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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) 254-1000
FACSIMILE (205) 254-1099
MONTGOMERY OFFICE:
ONE COMMERCE STREET
SUITE 302
MONTGOMERY, ALABAMA 36104
(334) 262-2001
Writer's Direct Dial No.: (205) 254-1055
March 28, 1997
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.
Please do not hesitate to contact the undersigned if you have
any questions or comments.
Very truly yours,
/s/ J. Michael Savage
_____________________
J. Michael Savage
JMS/ead
Enclosures
cc: Jack M. Wainwright, III
Larry M. Sellers
Kevin M. Rittelmeyer
James M. Pool
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number 0-14549
UNITED SECURITY BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
Alabama 63-0843362
_______________________________ __________________
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
131 West Front Street
Post Office Box 249
Thomasville, Alabama 36784
________________________________________ __________
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (334) 636-5424
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $0.01 per share (Title of class)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports) and (2) has been subject to such filing requirements
for the past 90 days. Yes [X]. No .
Shares of common stock ($0.01 par value) outstanding as of
December 31, 1996: 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 6, 1997, is $15.50.
(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
1997 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, 1996
TABLE OF CONTENTS
Sequential
Part Item Caption Page No.
I 1 Business 3
2 Properties 7
3 Pending Legal Proceedings 8
4 Submission of Matters to a vote of Security Holders 8
II 5 Market for Registrant's Common Equity and Related
Stockholder Matters 8
6 Selected Financial Data 9
7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
8 Financial Statements and Supplementary Data 32
9 Disagreements on Accounting and Financial Disclosure 56
III 10 Directors and Executive Officers of the Registrant 57
11 Executive Compensation 57
12 Security Ownership of Certain Beneficial Owners
and Management 57
13 Certain Relationships and Related Transactions 57
IV 14 Exhibits, Financial Statement Schedules
and Reports on Form 8-K 58
Signatures 59
Exhibits 60
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 nine banking offices which are located in
Thomasville, Coffeeville, Fulton, Gilbertown, Grove Hill, Butler,
Jackson, and Brent, Alabama, and its market area includes portions
of Bibb, Clarke, Choctaw, Marengo, Sumter, Washington, and Wilcox
Counties in Alabama, as well as Clarke, Lauderdale and Wayne
Counties in Mississippi. Bancshares has entered into an Agreement
and Plan of Merger, dated as of August 19, 1996 (the "Merger
Agreement"), pursuant to which First Bancshares, Inc. ("FBI") will
merge with and into Bancshares, and FBI's wholly-owned subsidiary
bank, First Bank and Trust, will merge with and into the Bank. This
merger is conditioned upon receipt of the necessary regulatory
approvals. As part of that process, the United States Department of
Justice (the "Justice Department") has issued a report to the
Federal Deposit Insurance Corporation ("FDIC") stating its belief
that the merger will not have a significantly adverse effect on
competition and concurring in the consummation of the merger
fifteen (15) days after the date of FDIC approval, on the condition
that Bancshares complies with certain conditions required by the
Justice Department, including the divestiture of one branch.
Management of Bancshares is of the opinion that the conditions
imposed by the Justice Department will not have a material effect
on its operations or properties.
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, 1996, the Bank had 107 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, 1996, $8,193,418 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 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
this 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 "full-scope,
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 competitiveness 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 eight 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. The Brent Branch was acquired on May 31,
1996. This branch is located in Brent, Alabama in a one-story brick
building with approximately 8,500 square feet. There are three
drive-in facilities at this location. 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.
There are currently 2,202,060 shares of Bancshares common
stock issued and 2,137,960 shares outstanding. As of December 31,
1996, there were approximately 572 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 17 sales of
Bancshares common stock since January 1, 1996 at prices ranging
from $10.00 to $15.50 per share.
Bancshares has paid dividends on its common stock on a
quarterly basis in the past three years as follows:
Dividend paid
on Common Stock
Fiscal Year (per share)
1994 $.42
1995 $.44
1996 $.52
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,
1996 1995 1994 1993 1992
(In Thousands of Dollars, Except Per Share Amounts)
Total Interest Income $ 18,150 $ 16,167 $ 14,025 $ 12,154 $ 12,348
Total Interest Expense 8,067 7,002 5,420 4,642 5,434
Net Interest Income $ 10,083 $ 9,165 $ 8,605 $ 7,512 $ 6,914
Provision for Possible Loan Losses 78 0 29 51 135
Net Interest Income After Provision
for Possible Loan Losses $ 10,005 $ 9,165 $ 8,576 $ 7,461 $ 6,779
Other Non-Interest Income 1,435 1,111 1,041 2,240 2,599
Other Non-Interest Expense (5,657) (5,229) (5,231) (5,137) (5,187)
Income Before Income Taxes $ 5,783 $ 5,047 $ 4,386 $ 4,564 $ 4,191
Applicable Income Taxes 1,520 1,432 1,161 1,374 1,134
Net Income $ 4,263 $ 3,615 $ 3,225 $ 3,190 $ 3,057
Per Common Share:
Net Income $ 1.99 $ 1.69 $ 1.51 $ 1.49 $ 1.43
Cash Dividends Declared $ 0.52 $ 0.44 $ 0.42 $ 0.36 $ 0.33
At December 31,
1996 1995 1994 1993 1992
Total Loans, Net $ 64,573 $ 54,203 $ 56,733 $ 52,945 $ 49,590
Total Assets $235,191 $197,468 $186,441 $168,782 $149,848
Total Deposits $179,926 $146,515 $142,284 $132,519 $130,816
Long-Term Debt $ 597 $ 681 $ 764 $ 5,847 $ 0
Total Shareholders' Equity $ 28,826 $ 25,229 $ 18,721 $ 19,611 $ 17,159
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 1996, 1995, and 1994. All yields
presented and discussed herein are based on the cash basis and not
on the tax-equivalent basis.
At December 31, 1996, United Security had consolidated assets
of approximately $235.2 million and operated nine banking locations
in three counties. These nine locations contributed approximately
$4.3 million to consolidated net income in 1996. United Security
Bank's sole business is banking; therefore, loans and investments
are the principal sources 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 or First Bancshares,
Inc.;
(5) rising interest rates adversely affect the demand for
consumer credit; and
(6) general economic conditions, either nationally or in
Alabama, are less favorable than expected.
On August 19, 1996, United Security Bancshares, Inc. signed a
definitive agreement to merge with First Bancshares, Inc. of Grove
Hill, Alabama. At December 31, 1996, First Bancshares had assets of
approximately $195.2 million and equity of approximately $18.8
million. The transaction is subject to shareholder approval and is
to be accounted for under the pooling-of-interest method of
accounting. If the transaction is approved, the merger is expected
to have a significant impact on the operation and financial
condition of United Security Bancshares, Inc. during the year 1997
and beyond.
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.
The acquisition of Brent Banking Company contributed
significantly to United Security's growth during 1996. It added
approximately $34 million in assets and one office in Bibb County,
Alabama.
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, 1996, 1995, and 1994.
Distribution of Assets, Liabilities, and Shareholders' Equity, with
Interest Rates and Interest Differentials
December 31,
1996 1995 1994
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) $ 63,232 $ 6,059 9.58% $ 56,956 $ 5,528 9.71% $ 55,842 $ 4,835 8.66%
Taxable Investments (Note B) 129,433 11,060 8.54% 109,288 9,673 8.85% 96,931 8,345 8.61%
Non-Taxable 14,945 949 6.35% 13,381 917 6.85% 12,308 835 6.78%
Federal Funds Sold 1,463 82 5.60% 792 49 6.19% 228 10 4.39%
Total Interest-Earning
Assets $209,073 $18,150 8.68% $180,417 $16,167 8.96% $165,309 $14,025 8.48%
Non-Interest Earning Assets:
Cash and Due from Banks 5,388 5,148 5,192
Premises 3,883 3,730 3,832
Other Assets 5,265 4,359 4,031
Allowance for Loan Losses
(Deduction) (1,014) (786) (765)
Total $222,595 $192,868 $177,599
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest-Bearing Liabilities:
Demand Deposits $ 29,489 $ 735 2.49% $ 23,907 $ 627 2.62% $ 27,080 $ 712 2.63%
Savings Deposits 16,459 452 2.75% 15,247 453 2.97% 14,898 443 2.97%
Time Deposits 97,368 5,393 5.54% 82,412 4,489 5.45% 76,248 3,458 4.54%
Other Liabilities 26,956 1,487 5.52% 23,457 1,433 6.11% 16,828 807 4.80%
Total Interest-Bearing
Liabilities $170,272 $ 8,067 4.74% $145,023 $ 7,002 4.83% $135,054 $ 5,420 4.01%
Non-Interest Bearing Liabilities:
Demand Deposits 23,232 23,079 21,898
Other 2,591 1,785 1,533
Shareholders' Equity 26,500 22,981 19,114
Total $222,595 $192,868 $177,599
Net Interest Earnings $ 10,083 $ 9,165 $ 8,605
Net Yield on Interest-
Earning Assets 4.82% 5.08% 5.21%
Note A -- For the purpose of these computations, non-accruing loans
are included in the average loan amounts outstanding.
Note B -- Taxable investments include all held-to-maturity,
available-for-sale, and trading account securities.
Loans and Allowances for Possible Loan Losses
Net loans increased in 1996 by $10.4 million. This increase of
19.13% is primarily the result of the acquisition of Brent Banking
Company in June 1996. Real estate loans outstanding increased 45.3%
to $23.6 million. Loans outstanding in the commercial, financial,
and agricultural category increased 8.8% from $34.1 million in 1995
to $37.1 million in 1996. Installment loans increased for the first
time in several years to $5.5 million. Most of these increases can
be attributed to the acquisition.
Consumer installment loans at year end 1996 represented 8.34%
of total loans. With the acquisition of Brent Banking Company at
mid-year 1996, and other programs taking precedence in 1996, the
Bank was unable to implement a home equity line for consumer loans
which was to be tied to the Bank's credit card program. Plans for
this program are still in place and scheduled for implementation in
1997. Additional plans for increasing the regular credit card
program in the Bibb County market are scheduled for implementation
in March of 1997.
The increase in real estate loans is almost exclusively due to
the acquisition of Brent Banking Company. Construction activity in
the trade area continues to be predominately commercial. The Bank
was able to secure some of the construction loan business for both
commercial and one-to-four family dwellings. The Bank continues to
support the local area through its affiliation with Allied
Community Development Corporation by providing rental housing for
low to moderate income families. In 1996, the Bank and Allied
Community Development Corporation assisted in providing 96 rental
units and a 14-unit assisted living facility in the trade area. The
Bank has invested approximately $1.9 million in limited
partnerships. These partnerships develop real estate which
qualifies for federal tax credits. The Bank's interest in these
partnerships are carried in Other Assets on the balance sheet.
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 in the allowance for loan loss account as of
December 31, 1996, was $1.191 million. This increase of
approximately $413,000 over year-end 1995 reflects the increase in
loans outstanding due to the acquisition of Brent Banking Company
and is considered by management to be an adequate reserve for
future loan losses. This allowance is 1.80% of total loans.
The following table shows the Bank's loan distribution as of
December 31, 1996, 1995, 1994, 1993 and 1992.
December 31,
1996 1995 1994 1993 1992
(In Thousands of Dollars)
Commercial, Financial, and Agricultural $37,134 $34,108 $34,676 $29,962 $25,073
Real Estate 23,632 16,267 17,240 16,224 16,909
Installment 5,527 5,095 6,146 8,295 9,274
Total $66,293 $55,470 $58,062 $54,481 $51,246
The amounts of total loans (excluding installment loans)
outstanding at December 31, 1996, 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 $24,055 $ 9,624 $ 3,455 $37,134
Real Estate -- Mortgage 5,840 13,729 4,063 23,632
Total $29,895 $23,353 $ 7,518 $60,766
Variable rate loans totaled approximately $12.2 million and
are included in the one-year category.
United Security Bank started the year 1996 with a balance in
the Reserve for Loan Loss Account of $778,391. Loans charged off in
1996 totaled $202,599. This is higher than the $84,786 charged off
in 1995 but was anticipated by management when the Brent Banking
Company acquisition was completed in June of 1996. Approximately
sixty percent (60%) of the loans charged off during the year were
at the Brent Office. Loans charged off other than at the Brent
Office totaled $81,000 and remained approximately the same as in
1995. Loan recoveries during 1996 on loans charged off totaled
$114,128, resulting in net loans charged off of $88,471. Management
added $78,000 to the reserve account from operating income during
the year and transferred $423,251 from the Brent Office Reserve
Account for a reserve balance at year end of $1.2 million.
At December 31, 1996, United Security had one loan considered
to be impaired under FAS114. The amount of this loan, which is on
non-accrual, is $557,345, and the related allowance is $55,000. The
average recorded investment in impaired loans during the year ended
December 31, 1996 was approximately $371,000. For the year ended
December 31, 1996, United Security did not recognize interest
income on the impaired loan during the period the loan was
considered impaired. United Security had no loans considered to be
impaired at December 31, 1995.
Non-Performing Assets
The following table presents information on non-performing
loans and real estate acquired in settlement of loans.
December 31,
1996 1995 1994 1993 1992
(In Thousands of Dollars)
Non-Performing Loans:
Loans Accounted for on a Non-Accrual Basis $ 852 $ 169 $ 270 $ 785 $ 152
Accruing Loans Past Due 90 Days or More 848 150 79 22 101
Real Estate Acquired in Settlement of Loans 0 0 55 145 556
Total $1,700 $ 319 $ 404 $ 952 $ 809
Percent of Net Loans and Other Real Estate 2.63% 0.59% 0.71% 1.79% 1.61%
NOTE: 1) 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."
2) As mentioned under "Loans and Allowances for Possible
Loan Losses," two loans represent a substantial
percentage of the increase in non-performing loans.
Without these credits, total non-performing loans would
be $675,000 and 1.02% of Net Loans and Other Real Estate.
In the opinion of management, non-performing loans and any
other loans which have been classified for regulatory purposes do
not represent or result from trends or uncertainties which will
materially impact future operating results, liquidity, or capital
resources. Management is not aware of information which would cause
serious doubts as to the ability of borrowers to comply with
present repayment terms. Non-performing assets as a percentage of
net loans and other real estate was 2.63%. This represents a
substantial increase over year end 1995. However, one loan accounts
for 91% of accruing loans past due 90 days or more. This loan,
although more than 90 days past due, was performing at year end
with regular monthly payments being made. This loan, as well as the
other loans past due 90 days or more and still accruing, is
reviewed closely by management and is allowed to continue accruing
only because of underlying collateral values and management's
belief that the financial strength of the borrowers is sufficient
to protect the Bank from loss. If at any time management determines
there may be a loss of interest or principal, these loans will be
changed to non-accrual and their asset value downgraded. Through
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 the 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. This
provision was $1,191,171 at year-end and represented 1.80% 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 five years indicated.
December 31,
1996 1995 1994 1993 1992
Percent Percent Percent Percent Percent
Category Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total
(In Thousands of Dollars)
Commercial,
Financial, and
Agricultural $ 774 56.0% $ 506 61.5% $ 501 59.7% $ 488 55.0% $ 426 49.0%
Real Estate 238 35.6 156 29.3 155 29.7 150 20.8 142 33.0
Installment 179 8.4 116 9.2 116 10.6 112 15.2 142 18.0
Totals $1,191 100% $ 778 100% $ 772 100% $ 750 100% $ 710 100%
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 last five years.
Management does not anticipate charge-offs in 1997 to exceed the
five-year average of $133,000. Loan charge offs of $202,000 in 1996
did exceed this average by $69,000. This increase was the result of
the addition of approximately $14 million in loans from the Brent
Banking Company acquisition. Loans charged off in 1996 from the
Brent portfolio amounted to $122,000 or 60% of the total loans
charged to the reserve for loan loss during the year.
Summary of Loan Loss Experience
This table summarizes the Bank's loan loss experience for each
of the five years indicated.
December 31,
1996 1995 1994 1993 1992
(In Thousands of Dollars)
Balance at Beginning of Period $ 778 $ 772 $ 750 $ 710 $ 627
Charge-Offs:
Commercial, Financial, and Agricultural 89 52 41 51 52
Real Estate -- Mortgage 0 0 5 6 61
Installment 104 25 25 46 60
Credit Cards 9 8 9 6 15
$ 202 $ 85 $ 80 $ 109 $ 188
Recoveries:
Commercial, Financial and Agricultural $ 67 $ 50 $ 38 $ 38 $ 64
Real Estate -- Mortgage 0 0 0 1 0
Installment 43 33 32 55 68
Credit Cards 4 8 3 4 4
$ 114 $ 91 $ 73 $ 98 $ 136
Net Charge-Offs (Deduction) $ (88) $ 6 $ (7) $ (11) $ (52)
Additions Charged to Operations 78 0 29 51 135
Reserve Acquired 423 0 0 0 0
Balance at End of Period $1,191 $ 778 $ 772 $ 750 $ 710
Ratio of Net Charge-Offs During Period to
Average Loans Outstanding 0.14% 0% 0.01% 0.02% 0.10%
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,
1996 1995 1994
(In Thousands of Dollars)
Total Loans Accounted for on a Non-Accrual Basis $ 852 $ 169 $ 270
Interest Income that Would Have Been Recorded
under Original Terms 58 23 53
Interest Income Reported and Recorded During
the Year 17 10 44
Total loans accounted for on a non-accrual basis increased by
$683,383 in 1996 to $852,447. One loan represents 81% of this
increase. This loan is a commercial loan with collateral.
Negotiations for payment through bankruptcy proceedings are
pending. Management believes we have adequately reserved for any
loss which may occur in this account as well as all other
non-accruing loans. 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
The United Security Bank trade area includes Clarke, Choctaw,
and Bibb Counties in Alabama. In addition, parts of Chilton, Hale,
Jefferson, Marengo, Monroe, Perry, Shelby, Tuscaloosa, Washington,
Sumter and Wilcox Counties in Alabama as well as parts of Clarke,
Lauderdale and Wayne Counties in Mississippi are included. There
are several major paper mills in our trade area including Alabama
River Paper, Boise Cascade, James River Corporation and MacMillan
Bloedel. In addition, there are several sawmills, lumber companies,
and pole and piling producers. The table below shows the dollar
amount of loans made to timber and timber-related companies and to
the principals and employees of those companies as of December 31,
1996. The amount of these loans decreased 6.5% from $20 million at
year end 1995 to $18.7 million at year end 1996. Timber related
loans as a percentage of total gross loans decreased from 36.10% in
1995 to 28.26% in 1996.
With the Brent Banking Company acquisition in June of 1996, we
were able to diversify our loan portfolio to some extent. However,
the Bibb County market as well as our previous market area is still
heavily dependent on the timber and timber related industries. We
do plan to pursue opportunities relating to the Mercedes plant
which will be located within 25 miles of our Brent Office. This
will include loans to employees of the plant and to business and
industry associated with this plant.
Timber Total Percentage of
Related Loans Gross Loans Total Loans
$18,734,983 $66,294,023 28.26%
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 believe that this concentration is excessive or that it
represents a trend which might materially impact future earnings,
liquidity, or capital resources of the Bank. Management 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 26.5% during the last three
years with a 15.1% increase in 1996. This growth was affected by
the interest rate environment, product expansion, continued
emphasis on service quality and the Brent Banking Company
acquisition. In June, 1996, Brent Banking Company was acquired and
this acquisition contributed $33 million to United Security Bank's
total deposits.
Average non-interest bearing demand deposits have increased
24.1% over the last three years, but the growth for 1996 was less
than 1%. The ratio of average non-interest bearing deposits to
average total deposits decreased in 1996 to 13.9% from 16% in 1995
and 15.6% in 1994. This decline can be attributed to the shift from
non-interest bearing demand deposits to interest bearing demand
deposits the Bank experienced in 1996. Average interest bearing
demand deposits increased 23.3% in 1996 and accounted for 17.7% of
total average deposits for the year compared to 16.5% in 1995 and
19.3% in 1994. The significant increase in interest-bearing demand
deposits is expected since the deposits acquired through the Brent
acquisition have a higher concentration of interest-bearing demand
deposits. The increase in the interest bearing accounts contributes
to a reduced gross interest margin.
During the last three years, average time deposits increased
31.9%. This represents an increase of over $23.5 million. Average
time deposits increased by 18.1% in 1996 compared to an increase of
8.1% in 1995 and 3.3% in 1994. Additionally, time deposits
represented 58.5% of the total average deposits in 1996 compared to
57% in 1995 and 54.4% in 1994. This growth in time deposits coupled
with the flat growth in interest bearing demand deposits suggests
that consumers were willing to sacrifice fund accessibility for a
higher interest rate in 1996.
Average savings deposits have grown 21.5% since the end of
1993. Average savings grew 7.9% in 1996. The ratio of average
savings to average total deposits declined to 9.9% in 1996 compared
to 10.5% in 1995 and 10.6% in 1994.
United Security's deposit base remains the primary source of
funding for the Bank. The average deposit base represented 74.8% of
average liabilities and equity in 1996. As seen in the following
table, overall rates on these deposits increased to 3.95% in 1996,
compared to 3.84% in 1995 and 3.29% in 1994. This rate increase
reflects the shift to interest bearing demand accounts and to the
higher rates of certificates of deposit. 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 deposit. This will be accomplished by
remaining safe and sound, enhancing our products, and providing
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,
1996 1995 1994
Amount Rate Amount Rate Amount Rate
(In Thousands of Dollars, Except Percentages)
Non-Interest Bearing DDA $ 23,232 $ 23,079 $ 21,898
Interest-Bearing Demand 29,489 2.49% 23,907 2.62% 27,080 2.63%
Savings 16,459 2.75 15,247 2.97 14,898 2.97
Time Deposits 97,368 5.54 82,412 5.45 76,248 4.54
Total $166,548 3.95% $144,645 3.84% $140,124 3.29%
Maturities of Time Certificates of Deposits and Other Time
Deposits of $100,000 or more outstanding at December 31, 1996, are
summarized as follows:
Time Other
Certificates Time
Maturities of Deposits Deposits Total
(In Thousands of Dollars)
3 Months or Less $ 6,686 $ 7,987 $14,673
Over 3 Through 6 Months 1,970 0 1,970
Over 6 Through 12 Months 2,507 0 2,507
Over 12 Months 5,914 0 5,914
Total $17,077 $ 7,987 $25,064
Investment Securities and Securities Available for Sale
Effective January 1, 1994, United Security Bank adopted
Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities" (SFAS 115).
SFAS 115 requires that debt securities, which the Company has both
the positive intent and ability to hold to maturity, should be
carried at amortized cost. These securities are classified as
investment securities in the consolidated financial statements.
Debt securities which the Company does not have the positive intent
and ability to hold to maturity and all marketable equity
securities, are carried at estimated fair value and are included in
securities available for sale in the consolidated financial
statements, exclusive of any such securities that are included in
trading securities. Unrealized holding gains and losses on
securities available for sale, net of taxes, are carried as a
separate component of stockholders' equity. All securities held are
classified as available for sale.
Investment securities decreased $23.07 million in July 1995
with the election to transfer the entire portfolio into available
for sale. This was done to provide additional flexibility in
managing the securities portfolio.
Securities available for sale include Collateralized Mortgage
Obligations (CMOs) of $103.86 million, other mortgage backed
securities of $30.18 million, state, county and municipal
securities of $16.60 million, and other securities of $0.20
million. The total securities portfolio increased $22.86 million or
17.72% from December 1995 to December 1996.
At December 1996, approximately $99.47 million in CMO's had
floating interest rates which reprice monthly and $4.39 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 are
also subject to any prepayments of principal due to prepayment,
refinancing, or foreclosure of the underlying mortgages. Although
maturities of the underlying mortgage loans may range up to 30
years, amortization and prepayments substantially shorten the
effective maturities of mortgage-backed securities. Transactions in
these securities have focused on the seven to ten year average life
goal. Principal and interest payments also add significant
liquidity to the balance sheet. In 1996, there was a continuing
emphasis in Collateralized Mortgage Obligations ("CMO's"), 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 CMO's
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
#1 -- Average Life Test --
The expected average life of the security must be less
than or equal to 10 years.
#2 -- Average Life Sensitivity Test --
The average life of the security will not extend by more
than 4 years or shorten by more than 6 years for
immediate Treasury curve shifts of +/- 300 basis points
(3%).
#3 -- Price Sensitivity Test --
The estimated price of the security will not change by
more than 17% for immediate Treasury curve shifts of +/-
300 basis points.
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 $31.06 million in securities which, at
December 31, 1996, were designated high risk. $9.43 million of
these securities were floating rate, and $21.63 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, 1996 of $1.04
million. Despite these unrealized losses, the securities in this
segment of the portfolio produced $4.35 million in interest income
and positive total return for 1996.
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 be prepaid, 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 $1.06 million in the securities
portfolio on December 31, 1996, versus net unrealized gain (net of
taxes) of $616,295 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 S in the "Notes to Consolidated
Financial Statements."
Condensed Portfolio Maturity Schedule
Dollar Portfolio
Maturity Summary Amount Percentage
Maturing in less than 1 year $ 951,673 0.63%
Maturing in 1 to 5 years 3,245,150 2.15%
Maturing in 5 to 10 years 6,949,017 4.61%
Maturing in over 10 years 139,638,118 92.61%
Total $150,783,958 100.00%
The following Marketable Equity Securities have been excluded from
the above Maturity Summary due to no stated maturity date.
Federal Home Loan Bank Stock $1,034,000
Mutual Funds $ 9,927
Other Marketable Securities $ 45,579
Condensed Portfolio Repricing Schedule
Dollar Portfolio
Repricing Summary Amount Percentage
Repricing in 30 days or less $ 99,490,380 65.98%
Repricing in 31 to 90 days 207,916 0.14%
Repricing in 91 days to 1 year 718,757 0.48%
Repricing in 1 to 5 years 3,245,149 2.15%
Repricing in 5 to 10 years 6,844,483 4.54%
Repricing in over 10 years 40,277,273 26.71%
Total $150,783,958 100.00%
Repricing in 30 days or less does not include:
Mutual Funds $ 9,927
Other Marketable Equity Securities $ 45,579
Repricing in 31 to 90 days does not include:
Federal Home Loan Bank Stock $1,034,100
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:
State, County and Municipal
Obligations $ 943 6.51% $3,050 6.68% $1,988 7.03% $ 10,617 5.98%
Mortgage-Backed
Securities $ 9 5.91% $ 53 5.37% $4,961 6.28% $129,021 8.75%
Other $ 0 0.00% $ 142 7.63% $ 0 0.00% $ 0 0.00%
Total $ 952 6.50% $3,245 6.70% $6,949 6.50% $139,638 8.53%
* 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 income
increased dramatically in 1996 compared to 1995 and 1994. The
majority of the profits realized in 1996 were generated in options
and other related transactions. Losses in the investment securities
area occurred in connection with United Security's asset and
liability management activities and disposition of some securities
which were acquired through the Brent Banking Company acquisition.
Options income and other off-balance sheet income rose 124% from
$221,797 to $497,387. Although this income should be considered
non-recurring, it is expected that $224,640 will be recognized in
1997. This income which will be received in 1997 is the result of
early termination of interest rate contracts and the deferred gains
and losses associated with these interest rate risk management
tools and is being amortized over the original life of the hedge.
The table below shows the associated net gains or (losses) for
the periods 1996, 1995, and 1994:
1996 1995 1994
Investment Securities $ (103,644) $ (103,414) $ (34,573)
Trading Account (2,031) 23,215 (97,525)
Options & Off-Balance Sheet Transactions 497,387 221,797 225,228
Total $ 391,712 $ 141,598 $ 93,130
Losses in 1996 from sales of investment securities and trading
account securities were net of gains of $384,287 and $36,250,
respectively. Volume of sales as well as other information on
securities is further discussed in Note C to the 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,
1996 1995 1994
(In Thousands of Dollars)
Investment Securities Held to Maturity:
U.S. Treasury and Agencies Securities $ 0 $ 0 $ 3,252
Obligations of States, Counties, and
Political Subdivisions 0 0 13,144
Mortgage-Backed Securities 0 0 5,631
Other Securities 0 0 100
Total $ 0 $ 0 $ 22,127
Investment Securities Available for Sale:
U.S. Treasury and Agency Securities $ 0 $ 0 $ 992
Obligations of States, Counties, and
Political Subdivisions 15,441 11,989 0
Mortgage-Backed Securities 133,494 114,880 93,928
Other Securities 1,239 1,159 815
Unrealized Gains (Losses) 1,700 986 (5,147)
$151,874 $129,014 $ 90,588
Total $151,874 $129,014 $112,715
The maturities and weighted average yields of investment
securities available-for-sale at the end of 1996 are presented in
the preceding table based on stated maturity. While the average
stated maturity of the Mortgage Backed Securities (excluding CMO's)
was 24.04 years, the average life expected is 12.80 years. The
average stated maturity of the CMO portion of portfolio was 25.47
years, and the average expected life was 16.82 years. The average
expected life of investment securities available-for-sale was 14.86
years with an average yield of 8.37 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:
1996 $22,364
1995 $22,369
1994 $17,652
Weighted Average Interest Rate at Year-End:
1996 5.44%
1995 5.82%
1994 5.90%
Maximum Amount Outstanding at Any Month's End:
1996 $32,571
1995 $26,698
1994 $17,980
Average Amount Outstanding During the Year:
1996 $26,259
1995 $19,657
1994 $10,931
Weighted Average Interest Rate During the Year:
1996 5.49%
1995 6.11%
1994 4.55%
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, 1996,
shareholders' equity totaled $28.8 million, or 12.3% of total
assets compared to 12.8% and 10% for the same periods in 1995 and
1994, respectively. This level of equity indicates to United
Security's shareholders, customers and regulators that United
Security is financially sound and offers the ability to sustain an
appropriate degree of leverage to provide a desirable level of
profitability and growth.
Over the last three years shareholders' equity grew from $19.6
million at the beginning of 1994 to $28.8 million at the end of
1996. All of this growth was the result of internally generated
retained earnings, with the exception of the market value
adjustment of $1,062,247 made for the available for sale
investments as required by Statement of Financial Accounting
Standards No. 115. (See Note A of the Consolidated Financial
Statements for additional information.) The internal capital
generation rate (net income less cash dividends as a percentage of
average shareholders' equity) was 11.9% in 1996, up from 11.6% in
1995.
On May 31, 1996, United Security acquired the assets and
assumed the liabilities of Brent Banking Company of Bibb County.
This transaction had no direct affect on shareholders' equity since
it was a purchase transaction.
United Security is required to comply with capital adequacy
standards established by the Federal Reserve and FDIC. Currently,
there are two basic measures of capital adequacy: a risk-based
measure and a leverage measure.
The risk-based capital standards are designed to make
regulatory capital requirements more sensitive to differences in
risk profile among banks and bank holding companies, to account for
off-balance sheet exposure, and to minimize disincentives for
holding liquid assets. Assets and off-balance sheet items are
assigned to broaden risk categories, each with a specified
risk-weighting factor. The resulting capital ratios represented
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 holding companies. Under the
final rule, institutions are generally directed not to include the
component of common stockholders' equity created by SFAS115, (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 l Capital"). The remainder ("Tier II Capital")
may consist of a limited amount of other preferred stock, mandatory
convertible securities, subordinated debt, and a limited amount of
the allowance for loan losses. The sum of Tier l Capital and Tier
II Capital is "total risk-based capital".
The banking regulatory agencies have also adopted regulations
which supplement the risk based guidelines to include a minimum
leverage ratio of 3% of Tier l Capital to total assets less
goodwill (the "leverage ratio"). Depending upon the risk profile of
the institution and other factors, the regulatory agencies may
require a leverage ratio of 1% or 2% higher than the minimum 3%
level.
The following chart summarizes the applicable bank regulatory
capital requirements. United Security's capital ratios at December
31, 1996, substantially exceeded all regulatory requirements.
Risk-Based Capital Requirements
Minimum United Security's
Regulatory Ratio at
Requirement December 31, 1996
Tier I Capital to Risk-Adjusted Assets 4.00% 20.51%
Total Capital to Risk-Adjusted Assets 8.00% 21.47%
Tier I Leverage Ratio 3.00% 11.57%
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 $1.1 million or $.52 per share compared to $.44
per share in 1995 and $.42 per share in 1994. The total cash
dividends represented a payout ratio of 26.08% in 1996 with a
payout ratio of 26.02% and 27.84% in 1995 and 1994 respectively.
This is the eighth consecutive year that United Security has
increased cash dividends.
Ratio Analysis
The following table presents operating and capital ratios for
each of the last three years.
Year Ended December 31,
1996 1995 1994
Return on Average Assets 1.92% 1.87% 1.82%
Return on Average Equity 16.09% 15.73% 16.87%
Cash Dividend Payout Ratio 26.08% 26.02% 27.84%
Average Equity to Average Assets Ratio 11.91% 11.92% 10.76%
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 $34,967,000 at December 31, 1996.
Investment securities maturing or repricing in the same time
frame totaled $107,886,000 or 71% of the investment portfolio at
year-end 1996. In addition, principal payments on mortgage-backed
securities totaled $3,260,000 in 1996. For repricing purposes,
$1,896,000 in payments have been included in the one year or less
categories in the "Interest Rate Sensitivity Analysis," reflecting
recent prepayment experience.
The liability portion of the balance sheet provides liquidity
through interest-bearing and non-interest bearing deposit accounts.
Federal Funds purchased, securities sold under agreements to
repurchase, 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 general
levels of interest rates.
The balance of cash and cash equivalents increased at December
31, 1996, by $1,883,198. This increase was primarily a result of
net cash received in the acquisition of Brent Banking Company and
lower loan levels. 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 9.37 percent of total
liabilities and equity.
United Security currently has up to $30 million in borrowing
capacity from the Federal Home Loan Bank and $11 million in
established Federal Funds Lines.
Measuring Interest Rate Sensitivity: Gap analysis is a
technique used to measure interest rate sensitivity, an example of
which is presented below. Assets and liabilities are placed in gap
intervals based on their repricing dates. Assets and liabilities
for which no specific repricing dates exist are placed in gap
intervals based on management's judgment concerning their most
likely repricing behaviors. Derivatives used in interest rate
sensitivity management are also included in the applicable gap
intervals.
A net gap for each time period is calculated by subtracting
the liabilities repricing in that interval from the assets
repricing. A positive gap -- more assets repricing than liabilities
- -- will benefit net interest income if rates are rising and will
detract from net interest income in a falling rate environment.
Conversely, a negative gap -- more liabilities repricing than
assets -- will benefit net interest income in a declining interest
rate environment and will detract from net interest income in a
rising interest rate environment.
Gap analysis is the simplest representation of United
Security's interest rate sensitivity. However, it cannot reveal
the impact of factors such as administered rates (e.g., the prime
lending rate), pricing strategies on consumer and business
deposits, changes in balance sheet mix, or the effect of various
options embedded in balance sheet instruments.
The accompanying table shows United Security's rate sensitive
position at December 31, 1996, as measured by gap analysis. Over the
next 12 months approximately $13 million more interest earning
assets than interest bearing liabilities can be repriced to current
market rates at least once. This analysis indicates that United
Security has a positive gap within the next 12 month range and net
interest income should benefit from a rising rate environment
according to the table.
Interest Rate Sensitivity Analysis
December 31, 1996
(In Thousands of Dollars)
0-3 4-12 1-5 Over 5 Non-Rate
Months Months Years Years Sensitive Total
Earning Assets:
Loans $ 19,312 $ 15,717 $ 24,123 $ 5,421 $ 0 $ 64,573
Taxable Investment Securities 105,520 1,422 7,568 20,766 0 135,276
Tax-Exempt Investment Securities 233 711 3,050 12,604 0 16,598
Total Earning Assets $125,065 $ 17,850 $ 34,741 $ 38,791 $ 0 $216,447
Interest-Bearing Liabilities:
Interest-Bearing Demand Deposits
Demand Deposits $ 31,064 $ 0 $ 10,355 $ 0 $ 0 $ 41,419
Savings Deposits 6,517 151 9,775 0 0 16,443
Time Deposits 37,274 32,408 27,694 0 0 97,376
Other Liabilities 22,385 63 336 261 0 23,045
Non-Interest-Bearing Liabilities
Demand Deposits 601 0 0 0 24,094 24,695
Shareholders' Equity 0 0 0 0 13,469 13,469
Total Funding Sources $ 97,841 $ 32,622 $ 48,160 $ 261 $ 37,563 $216,447
Interest Sensitivity Gap (Balance Sheet) $ 27,224 $(14,772) $(13,419) $ 38,530 $(37,563) $ 0
Off-Balance Sheet $ 587 $ 0 $ (587) $ 0 $ 0 $ 0
Interest Sensitive Gap $ 27,811 $(14,772) $(14,006) $ 38,530 $(37,563) $ 0
Cumulative Interest-Sensitive Gap $ 27,811 $ 13,039 $ (967) $ 37,563 $ 0 $ 0
Note: Management adjustments reflects United Security's anticipated
repricing sensitivity of non-maturity deposit products.
Historically, balances on non-maturity deposit accounts have
remained relatively stable despite changes in market interest
rates. Management has classified certain of these accounts as
non-rate sensitive based on a management's historical pricing
practices and runoff experience. Approximately 10% of the
interest-bearing demand deposit account balances and 60% of
the savings account balances are classified as over one year.
Certain interest-sensitive assets and liabilities are included
in the table based on historical repricing experience and
expected prepayments in the case of Mortgage Backed Securities
rather than contractual maturities. Non-accruing loans are
included in loans at the contractual maturity.
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 S 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 Ranges Maturity
1 Pay Fixed $ 587 $ 0 $ 10 Prime Rate 6.80% 21 mos.
Caps and Floors:
Contracts Terms Ranges Maturity
3 Caps Purchased $30,000 $ 297 $ 180 6.45% to 6.75% 19-37 mos.
4 Floors Purchased 25,000 101 10 4.00% to 8.25% 12-24 mos.
2 Caps Sold 20,000 (82) (78) 7.45% 23-37 mos.
$75,587 $ 316 $ 122
Income Taxes
The effective tax rate as a percentage of pre-tax income was
26.3% in 1996 compared to 28.4% and 26.5% in 1995 and 1994,
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".
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, 1996, the Bank had
outstanding standby letters of credit and commitments to make loans
of $6,807,823 and $36,462,517, 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, 1996, the Bank's options written totaled $4,000,000.
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. There were no
commitments to buy or sell securities for delayed delivery as of
December 31, 1996.
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 $839,923 or 9.2% in 1996
compared to 6.9% and 14.5% increases in 1995 and 1994 respectively.
Volume, rate, and yield changes contributed to the growth in net
interest income. Average interest-earning assets increased by $28.7
million or 15.9% in 1996. This increase in interest-earning assets
is partly offset by the volume increase of $25.2 million or 17.4%
in average interest-bearing liabilities. These increases were
mostly due to the Brent Banking Company acquisition. 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 1996, average
interest-earning assets outgained average interest-bearing
liabilities by $3.4 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 4.8% in 1996 compared to 5.1% and 5.2% in 1995
and 1994, 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, as noted in the table "Distribution of Assets,
Liabilities, and Shareholders' Equity, with Interest Rates and
Interest Differentials", increased 17.4% in 1996, while the average
rate of interest paid decreased from 4.83% in 1995 to 4.74% in
1996, a decrease of 9 basis points. Average interest-earning assets
increased 15.9% in 1996, while the average yield decreased from
8.96% in 1995 to 8.68% in 1996, a decrease of 28 basis points. Net
yield on average interest earning assets decreased 26 basis points
from 1995 to 1996. The slower decline in interest rates paid on
liabilities is due in part to the higher rates paid on the time
deposits acquired with Brent Banking Company.
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 1996, 81% of the Bank's average earning assets were
funded by interest-bearing liabilities as opposed to 80% in 1995
and 82% in 1994. Net interest income is improved as earning assets
are funded by a decreasing percentage of interest-bearing
liabilities.
Summary of Operating Results
Year Ended December 31,
1996 1995 1994
(In Thousands of Dollars)
Total Interest Income $18,150 $16,167 $14,025
Total Interest Expense 8,067 7,002 5,420
Net Interest Income $10,083 $ 9,165 $ 8,605
Provision for Possible Loan Losses 78 0 29
Net Interest Income After Provision for
Possible Loan Losses $10,005 $ 9,165 $ 8,576
Non-Interest Income 1,435 1,111 1,041
Non-Interest Expense (5,658) (5,229) (5,231)
Income Before Income Taxes $ 5,782 $ 5,047 $ 4,386
Applicable Income Taxes 1,520 1,432 1,161
Net Income $ 4,262 $ 3,615 $ 3,225
Changes in Interest Earned and Interest Expense Resulting from
Changes in Volume and Changes in Rates
1996 Compared to 1995 1995 Compared to 1994 1994 Compared to 1993
Increase (Decrease) Increase (Decrease) Increase (Decrease)
Due to Change In: Due to Change In: Due to Change In:
Average Average Average
Volume Rate Net