of Allowance for Possible Loan Losses
The following table shows an allocation of the allowance for
possible loan losses for each of the three years.
December 31,
1995 1994 1993
Percent Percent Percent
Category Amount of Total Amount of Total Amount of Total
(In Thousands of Dollars)
Commercial, Financial, and Agricultural $ 506 65% $ 501 65% $ 488 65%
Real Estate 156 20 155 20 150 20
Installment 116 15 116 15 112 15
Totals $ 778 100% $ 772 100% $ 750 100%
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, and non-accrual loans. Management
considers this allocation as a guide and not restrictive to each
category.
Net charge-offs as shown in the "Summary of Loan Loss
Experience" below indicates the trend for the past five years.
Management does not anticipate charge-offs in 1996 to exceed the
five-year average of $187,000.
Summary of Loan Loss Experience
This table summarizes the Bank's loan loss experience for each
of the five years indicated.
December 31,
1995 1994 1993 1992 1991
(In Thousands of Dollars)
Balance at Beginning of Period $ 772 $ 750 $ 710 $ 627 $ 624
Charge-Offs:
Commercial, Financial, and Agricultural 52 41 51 52 306
Real Estate -- Mortgage 0 5 6 61 98
Installment 25 25 46 60 68
Credit Cards 8 9 6 15 0
$ 85 $ 80 $ 109 $ 188 $ 472
Recoveries:
Commercial, Financial and Agricultural $ 50 $ 38 $ 38 $ 64 $ 67
Real Estate -- Mortgage 0 0 1 0 4
Installment 33 32 55 68 76
Credit Cards 8 3 4 4 0
$ 91 $ 73 $ 98 $ 136 $ 147
Net Charge-Offs (Deduction) $ 6 $ (7) $ (11) $ (52) $(325)
Additions Charged to Operations 0 29 51 135 328
Balance at End of Period $ 778 $ 772 $ 750 $ 710 $ 627
Ratio of Net Charge-Offs During Period to
Average Loans Outstanding 0% 0.01% 0.02% 0.10% 0.61%
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,
1995 1994 1993
(In Thousands of Dollars)
Total Loans Accounted for on a Non-Accrual Basis $169 $270 $785
Interest Income that Would Have Been Recorded
under Original Terms 23 53 65
Interest Income Reported and Recorded During
the Year 10 44 35
Total loans accounted for on a non-accrual basis decreased by
$100,603 in 1995. Total non-accruing loans at year-end were
$169,064. Lending officers and other personnel involved in the
lending process receive ongoing training, and emphasis is placed on
the quality of our loan portfolio. The Bank has no foreign loans.
The Bank does not make loans on commercial property outside our
market area. The Bank continues to be conservative in its lending
directives.
Timber Industry Concentration
United Security Bank is located in Clarke and Choctaw
Counties, Alabama. Our trade area, however, covers portions of six
counties in Alabama and three counties in Mississippi and is in the
heart of the timber producing area in the State of Alabama. Our
neighboring counties of Marengo, Monroe, Washington, and Wilcox are
all in the top ten counties in the State in timber production. We
have several major paper mills in our trading area including
Alabama River Paper, Boise Cascade, James River Corporation, and
MacMillan Bloedel. In addition, there are several sawmills, lumber
companies, and pole and piling producers. This table shows the
dollar amount of loans made to timber and timber-related companies
and to the principals and employees of those companies as of
December 31, 1995. The amount of these loans decreased from $22
million in 1994 to $20 million in 1995, a decrease of 9.3%.
Timber-related loans as a percentage of total gross loans decreased
from 38.04% in 1994 to 36.10% in 1995. The Bank's concentration in
the timber industry as of December 31, 1995, is shown below.
Timber Total Percentage of
Related Loans Gross Loans Total Loans
$20,027,101 $55,469,552 36.10%
Management understands the concern for 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 feel 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 does
realize the Bank is heavily dependent on the economic health of the
timber-related industries. The Bank 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
Bank's total loan portfolio.
Deposits
Average total deposits have grown 14.9% during the last three
years with a 3.2% increase in 1995. This growth can be attributed
to the rate environment, product expansion, continued emphasis on
quality service, and the Bank's safety and soundness.
Average non-interest bearing demand deposits have increased
31% over the last three years. The growth for 1995 was 5.4%. The
ratio of average non-interest bearing deposits to average total
deposits also increased in 1995 to 16% from 15.6% in 1994 and 14.2%
in 1993. The growth of United Security's non-interest bearing
demand deposits can be attributed in part to the Bank's product
enhancements such as the introduction of image checking technology
and 24-hour account accessibility. This increase in non-interest
bearing deposits continues to contribute to the gross interest
margin.
Another contributing factor in the growth in non-interest
bearing demand deposits is the shift from interest bearing demand
deposits the Bank experienced in 1995. Average interest-bearing
demand deposits decreased 11.7% in 1995 and accounted for 16.5% of
total average deposits for the year compared to 19.3% in 1994 and
19.4% in 1993. While some of these interest-bearing demand deposits
moved to the non-interest bearing demand deposit accounts, it is
clear that most transferred to time deposits.
During the last three years, average time deposits increased
11.8%. This represents an increase of over $8.6 million. Average
time deposits increased by 8.1% in 1995 compared to an increase of
3.3% in 1994 and .1% in 1993. Additionally, time deposits
represented 57% of the total average deposits in 1995 compared to
54.4% in 1994 and 56.1% in 1993. This growth in time deposits
coupled with the losses in interest-bearing demand deposits
suggests that consumers were willing to sacrifice fund
accessibility for a higher interest rate in 1995. This activity
confirms the theory that the interest-bearing demand deposits were
somewhat inflated in 1994 due to consumers waiting for rates to
rise.
Average savings deposits have grown 26.4% since the end of
1992. This growth slowed in 1995 with a growth rate of 2.3%. The
ratio of average savings to average total deposits, however, stayed
consistent at 10.5% in 1995 compared to 10.6% in 1994 and 10% in
1993.
United Security's deposit base remains the primary source of
funding for the Bank. The average deposit base represented 75% of
average liabilities and equity in 1995. As seen in the table on the
following page, overall rates on these deposits increased to 3.84%
in 1995 compared to 3.29% in 1994 and 3.36% in 1993. This rate
increase reflects the rising rate environment in 1995 as well as
the shift from interest-bearing demand accounts to the higher rates
of certificates of deposits. Emphasis continues to be placed upon
attracting consumer deposits. It is United Security's intent to
expand its consumer deposit base in order to continue to fund asset
growth through growth in both demand deposits and consumer
certificates of deposits. This will be accomplished by remaining
safe and sound, enhancing our products, and providing aggressive
quality service.
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,
1995 1994 1993
Amount Rate Amount Rate Amount Rate
(In Thousands of Dollars, Except Percentages)
Non-Interest Bearing DDA $ 23,079 $ 21,898 $ 18,716
Interest-Bearing Demand 23,907 2.62% 27,080 2.63% 25,569 2.87%
Savings 15,247 2.97 14,898 2.97 13,545 2.98
Time Deposits 82,412 5.45 76,248 4.54 73,824 4.46
Total $144,645 3.84% $140,124 3.29% $131,654 3.36%
Maturities of Time Certificates of Deposits and Other Time
Deposits of $100,000 or more outstanding at December 31, 1995, are
summarized as follows:
Time Other
Certificates Time
Maturities of Deposits Deposits Total
(In Thousands of Dollars)
3 Months or Less $ 3,463 $ 4,317 $ 7,780
Over 3 Through 6 Months 2,497 0 2,497
Over 6 Through 12 Months 856 0 856
Over 12 Months 7,111 0 7,111
Total $13,927 $ 4,317 $18,244
Investment Securities and Securities Available for Sale
At December 31, 1995, total securities were $129 million. All
securities held were classified as available for sale.
Investment securities decreased $23.07 million with the
election in July, 1995 to transfer the entire portfolio into
available for sale.
Securities available for sale include Collateralized Mortgage
Obligations (CMOs) of $100.45 million, other mortgage backed
securities of $13.97 million, state, county and municipal
securities of $13.43 million, and other securities of $1.1 million.
The total securities portfolio increased $16.29 million or 14.45%
from December 1994 to December 1995.
At December 1995, approximately $97.53 million in CMOs had
floating interest rates which reprice monthly and $2.93 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 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 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 seven to ten year average life goal. Principal and
interest payments also add significant liquidity to the balance
sheet. In 1995, there was a continuing emphasis in Collateralized
Mortgage Obligations ("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.
The Federal Financial Institution Examination Council requires
that all MBS derivatives be tested for suitability as an investment
in the portfolio of financial institutions. These tests are run at
purchase and periodically thereafter.
FFIEC Policy Statement -- Derivative MBS Tests
Tests
#1 -- Average Life Test
Expected Average Life must be less than or equal to 10 years.
#2 -- Average Life Sensitivity Test
Extends by more than 4 years or shortens by more than 6 years
for immediate Treasury curve shifts of +/-300 basis points.
#3 -- Price Sensitivity Test
Estimated price changes by more than 17% for immediate
Treasury curve shifts of +/-300 basis points. (Price change
measured from the offer, using constant spread to Treasury
from Bid price.)
The FFIEC Policy Statement specifically exempts floating-rate
CMOs from the average life and average life sensitivity tests (#1
and #2) if the instrument is uncapped at the time of purchase or on
subsequent re-testing dates.
Securities that do not pass the applicable tests are
designated "high risk". Institutions that hold high risk securities
other than for trading may do so only to reduce interest rate risk.
United Security held $30.93 million in securities which, at
December 31, 1995, were designated high risk. $18.92 million of
these securities were floating rate, and $10.18 million were
inverse floating 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, 1995 of $1.82
million. Despite these unrealized losses, the securities in this
segment of the portfolio produced $2.76 million in interest income
and positive total return for 1995.
The securities portfolio and its various components are
monitored, and assessments are made regularly relative to United
Security's exposure to high risk investments. 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 in that mortgages collateralizing
these securities can prepay, thereby affecting the yield of the
securities and their carrying amounts. Such an occurrence is most
likely in periods of low interest rates when borrowers refinance
their mortgages, creating prepayments on their existing mortgages.
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 value 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 gains (net of taxes) of $616,295 in the securities
portfolio on December 31, 1995 versus net unrealized loss (net of
taxes) of ($3,217,137) one year ago.
United Security uses other off balance sheet derivative
products for hedging purposes. These include interest rate swaps,
caps, floors and options. The use and detail regarding these
products are fully discussed under "Liquidity and Interest Rate
Sensitivity Management" and in Note R in the "Notes to Consolidated
Financial Statements."
Reversing the 1994 trend, 1995 can be described as a year of
falling interest rates. Interest rates declined over 200 basis
points for all maturities of one year or longer. In addition, the
yield curve flattened dramatically from a spread of approximately
200 basis points in December of 1994 to 87 basis points at December
31, 995. Short-term interest rates are generally influenced by the
monetary policy stance of the Federal Reserve while longer term
rates are determined by the market's perception of future inflation
and real returns. The long end of the curve saw another year of
consumer inflation below 3% and with mixed economic signals and
slower growth the outlook is for lower inflation in the future. The
year ahead should see the curve steepen, particularly with the
Federal Reserve easing short-term rates. The risk of much slower
growth, higher unemployment, declining production, and possible
recessions in Europe and Japan continues to be greater than the
risk of inflation. United Security will continue to invest in
rate-sensitive securities which should have less price exposure to
changes in interest rates. It is expected that there will be
continued use of various on and off balance sheet techniques to
manage interest rate risk in the securities portfolio.
Condensed Portfolio Maturity Schedule
Dollar Portfolio
Maturity Summary Amount Percentage
Maturing in less than 1 year $ 0 0%
Maturing in 1 to 5 years 1,185,835 0.92%
Maturing in 5 to 10 years 1,108,523 0.86%
Maturing in over 10 years 126,708,244 98.22%
Total $129,002,602 100.00%
Condensed Portfolio Repricing Schedule
Dollar Portfolio
Repricing Summary Amount Percentage
Repricing in 30 days or less $ 97,559,848 75.63%
Repricing in 31 to 90 days 1,138,200 0.88%
Repricing in 91 days to 1 year 0 0.00%
Repricing in 1 to 5 years 1,269,238 0.98%
Repricing in 5 to 10 years 1,108,523 0.86%
Repricing in over 10 years 27,926,793 21.65%
Total $129,002,602 100.00%
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:
Obligations of SCMs $1,186 6.69% $1,108 6.47% $ 11,136 6.09%
Mortgage-Backed
Securities 93 7.46% 114,331 9.51%
Other $1,148 7.39%
Total $1,148 7.39% $1,279 6.75% $1,108 6.47% $125,467 9.21%
*Available for Sale Securities are stated at Market Value and Market Yield
Securities Gains and Losses
Non-interest income from securities transactions, trading
account transactions, and associated option premium and off-balance
sheet income was up slightly in 1995 compared to 1994 but
significantly less than in 1993. The majority of the profits
realized in 1995 were generated in options and other related
transactions. Losses in the investment securities area were a
result of a restructuring of the fixed-rate portion of the
portfolio into floating rates or other fixed rates for greater
future returns.
The table below shows the associated net gains or (losses) for
the periods 1995, 1994, and 1993:
1995 1994 1993
Investment Securities $(103,414) $(34,573) $ 900,837
Trading Account 23,215 (97,525) 80,402
Options & Off-Balance Sheet
Transactions 221,797 225,228 257,471
Total $ 141,598 $ 93,130 $1,238,710
Losses in 1995 from sales of investment securities were net of
gains of $511,610. Volume of sales as well as other information on
securities is further discussed in Note C to the "Notes to Consolidated
Financial Statements."
Investment Securities and Investment Securities Available for Sale
The following table sets forth the carrying value of
investment securities at the dates indicated.
December 31,
1995 1994 1993
(In Thousands of Dollars)
Investment Securities Held to Maturity:
U.S. Treasury and Agencies Securities $ 0 $ 3,252 $ 3,171
Obligations of States, Counties, and
Political Subdivisions 0 13,144 11,524
Mortgage-Backed Securities 0 5,631 15,860
Other Securities 0 100 99
$ 0 $ 22,127 $ 30,654
Investment Securities Available for Sale:
U.S. Treasury and Agency Securities $ 0 $ 992 $ 5,657
Obligations of States, Counties, and
Political Subdivisions 11,989 0 0
Mortgage-Backed Securities 114,880 93,928 64,664
Other Securities 1,148 815 805
Unrealized Gains (Losses) 986 (5,147) 0
$129,003 $ 90,588 $ 71,126
Total $129,003 $112,715 $101,780
The maturities and weighted average yields of the investment
securities available-for-sale at the end of 1995 are presented in
the preceding table based on stated maturity. While the average
stated maturity of the Mortgage-Backed Securities (excluding CMO's)
was 25.80 years, the average life expected was 10.64 years. The
average stated maturity of the CMO portion of the portfolio was
27.34 years, and the average expected life was 17.63 years. The
average expected life of investment securities available for sale
was 15.65 years with an average yield of 8.86 percent.
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-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.
Other Short-Term Borrowings
(In Thousands of Dollars)
Year Ended December 31:
1995 $22,369
1994 $17,652
1993 $ 8,176
Weighted Average Interest Rate at Year-End:
1995 5.82%
1994 5.90%
1993 2.19%
Maximum Amount Outstanding at Any Month's End:
1995 $26,698
1994 $17,980
1993 $ 8,716
Average Amount Outstanding During the Year:
1995 $19,657
1994 $10,931
1993 $ 2,040
Weighted Average Interest Rate During the Year:
1995 6.11%
1994 4.55%
1993 2.64%
Balances in these accounts fluctuate dramatically on a
day-to-day basis. Rates on these balances also fluctuate daily, but
as you can see in the chart above, they generally depict the
current interest rate environment.
The increase in short-term borrowings over the last two years
can be attributed mainly to borrowings from the Federal Home Loan
Bank of Atlanta which the Bank joined in 1992.
Shareholders' Equity
United Security has always placed great emphasis on
maintaining its strong capital base. At December 31, 1995,
shareholders' equity totaled $25.2 million, or 12.8% of total
assets compared to 10% and 11.6% for the same periods in 1994 and
1993, respectively. This level of equity assures United Security's
shareholders, customers and regulators that United Security is
financially sound and offers the ability to sustain an appropriate
level of profitability and growth.
Over the last three years shareholders' equity grew from $17.2
million at the beginning of 1993 to $25.2 million at the end of
1995. All of this growth was a result of internally generated
retained earnings, with the exception of the market value
adjustment made for the available for sale investments as required
by Statement of Financial Accounting Standards No. 115. (See Note
A of the "Notes to Consolidated Financial Statements" for additional
information.) This accounting change, adopted in 1994, accounted
for over half of the equity increase in 1995. The internal capital
generation rate (net income less cash dividends as a percentage of
average shareholders' equity) was 11.6% in 1995, down from 12.2% in
1994.
At United Security's annual meeting on April 25, 1995,
the shareholders ratified a change in the par value of the
Company's stock from $.25 to $.01 per share. Additionally, the
shareholders approved an increase in the number of authorized
shares from 600,000 shares to 2,400,000 shares in order for the
Company to effect a four-for-one split of its stock payable to the
shareholders of record on that date. This action had no effect on
the total amount of shareholders' equity.
United Security is required to comply with capital
adequacy standards established by the banking regulatory agencies.
Currently, the two basic measures of capital adequacy are the
risk-based measure and the 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 broad 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
adopted initiatives to begin considering interest rate risk in
computing risk-based capital ratios. On December 14, 1994, the
Federal Reserve Board adopted amendments to its risk based capital
guidelines for state member banks and bank holding companies. Under
the final rule, institutions are generally directed not to include
the component of common stockholders equity created by SFAS 115
(net unrealized holding gains and losses on securities available
for sale).
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 I 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 I Capital and Tier
II Capital is "total risk-based capital".
The banking regulatory agencies have also adopted regulations
which supplement the risk-based guidelines to include a minimum
leverage ratio of 3% of Tier I 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 following chart summarizes the applicable bank regulatory
capital requirements. United Security's capital ratios at December
31, 1995, substantially exceeded all regulatory requirements.
Risk-Based Capital Requirements
Minimum United Security's
Regulatory Ratio at
Requirement December 31, 1995
Tier I Capital to Risk-Adjusted Assets 4.00% 23.69%
Total Capital to Risk-Adjusted Assets 8.00% 24.44%
Tier I Leverage Ratio 3.00% 12.46%
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 paid were $940,703 or $.44 per share compared to $.42 per
share in 1994 and $.3625 per share in 1993. The total cash
dividends represented a payout ratio of 26.02% in 1995 with a
payout ratio of 27.84% and 24.36% in 1994 and 1993, respectively.
This is the seventh consecutive year that United Security has
increased cash dividends. The per share dividends are adjusted to
reflect the four-for-one split authorized in 1995.
Ratio Analysis
The following table presents operating and capital ratios for
each of the last three years.
Year Ended December 31,
1995 1994 1993
Return on Average Assets 1.87% 1.82% 2.01%
Return on Average Equity 15.73% 16.87% 17.31%
Cash Dividend Payout Ratio 26.02% 27.84% 24.36%
Average Equity to Average Assets Ratio 11.92% 10.76% 11.62%
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 sensitivity management focuses on the
maturity structure of assets and liabilities and their repricing
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 $28.63 million at December 31, 1995.
Investment securities maturing or repricing in the same time
frame totaled $98.70 million or 76.51% of the investment portfolio
at year-end 1995. In addition, principal payments on
mortgage-backed securities totaled $2.82 million in 1995. For
repricing purposes, $3.67 million in payments have been included in
the one year or less categories in the Interest Rate Sensitivity
Analysis, reflecting recent prepayment experience.
The liabilities 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 and short-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.
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 the general
level of interest rates.
The balance of cash and cash equivalents decreased at December
31, 1995, by $840,901. This decrease was the result of cash used in
investing activities exceeding cash provided by operating and
financing activities. Net income was the primary contributor from
operating activities, while deposit growth was the main contributor
to cash from financing activities. The primary sources of cash
flows for United Security are earnings, proceeds from sales,
payments and maturities of investment securities, and deposit
growth, and short-term borrowings.
Proceeds from sales and maturities of investments have
consistently been reinvested in the investment portfolio. Although
the majority of the 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 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 to purchase additional investments.
United Security currently has long-term debt and short-term
borrowings that on average represent 11.7 percent of total
liabilities and equity.
United Security's total deposits have shown steady growth each
year since 1990. This growth occurred primarily in time deposits.
All deposit functions experienced growth in 1995 except
interest-bearing demand deposits. This increase in deposits has
been used primarily to finance a portion of the increase in the
investment securities portfolio.
The following table shows United Security's rate sensitive
position at December 31, 1995, as measured by gap analysis (the
difference between the earning asset and interest-bearing liability
amounts eligible to be repriced to current market rates in
subsequent periods).
Interest Rate Sensitivity Analysis
December 31, 1995
(In Thousands of Dollars)
Over 5
Years and
0-3 4-12 1-5 Non-Rate
Months Months Years Sensitive Total
Earning Assets:
Loans $ 16,690 $ 13,093 $ 19,691 $ 4,729 $ 54,203
Taxable Investment Securities 100,216 2,754 13,202 0 116,172
Tax-Exempt Investment Securities 0 0 1,186 12,245 13,431
Total Earning Assets $116,906 $ 15,847 $ 34,079 $ 16,974 $183,806
Interest-Bearing Liabilities:
Non-Interest-Bearing Demand Deposits $ 0 $ 0 $ 0 $ 24,366 $ 24,366
Interest-Bearing Deposits
Demand 23,126 0 0 0 23,126
Savings 0 180 14,620 0 14,800
Certificates of Deposits 22,351 31,441 30,432 0 84,224
Borrowings 22,390 63 336 344 23,133
Shareholders' Equity 0 0 0 14,157 14,157
Total Funding Sources $ 67,867 $ 31,684 $ 45,388 $ 38,867 $183,806
Interest Sensitivity Gap (Balance Sheet) $ 49,039 $(15,837) $(11,309) $(21,983) $ 0
Off-Balance Sheet $(19,037) $ 0 $ 19,037 $ 0 $ 0
Interest Sensitive Gap $ 30,002 $(15,837) $ 7,728 $(21,983) $ 0
Cumulative Interest-Sensitive Gap $ 30,002 $ 14,165 $ 21,893 $ 0 $ 0
In addition to the ongoing monitoring of interest-sensitive
assets and liabilities, United Security enters into various
interest rate contracts ("interest rate protection contracts") to
help manage United Security's interest sensitivity. Such contracts
generally have a fixed notional principal amount and include (i)
interest rate swaps where United Security typically receives or
pays a fixed rate and a counterparty pays or receives a floating
rate based on a specified index, (ii) interest rate caps and floors
purchased where United Security receives interest if the specified
index falls below the floor rate or rises above the cap rate. All
interest rate swaps represent end-user activities and are designed
as hedges. The interest rate risk factor in these contracts is
considered in the overall interest management strategy and the
Company's interest risk management program. The income or expense
associated with interest rate swaps, caps and floors classified as
hedges are ultimately reflected as adjustments to interest income
or expense. Changes in the estimated fair value of interest rate
protection contracts are not reflected in the financial statements
until realized. A discussion of interest rate risks, credit risks
and concentrations in off-balance sheet financial instruments is
included in Note R of the "Notes to Consolidated Financial
Statements."
Interest Rate Protection Contracts
Contract Terms
Notional Carrying Estimated Weighted Average Rate
Amount Value Fair Value Receive Pay Maturity
(in Thousands)
Swaps:
Contracts Terms
1 Pay Fixed 890 0 14 Prime Rate 6.80% 21 mos.
2 Receive Fixed 10,000 0 676 7.49% 1 mo. LIBOR 23 to 43 mos.
Caps and Floors:
Contracts Terms Ranges Maturity
5 Caps Purchased 58,089 336 23 6.45% to 8.00% 4 - 35 mos.
5 Floors Purchased 35,000 386 680 4.00% to 9.00% 18 - 36 mos.
1 Cap Sold 10,000 (42) (30) 7.45% 35 mos.
113,979 680 1,363
Income Taxes
The effective tax rate as a percentage of pre-tax income was
28.4% in 1995 compared to 26.5% and 30.0% in 1994 and 1993,
respectively. These rates are lower than the maximum Federal
statutory rate of 35% due primarily to tax exempt interest income
and tax credits generated by investments in low income housing
partnerships. The Company's taxable income was also only in the 34%
tax bracket. The Company's effective tax rate should continue to be
lower than the maximum Federal rates in future years.
Deferred income taxes are reported for timing differences
between items of income and expense reported in the financial
statements and those reported for income tax purposes. Deferred
taxes are computed in accordance with SFAS No. 109 "Accounting for
Income Taxes" which was adopted in 1993.
Commitments
The Bank maintains financial instruments with risk exposure
not reflected in the Consolidated Financial Statements. These
financial instruments are executed in the normal course of business
to meet the financing needs of its customers and in connection with
its investing and trading activities. These financial instruments
include commitments to make loans, options written, standby letters
of credit, and commitments to purchase securities for forward
delivery.
The Bank's exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for
commitments to make loans and standby letters of credit is
represented by the contractual amount of those instruments. The
Bank applies the same credit policy in making these commitments
that it uses for on-balance sheet items.
Collateral obtained upon exercise of the commitment is
determined based on management's credit evaluation of the borrower
and may include accounts receivable, inventory, property, land, and
other items. The Bank does not normally require collateral for
standby letters of credit. As of December 31, 1995, the Bank had
outstanding standby letters of credit and commitments to make loans
of $1,352,853 and $28,329,347, respectively.
For options written and commitments to purchase securities for
forward delivery, the contractual amounts reflect the extent of the
Bank's involvement in various classes of financial instruments and
does not represent exposure to credit loss. The Bank controls the
credit risk of these instruments through credit approvals, limits,
and monitoring procedures.
Options are contracts that allow the buyer of the option to
purchase or sell a financial instrument at a specified price and
within a specified period of time from or to the seller or writer
of the option. As a writer of options, the Bank is paid a premium
at the outset and then bears the risk of an unfavorable change in
the price of the financial instrument underlying the option. As of
December 31, 1995, the Bank's options written totaled $2,000,000.
Commitments to buy and sell securities for delayed delivery
require the Bank to buy and sell a specified security at a
specified price for delivery on a specified date. Market risk
arises from potential movements in securities values and interest
rates between the commitment and delivery dates. The Bank's
commitments to buy and sell securities for delayed delivery as of
December 31, 1995, totaled $1,268,500 and $3,900,100, respectively.
The Bank is prepared to fulfill the above commitments through
scheduled maturities of loans and securities along with cash flows
from operations, anticipated growth in deposits, and short-term
borrowings.
Operating Results
Net Interest Income
Net interest income is an effective measurement of how well
management has matched interest-rate-sensitive assets and
interest-bearing liabilities. The fluctuations in interest rates
materially affect net interest income. The accompanying table
analyzes these changes.
Net interest income increased by $588,609 or 6.9% in 1995
compared to 14.5% and 8.6% increases in 1994 and 1993,
respectively. Volume, rate, and yield changes contributed to the
growth in net interest income. Average interest-earning assets
increased by $15.1 million or 9.1% in 1995. This increase in
interest-earning assets is partly offset by the volume increase of
$10 million or 7.4% in average interest-bearing liabilities. Volume
changes of equal amounts in interest-earning assets and
interest-bearing liabilities generally increase net interest income
because of the spread between the yield on loans and investments
and the rates paid on interest-bearing deposits. In 1995, average
interest-earning assets outgained average interest-bearing
liabilities by $5.1 million.
United Security's ability to produce net interest income
is measured by a ratio called the interest margin. The interest
margin is net interest income as a percent of average earning
assets. The interest margin was 5.1% in 1995 compared to 5.2% and
5.1% in 1994 and 1993, respectively.
Interest margins are affected by several factors, one of
which is the relationship of rate-sensitive earning assets to
rate-sensitive interest-bearing liabilities. This factor determines
the effect that fluctuating interest rates will have on net
interest income. Rate-sensitive earning assets and interest-bearing
liabilities are those which can be repriced to current market rates
within a relatively short time. United Security's objective in
managing interest rate sensitivity is to achieve reasonable
stability in the interest margin throughout interest rate cycles by
maintaining the proper balance of rate sensitive assets and
liabilities. For further analysis and discussion of interest rate
sensitivity, refer to the preceding section entitled "Liquidity and
Interest Rate Sensitivity Management."
Another factor that affects the interest margin is the
interest rate spread. The interest rate spread measures the
difference between the average yield on interest-earning assets and
the average rate paid on interest-bearing liabilities. This
measurement gives a more accurate representation of the effect
market interest rate movements have on interest rate-sensitive
assets and liabilities. The average volume of the interest-bearing
liabilities increased 7.4% in 1995, while the average rate of
interest paid increased from 4.01% in 1994 to 4.83% in 1995, an
increase of 82 basis points. Average interest-earning assets
increased 9.1% in 1995, while the average yield increased from
8.48% in 1994 to 8.96% in 1995, an increase of 48 basis points. Net
yield on average interest-earning assets, however, decreased only
13 basis points from 1994 to 1995.
The percentage of earning assets funded by interest-bearing
liabilities also affects the Bank's interest margin. United
Security's earning assets are funded by interest-bearing
liabilities, non-interest-bearing demand deposits, and
shareholders' equity. The net return on earning assets funded by
non-interest-bearing demand deposits and shareholders' equity
exceeds the net return on earning assets funded by interest-bearing
liabilities. United Security maintains a relatively consistent
percentage of earning assets funded by interest-bearing
liabilities. In 1995, 80% of the Bank's average earning assets were
funded by interest-bearing liabilities as opposed to 82% in 1994
and 81% in 1993. The earning assets funded by interest-bearing
liabilities had a favorable effect on the net interest income.
Summary of Operating Results
Year Ended December 31,
1995 1994 1993
(In Thousands of Dollars)
Total Interest Income $16,167 $14,025 $12,154
Total Interest Expense 7,002 5,420 4,642
Net Interest Income $ 9,165 $ 8,605 $ 7,512
Provision for Possible Loan Losses 0 29 51
Net Interest Income After Provision for
Possible Loan Losses $ 9,165 $ 8,576 $ 7,461
Other Non-Interest Income 1,111 1,041 2,240
Other Non-Interest Expense (5,229) (5,231) (5,137)
Income Before Income Taxes $ 5,047 $ 4,386 $ 4,564
Applicable Income Taxes 1,432 1,161 1,374
Net Income $ 3,615 $ 3,225 $ 3,190
Changes in Interest Earned and Interest Expense Resulting from
Changes in Volume and Changes in Rates
1995 Compared to 1994 1994 Compared to 1993 1993 Compared to 1992
Increase (Decrease) Increase (Decrease) Increase (Decrease)
Due to Change In: Due to Change In: Due to Change In:
Average Average Average
Volume Rate Net Volume Rate Net Volume Rate Net
(In Thousands of Dollars)
Interest Earned On:
Loans $ 98 $ 595 $ 693 $ 368 $ (73) $ 295 $ (64) $(473) $(537)
Taxable Investments 1,089 239 1,328 1,009 525 1,534 457 (218) 239
Non-Taxable Investments 73 9 82 119 (39) 80 98 (5) 93
Federal Funds 34 5 39 (52) 14 (38) 12 (2) 10
Total Interest-
Earning Assets $1,294 $ 848 $2,142 $1,444 $ 427 $1,871 $ 503 $(698) $(195)
Interest Expense On:
Demand Deposits $ (82) $ (3) $ (85) $ 41 $ (63) $ (22) $ 96 $(118) $ (22)
Savings Deposits 10 0 10 40 (1) 39 46 (45) 1
Time Deposits 296 735 1,031 105 57 162 5 (637) (632)
Other Liabilities 370 256 626 434 165 599 (59) (80) (139)
Total Interest-
Bearing Liabilities $ 594 $ 988 $1,582 $ 620 $ 158 $ 778 $ 88 $(880) $(792)
Increase in Net
Interest Income $ 700 $(140) $ 560 $ 824 $ 269 $1,093 $ 415 $ 182 $ 597
Provision for Possible Loan Losses
The provision for possible loan losses is an expense used to
establish the allowance for possible loan losses. Actual loan
losses, net of recoveries, are charged directly to the allowance.
The expense recorded each year is a reflection of actual losses
experienced during the year and management's judgment as to the
adequacy of the allowance to absorb future losses. Net recoveries
on prior charge-offs exceeded loans charged-off during the year
1995. As a result, no provision from current earnings was necessary
to maintain the reserve for loan losses. For additional analysis
and discussion of the allowance for loan losses, refer to the
section entitled "Loans and Allowance for Possible Loan Losses."
Non-Interest Income
Non-interest income consists of revenues generated from a
broad range of financial services and activities including
fee-based services and commissions earned through insurance sales
and trading activities. In addition, gains and losses from the sale
of investment portfolio securities and option transactions are
included in non-interest income.
Fee income from service charges increased 1.2% in 1995
compared to a 2.8% decrease in 1994. The increase in service charge
income resulted primarily from the introduction of the commercial
demand deposit account analysis product. This product allows the
Bank to evaluate and effectively price the commercial demand
deposit account. Insurance premiums and commissions income
continued to decline. This income originated primarily from the
sale of credit life and accident and health insurance to consumer
loan customers. The decline in insurance income resulted from
declining volumes of credit life insurance written for customers,
coupled with lower premium rates for the last four years. Insurance
premiums and commissions income are not expected to increase due to
the uncertainty in the credit life insurance market.
Other non-interest income including safe deposit box fees,
credit card fees, letters of credit fees and other customer charges
increased to $128,113 in 1995 and accounted for 13.2% of
non-interest income (excluding security related income) compared to
11.1% in 1994 and 13.3% in 1993.
Non-recurring items of non-interest income include all the
securities gains (losses) discussed previously. Investment
securities had a total loss of $103,414 in 1995 compared to a
$34,573 loss in 1994 and a $900,837 gain in 1993. The investment
securities loss of $103,414 in 1995 was offset by a trading
securities gain of $23,215 and an option income of $221,797 in
1995. The combination of these accounts yielded a net income of
$141,598 in securities related non-interest income in 1995 compared
to $93,130 in 1994, and $1,238,710 in 1993. Income generated in the
area of securities gains and losses (which is also discussed under
a separate category "Securities Gains and Losses") is dependent on
many factors including investment portfolio strategies, interest rate
changes, and the short, intermediate, and long-term outlook for the
economy. The investment strategy in 1994 and 1995 was directed more
toward interest income generated by the investment portfolio by
restructuring the fixed-rate portion of the portfolio into floating
rates or other fixed rates. This strategy will also enhance
future earnings.
United Security continues to search for new sources of
non-interest income. These sources will come from innovative ways
of performing banking services now as well as providing new
services in the future.
Non-Interest Expense
Non-interest expenses consist primarily of four major
categories: salaries and employee benefits, occupancy expense,
furniture and equipment expense, and other expense. United Security
Bank's non-interest expense remains relatively high when compared
to other banks of similar size because United Security Bank
operates eight banking offices. However, management's efforts to
control these expenses continue to show positive results. United
Security Bank's total non-interest expense as a percentage of
average assets was 2.7%, 3.0%, and 3.2% in 1995, 1994, and 1993,
respectively. The lower ratio of non-interest expenses to average
assets in 1995 is due to a 8.6% increase in average assets while
non-interest expenses were constant.
The control over non-interest expense growth was enhanced by
the Bank's success in effectively utilizing human resource
management to maximize productivity. Salaries and benefits
increased 1.4% in 1995, decreased less than 1% in 1994, and
increased 3.2% in 1993. The low growth in salaries and benefits
expense is due to a reduction in full-time equivalent employees. At
December 31, 1995, United Security had 90 full-time equivalent
employees compared to 94 at December 31, 1994 and 96.5 in 1993.
Assets per employee increased to $2.2 million in 1995 compared to
$2 million in 1994 and $1.7 million in 1993. Deposits per employee
also have steady improvements. In 1995, deposits per employee
increased to $1.6 million from $1.5 million 1994 and $1.4 million
in 1993. Improvements in these employee productivity measures
resulted from effective utilization of human resources, investments
in technology, and a concerted effort to carefully manage employee
levels. Current levels of employment have been achieved through
attrition.
United Security sponsors an Employee Stock Ownership Plan with
401(k) provisions. Employee participation continues to increase;
therefore, the Bank's matching contribution expense has increased.
The contribution expense increased to $94,829 or 10.4% in 1995,
$85,902 or 10% in 1994, and $78,075 or 6.6% in 1993.
Occupancy expense includes depreciation, rents, utilities,
maintenance, insurance, taxes, and other expenses as