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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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number 0-14549
UNITED SECURITY BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
Alabama 63-0843362
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
131 West Front Street
Post Office Box 249
Thomasville, Alabama 36784
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (334) 636-5424
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $0.01 per share (Title of class)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports) and (2) has been subject to such filing requirements
for the past 90 days. Yes [X]. No .
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ___
Shares of common stock ($0.01 par value) outstanding as of
December 31, 1998: 3,546,845.
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 February 17, 1999, is
$119,152,280. (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
1999 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, 1998
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
7A Quantitative and Qualitative Disclosures About
Market Risk............................................
8 Financial Statements and Supplementary Data............
9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure....................
III 10 Directors and Executive Officers of the Registrant.....
11 Executive Compensation.................................
12 Security Ownership of Certain Beneficial Owners
and Management.........................................
13 Certain Relationships and Related Transactions.........
IV 14 Exhibits, Financial Statement Schedules
and Reports on Form 8-K................................
Signatures...............................................................
Exhibits.................................................................
PART I
Item 1. Business.
General
United Security Bancshares, Inc. ("Bancshares") is an Alabama
corporation organized in 1984. Bancshares is a bank holding company
registered under the Bank Holding Company Act of 1956, as amended,
and it operates one banking subsidiary, First United Security Bank
(the "Bank"). The Bank's name was changed from United Security Bank
to First United Security Bank on July 9, 1997. The Bank owns all of
the stock of Acceptance Loan Company, Inc. ("ALC"), a finance
company organized for the purpose of making consumer loans and
purchasing consumer loans from vendors. Bancshares owns all the
stock of First Security Courier Corporation ("First Security"), an
Alabama corporation organized for the purpose of providing certain
bank courier services.
The Bank has sixteen banking offices, which are located in
Thomasville, Coffeeville, Fulton, Gilbertown, Grove Hill, Butler,
Jackson, Brent, Centreville, North Bibb and Harpersville, Alabama,
and its market area includes portions of Bibb, Clarke, Choctaw,
Marengo, Shelby, Sumter, Tuscaloosa, Washington, and Wilcox
Counties in Alabama, as well as Clarke, Lauderdale and Wayne
Counties in Mississippi.
The Bank conducts a general commercial banking business and
offers banking services such as the receipt of demand, savings and
time deposits, making 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 located
in its service area for, among other things, new deposits, loans,
savings deposits, certificates of deposit, interest-bearing
transaction accounts, and other banking and financial services.
As of December 31, 1998, the Bank had 197 full-time equivalent
employees, ALC had 89 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
The Riegle-Neal Interstate Banking and Branching Efficiency
Act of 1994 (the "IBBEA") authorized bank holding companies to
acquire banks and other bank holding companies without geographic
limitations beginning September 30, 1995. The arrival of interstate
banking is expected to increase further the competitiveness of the
banking industry.
In addition, beginning on June 1, 1997, the IBBEA authorized
interstate mergers and consolidations of existing banks, provided
that neither bank's home state has opted out of interstate
branching by May 31, 1997. The State of Alabama has opted into
interstate branching effective on or before June 1, 1997. Once a
bank has established branches in a state through an interstate
merger, the bank generally may establish and acquire additional
branches at any location in the state where any bank involved in
the interstate merger could have established or acquired branches
under applicable federal or state law.
Alabama banks may also establish branches or offices in any
other state, any territory of the United States, or any foreign
country, provided that the branch or office is established in
compliance with federal law and the law of the proposed location
and is approved by the Alabama Superintendent of Banks. Under
former law, Alabama banks could not establish a branch in any
location other than its principal place of business, except as
authorized by local laws or general laws of local application.
These more liberal branching laws are likely to increase
competition within the State of Alabama among banking institutions
located in Alabama and from banking institutions outside of
Alabama, many of which are larger than Bancshares. Size gives the
larger banks certain advantages in competing for business from
large corporations. These advantages include higher lending limits
and the ability to offer services in other areas of Alabama and the
southeast region.
Supervision, 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 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 Alabama State Banking Department and the
Federal Deposit Insurance Corporation ("FDIC") are the primary
regulators for the Bank. These regulatory authorities regulate or
monitor all areas of the Bank's operations, including security
devices and procedures, adequacy of capital loan reserves, loans,
investments, borrowings, deposits, mergers, issuances of
securities, payment of dividends, interest rates payable on
deposits, interest rates or fees chargeable on loans, establishment
of branches, corporate reorganizations, maintenance of books and
records and adequacy of staff training to carry on safe lending and
deposit gathering practices. The Bank must maintain certain capital
ratios and is subject to limitations on aggregate investments in
real estate, bank premises and furniture and fixtures.
The Bank's deposits are insured by the 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 (the "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 Alabama law,
a bank must transfer to surplus each year at least 10% of its net
earnings until the surplus of the bank is equal to at least 20% of
its capital. During this accumulation period, a bank may not pay a
dividend in excess of 90% of its net earnings. After this
accumulation period, banks must obtain prior written approval of
the Superintendent of the Alabama State Banking Department if the
total of all dividends declared by the bank in any calendar year
will exceed the total of the bank's net earnings (as defined by
statute) for that year combined with its retained net earnings for
the preceding two years, less any required transfers to surplus. In
addition, no dividends may be paid from surplus without the prior
written approval of the Superintendent.
In accordance with regulatory restrictions, the Bank had at
December 31, 1998, $4,531,000 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
the Federal Deposit Insurance Corporation Improvement Act of 1991
("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.
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.
FDICIA authorizes the BIF to borrow up to $30 billion from the
United States Treasury to be repaid by the banking industry through
deposit insurance assessments. FDICIA required the federal banking
agencies and the FDIC, as insurer, to take prompt action to resolve
the problems of insured depository institutions. All depository
institutions will be classified into one of five categories ranging
from well-capitalized to critically undercapitalized. As an
institution's capital level declines, it would become subject to
increasing regulatory scrutiny and tighter restrictions. FDICIA
further requires an increase in the frequency of "fullscope,
on-site" examinations and expands the current audit requirements.
In addition, federal banking agencies are mandated to review and
prescribe uniform accounting standards that are at least as
stringent as Generally Accepted Accounting Principles. FDICIA
permits the merger or acquisition of any depository institutions
with any other, provided that the transaction is approved by the
resulting entity's appropriate federal banking agency. This would
permit, for the first time, direct mergers between banks and thrift
institutions.
Among other things, FDICIA requires the federal banking
agencies to take "prompt corrective action" in respect of banks
that do not meet minimum capital requirements, as defined by the
regulations implementing FDICIA. If a depository institution fails
to meet regulatory capital requirements, regulatory agencies can
require submission and funding of a capital restoration plan by the
institution to limit growth, require the raising of additional
capital and, ultimately, require the appointment of a conservator
or receiver for the institution. Under FDICIA, a bank holding
company must guarantee that an undercapitalized subsidiary bank
meets its capital restoration plan, subject to certain limitations.
Because of concerns relating to the 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 alter
the statutory separation of commercial and investment banking and
to further expand the powers of banks, bank holding companies and
competitors of banks.
In September 1996, legislation was enacted to recapitalize the
SAIF and ensure against default on Financing Corp. ("FICO") bonds.
The legislation provided for a one-time payment into the BIF in an
amount approximating $.68 per $100 of SAIF insured deposits.
Thereafter and through December 31, 1999, the former assessment
rate of between $-0- and $.31 per $100 of insured deposits is
reduced to between $.0130 and $.2830 per $100, including a FICO
rate of $.0130 per $100, for bank deposits and a rate of between
$.0650 and $.3350 per $100, including a FICO rate of $.0650 per
$100, for previously SAIF insured deposits. After December 31,
1999, the BIF rate will be approximately $.0243 per $100 for all
deposits.
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.
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. The federal bank regulatory
authorities have adopted risk-based capital guidelines for banks
and bank holding companies that are designed to account for
off-balance sheet exposure, minimize disincentives for holding
liquid assets and make regulatory capital requirements more
sensitive to differences in risk profiles among banks and bank
holding companies. The resulting capital ratios represent
qualifying capital as a percentage of total risk-weighted assets
and off-balance sheet items. The guidelines are minimums, and the
federal regulators have noted that banks and bank holding companies
contemplating significant expansion programs should not allow
expansion to diminish their capital ratios and should maintain
ratios well in excess of the minimums. The current guidelines
require all bank holding companies and federally-regulated banks to
maintain a minimum risk-based total capital ratio equal to 8%, of
which at least 4% must be Tier 1 capital. Tier 1 capital includes
common stockholders' equity, qualifying perpetual preferred stock
and minority interests in equity accounts of consolidated
subsidiaries, but excludes goodwill and most other intangibles and
excludes the allowance for loan and lease losses. Tier 2 capital
includes the excess of any preferred stock not included in Tier 1
capital, mandatory convertible securities, hybrid capital
instruments, subordinated debt and intermediate term-preferred
stock and general reserves for loan and lease losses up to 1.25% of
risk-weighted assets.
Under these guidelines, banks' and bank holding companies'
assets are given risk-weights of 0%, 20%, 50% or 100%. In addition,
certain off-balance sheet items are given credit conversion factors
to convert them to asset equivalent amounts to which an appropriate
risk-weight will apply. These computations result in the total
risk-weighted assets. Most loans are assigned to the 100% risk
category, except for first mortgage loans fully secured by
residential property and, under certain circumstances, residential
construction loans, both of which carry a 50% rating. Most
investment securities are assigned to the 20% category, except for
municipal or state revenue bonds, which have a 50% rating, and
direct obligations of or obligations guaranteed by the United
States Treasury or United States Government agencies, which have a
0% rating.
The federal bank regulatory authorities have also implemented
a leverage ratio, which is Tier 1 capital as a percentage of
average total assets less intangibles, to be used as a supplement
to the risk-based guidelines. The principal objective of the
leverage ratio is to place a constraint on the maximum degree to
which a bank holding company may leverage its equity capital base.
The minimum required leverage ratio for top-rated institutions is
3%, but most institutions are required to maintain an additional
cushion of at least 100 to 200 basis points.
FDICIA established a new capital-based regulatory scheme
designed to promote early intervention for troubled banks. The new
capital-based regulatory framework contains five categories of
compliance with regulatory capital requirements, including "well
capitalized," "adequately capitalized," "undercapitalized,"
"significantly undercapitalized" and "critically undercapitalized."
To qualify as a "well capitalized" institution, a bank must have a
leverage ratio of no less than 5%, a Tier 1 risk-based ratio of no
less than 6% and a total risk-based capital ratio of no less than
10%, and the bank must not be under any order or directive from the
appropriate regulatory agency to meet and maintain a specific
capital level. As of December 31, 1998, Bancshares and the Bank
qualified as "well-capitalized."
Under FDICIA, the applicable agency can treat an institution
as if it were in the next lower category if the agency determines
(after notice and an opportunity for hearing) that the institution
is in an unsafe or unsound condition or is engaging in an unsafe or
unsound practice. The degree of regulatory scrutiny of a financial
institution will increase, and the permissible activities of the
institution will decrease, as it moves downward through the capital
categories. Institutions that fall into one of the three
undercapitalized categories may be required to (i) submit a capital
restoration plan; (ii) raise additional capital; (iii) restrict
their growth, deposit interest rates and other activities; (iv)
improve their management; (v) eliminate management fees; or (vi)
divest themselves of all or a part of their operations. Bank
holding companies controlling financial institutions can be called
upon to boost the institutions' capital and to partially guarantee
the institutions' performance under their capital restoration
plans.
FDICIA requires the federal banking regulators to revise the
risk-based capital standards to provide for explicit consideration
of interest-rate risk, concentration of credit risk and the risks
of non-traditional activities. It is uncertain what effect these
regulations, when implemented, will have on Bancshares and the
Bank.
Recent Legislative Developments. From time to time, various
bills are introduced in the United States Congress with respect to
the regulation of financial institutions. Certain of these
proposals, if adopted, could significantly change the regulation of
banks and the financial services industry. Bancshares cannot
predict whether any of these proposals will be adopted or, if
adopted, how these proposals would affect Bancshares.
There have been a number of legislative and regulatory
proposals that would have an impact on the operation of bank
holding companies and their banks. It is impossible to predict
whether or in what form these proposals may be adopted in the
future and, if adopted, what their effect will be on Bancshares and
the Bank. For example, on May 13, 1998, the U.S. House of
Representatives passed H.R. 10, the "Financial Services Competition
Act of 1998," which calls for a sweeping modernization of the
banking system that would permit affiliations between commercial
banks, securities firms, insurance companies and, subject to
certain limitations, other commercial enterprises. The stated
purposes of H.R. 10 are to enhance consumer choice in the financial
services marketplace, level the playing field among providers of
financial services, and increase competition. H.R. 10 removes many
of the statutory restrictions contained in current laws regulating
the financial services industry and calls for a new regulatory
framework of financial institutions and their holding companies.
Although H.R. 10 failed to reach the voting stage in the United
States Senate before the adjournment of the 105th Congress in 1998,
H.R. 10 was reintroduced in the House of Representatives on January
6, 1999, and is currently under consideration. At this time, it is
unknown whether H.R. 10 will be enacted into law, or if enacted,
what form the final version of such legislation might take and how
such legislation may affect Bancshares' business and operations.
One consequence may be increased competition from large financial
services companies that, under the bill, would be permitted to
provide many types of financial service to customers.
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. ALC leases office space throughout Alabama but owns no
property. The aggregate annual rental payments for office space for
ALC totals approximately $268,000.
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 fifteen branches in addition to its main
office. The Highway 43 South 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
Coffeeville Road branch in Jackson 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. The following branches were acquired as a result of the
merger of First Bancshares, Inc. with and into Bancshares in 1997:
The Centreville branch is located at the corner of Davidson Street
and Court Square in Centreville, Alabama. That building, a
two-story brick building of approximately 9,000 square feet with
two drive-in facilities, has been sold. The Bank is currently
renting the building while a new building is constructed. The Grove
Hill branch is located at the corner of Main Street and Court in
Grove Hill, Alabama. This branch is in a one-story brick building
with approximately 10,500 square feet and three drive-in
facilities. The two new Jackson branches are located on (1)
Commerce Street in a two-story brick building with approximately
9,000 square feet and three drive-in facilities and (2) College
Avenue in a one-story brick building with approximately 7,800
square feet and four drive-in facilities. The branch in Thomasville
is located in a one-story brick building with approximately 3,800
square feet and three drive-in facilities. The branch in North Bibb
County is located on Highway 11 in a one-story brick building with
two drive-in facilities. The Cobb Street branch has three drive-in
facilities and is located in a one-story brick building of
approximately 1,000 square feet. Finally, the Harpersville branch
has three drive-in facilities and is located in a 3,500 square foot
building. Except as noted, all of the Bank's offices are owned in
fee simple 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 3,610,945 shares of Bancshares common
stock issued and 3,546,845 shares outstanding. As of December 31,
1998, there were approximately 940 shareholders of Bancshares.
The Bank is authorized by its Articles of Incorporation to
issue 25,000 shares of common stock, par value $1.00 per share, all
of which are outstanding. Bancshares is the only shareholder of the
Bank.
There is no established public trading market for Bancshares
common stock. Management of Bancshares is aware that from time to
time Bancshares common stock is bought or sold in private
transactions or in transactions directly with a securities
broker-dealer making a limited market in Bancshares' common stock.
Management of Bancshares is aware of approximately 112 sales of
Bancshares common stock since January 1, 1998 at prices ranging
from $34.00 to $40.00 per share.
Bancshares has paid dividends on its common stock on a
quarterly basis in the past three years as follows:
Dividend paid
on Common Stock
Fiscal Year (per share)
1996 $.40
1997 $.53
1998 $.72
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 (filed
with the Commission in Washington, D.C., file no. 0-14549), 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,
1998 1997 1996 1995 1994
(In Thousands of Dollars, Except Per Share Amounts)
RESULTS OF OPERATIONS
Interest Revenue $ 43,255 $ 37,648 $ 34,551 $ 30,571 $ 23,340
Interest Expense 15,518 15,376 15,081 13,298 9,095
Net Interest Revenue 27,737 22,272 19,470 17,273 14,245
Provision for Loan Losses 3,187 1,710 800 255 224
Non-Interest Revenue 4,558 4,361 2,725 2,555 2,250
Non-Interest Expense 17,008 15,229 11,765 10,898 10,351
Income Before Income Taxes 12,100 9,694 9,630 8,675 5,920
Income Taxes 3,521 2,713 2,659 2,225 1,367
Net Income $ 8,579 $ 6,981 $ 6,971 $ 6,450 $ 4,553
Net Income Per Share:
Basic $ 2.42 $ 1.97 $ 1.97 $ 1.83 $ 1.30
Diluted $ 2.40 $ 1.96 $ 1.97 $ 1.83 $ 1.30
Average Number of Shares
Outstanding (000) 3,543 3,537 3,537 3,520 3,497
PERIOD END STATEMENT OF CONDITION
Total Assets $450,073 $425,941 $430,383 $377,120 $308,569
Loans 235,060 215,897 204,886 182,000 129,603
Deposits 326,645 322,418 346,306 304,381 247,534
Shareholders' Equity 60,568 52,711 47,616 41,795 31,597
AVERAGE BALANCES
Total Assets $439,080 $434,010 $410,541 $364,330 $301,112
Average Earning Assets 408,506 402,271 382,458 337,921 280,096
Loans 231,792 212,570 198,327 172,146 135,450
Deposits 320,958 345,442 327,531 294,063 244,788
Shareholders' Equity 57,409 50,164 44,044 37,588 32,175
PERFORMANCE RATIOS
Net Income to:
Average Total Assets 1.95% 1.61% 1.70% 1.77% 1.51%
Average Shareholders' Equity 14.94% 13.92% 15.83% 17.16% 14.15%
Average Shareholders' Equity to
Average Total Assets 13.07% 11.55% 10.73% 10.32% 10.69%
Dividend Payout Ratio 31.40% 26.79% 20.21% 18.12% 24.07%
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Introduction
The following discussion and financial information are
presented to aid in an understanding of the current financial
position and results of operations of United Security Bancshares,
Inc. ("United Security"), and should be read in conjunction with
the Audited Financial Statements and Notes thereto included herein.
The emphasis of this discussion will be on the years 1998, 1997,
and 1996. All yields presented and discussed herein are based on an
accrual basis and not on the tax-equivalent basis.
On June 30, 1997, First Bancshares, the parent holding company
of First Bank and Trust, merged with and into United Security. The
merger was accounted for as a pooling of interests, and,
accordingly, financial information for all prior periods has been
restated to present the combined financial condition and results of
operations of both companies as if the merger had been in effect
for all periods presented.
United Security is the parent holding company of First United
Security Bank (the "Bank"). The Bank operates a finance company,
Acceptance Loan Company, that currently has twenty-five offices in
Alabama and Northwest Florida.
United Security also began a courier company as a subsidiary,
First Security Courier Corporation, in 1997 mainly for the purpose
of delivering checks and documents to the Federal Reserve to aid in
check clearing. This courier company performs courier services for
First United Security Bank as well as other financial institutions
in our market area.
At December 31, 1998, United Security had consolidated assets
of approximately $450.1 million and operated sixteen banking
locations in four counties. These sixteen locations contributed
approximately $7.8 million to consolidated net income in 1998.
First United Security Bank's sole business is banking; therefore,
loans and investments are its principal source of income.
This discussion contains certain forward looking statements
with respect to the financial condition, results of operation and
business of United Security and the Bank related to, among other
things:
(A) trends or uncertainties which will impact future
operating results, liquidity and capital resources, and
the relationship between those trends or uncertainties
and nonperforming loans and other loans;
(B) the diversification of product production among timber
related entities and the effect of that diversification
on the Bank's concentration of loans to timber related
entities;
(C) the composition of United Security's derivative
securities portfolio and its interest rate hedging
strategies and volatility caused by uncertainty over the
economy, inflation and future interest rate trends;
(D) the effect of the market's perception of future inflation
and real returns and the monetary policies of the Federal
Reserve Board on short and long term interest rates;
(E) the effect of interest rate changes on liquidity and
interest rate sensitivity management;
(F) the amount of anticipated (i) net loan charge offs; (ii)
loans on a non-accrual basis; and (iii) options income
and other off-balance-sheet income;
(G) the success of the Company's prior and continuing efforts
to address issues stemming from potential automation
problems associated with the transition to the Year 2000;
and
(H) the expectations, beliefs, and plans of Management as set
forth in the letter to shareholders contained in this
Annual Report.
These forward looking statements involve certain risks and
uncertainties. Factors that may cause actual results to differ
materially from those contemplated by such forward looking
statements include, among 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 continue to accelerate
the rate at which the underlying obligations of
mortgage-backed securities and collateralized mortgage
obligations are prepaid, thereby affecting the yield on
such securities held by the Bank;
(3) inflation grows at a greater-than-expected rate with a
material adverse effect on interest rate spreads and the
assumptions management of United Security has used in its
interest rate hedging strategies and interest rate
sensitivity gap strategies;
(4) rising interest rates adversely affect the demand for
consumer credit;
(5) unexpected problems arise from the transition to the Year
2000, including failure of third parties with whom the
Company does business, or governmental or regulatory
bodies, to address Year 2000 issues; and
(6) general economic conditions, either nationally or in
Alabama, are less favorable than expected.
Financial Condition
United Security's financial condition depends primarily on the
quality and nature of the Bank's assets, liabilities, and capital
structure, the quality of its personnel, and prevailing market and
economic conditions.
The majority of the assets and liabilities of a financial
institution are monetary and, therefore, differ greatly from most
commercial and industrial companies that have significant
investments in fixed assets and inventories. Inflation has an
important impact on the growth of total assets in the banking
industry, resulting in the need to increase equity capital at rates
greater than the applicable inflation rate in order to maintain an
appropriate equity to asset ratio. Also, the category of other
expenses tends to rise during periods of general inflation.
The acquisition of Brent Banking Company contributed
significantly to United Security's growth during 1996. It added
approximately $34 million in assets. In conjunction with the merger
on June 30, 1997, First United Security Bank sold the deposits,
branch facility and associated assets of its branch office in Grove
Hill effective November 1, 1997 as directed by the United States
Department of Justice as a requirement for the merger approval.
This divestiture reduced deposits by approximately $9.8 million.
The Bank owns all of the stock of Acceptance Loan Company,
Inc. ("ALC"), an Alabama corporation. ALC is a finance company
organized for the purpose of making consumer loans. The Bank is
ALC's only source of funds and ALC'S funding makes up approximately
$65 million of the Bank's loans.
Management believes the most significant factor in producing
quality financial results is the Bank's ability to react properly
and timely to changes in interest rates. Management is therefore
attempting to maintain a more balanced position between
interest-sensitive assets and liabilities in order to protect
against wide interest rate fluctuations. The following table
reflects the distribution of average assets, liabilities, and
shareholders' equity for each of the three years ended December 31,
1998, 1997, and 1996.
Distribution of Assets, Liabilities, and Shareholders' Equity, with
Interest Rates and Interest Differentials
December 31,
1998 1997 1996
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate % Balance Interest Rate % Balance Interest Rate %
(In Thousands of Dollars, Except Percentages)
ASSETS
Interest-Earning Assets:
Loans (Note A) $231,792 $ 29,397 12.68% $212,570 $22,964 10.80% $198,327 $20,219 10.19%
Taxable Investments
(Note B) 150,678 12,292 8.16% 161,125 12,854 7.98% 149,337 12,311 8.24%
Non-Taxable Investments 24,206 1,469 6.07% 26,704 1,736 6.50% 31,971 1,873 5.86%
Federal Funds Sold 1,830 97 5.30% 1,872 95 5.07% 2,823 148 5.24%
Total Interest-Earning
Assets 408,506 43,255 10.59% 402,271 37,649 9.36% 382,458 34,551 9.03%
Non-Interest Earning Assets:
Other Assets 30,574 31,739 28,083
Total $439,080 $434,010 $410,541
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest-Bearing Liabilities:
Demand Deposits $ 59,794 $ 1,387 2.32% $ 64,607 $ 1,644 2.54% $ 69,461 $ 1,905 2.74%
Savings Deposits 41,728 1,137 2.72% 43,797 1,218 2.78% 30,939 887 2.87%
Time Deposits 180,128 9,971 5.44% 193,738 10,413 5.37% 185,588 10,230 5.51%
Other Liabilities 54,383 3,023 5.56% 34,605 2,101 6.07% 35,383 2,059 5.82%
Total Interest-Bearing
Liabilities $336,033 $ 15,518 4.62% $336,747 $15,376 4.57% $321,371 $15,081 4.69%
Non-Interest Bearing
Liabilities:
Demand Deposits $ 39,308 $ 43,300 $ 41,543
Other Liabilities 6,330 3,799 3,583
Shareholders' Equity 57,409 50,164 44,044
Total $439,080 $434,010 $410,541
Net Interest Income
(Note C) $ 27,737 $ 22,273 $ 19,470
Net Yield on Interest-
Earning Assets 6.79% 5.54% 5.09%
Note A -- For the purpose of these computations, non-accruing loans
are included in the average loan amounts outstanding.
Note B -- Taxable investments include all held-to-maturity,
available-for-sale, and trading account securities.
Note C -- Loan fees of $1,099,758, $815,566, and $704,194 for 1998
1997 and 1996, respectively, are included in interest
income amounts above.
Loans and Allowance for Loan Losses
Total loans outstanding increased by $21.3 million in 1998
with $245.0 million outstanding at year end. Real estate loans
decreased by $3.6 million to $123.3 million outstanding at December
31, 1998. Real estate loans made up 50.3% of total gross loans at
year end 1998. Construction activity in the trade areas continue to
be predominately commercial. The Company continues to offer a home
equity loan and a long-term fixed-rate mortgage loan program.
Real estate loans consist of construction loans to both
businesses and individuals. These loans relate to residential and
commercial development, commercial buildings and apartment
complexes. Real estate loans also consist of other loans secured by
real estate such as one-to-four family dwellings including mobile
homes, loans on land only, multi-family dwellings, non farm
non-residential real estate and home equity loans. Acceptance Loan
Company had a total of $9.8 million in real estate loans or 8.0% of
total real estate loans at year end 1998.
Commercial loans totaled $35.4 million at December 31, 1998.
These loans increased $.4 million or 1.2% from December 31, 1997.
Consumer installment loans totaled $86.3 million at December
31, 1998. This increase of $24.5 million or 39.6% is almost all
attributed to growth in Acceptance Loan Company. These loans
include loans to individuals for household, family and other
personal expenditures including credit cards and related plans.
Loans by ALC represent $61.4 million or 71.1% of total consumer
installment loans.
Acceptance Loan Company is a wholly-owned subsidiary of First
United Security Bank. ALC was organized in 1995 primarily to make
consumer loans. At December 31, 1995, three offices were in
operation with $1.9 million in total loans outstanding. At December
31, 1996, six offices were open with $11.3 million in total loans
outstanding. At December 31, 1997, twenty offices were open with
$39.4 million in total loans. There were twenty-five offices open
on December 31, 1998, with $71.2 million in gross loans
outstanding. Twenty-two offices are located in Alabama and three in
Northwest Florida. Combined loans from these offices make up 29.1
% of total loans of First United Security Bank.
The allowance for loan losses is maintained at a level which,
in management's judgment, is adequate to absorb credit losses
inherent in the loan portfolio. The amount of the allowance is
based on management's evaluation of the collectibility of the loan
portfolio, including the nature of the portfolio and changes in its
risk profile, credit concentrations, historical trends, specific
impaired loans, and economic conditions. This evaluation also
considers the balance of impaired loans. Losses on individually
identified impaired loans are measured based on the present value
of expected future cash flows discounted at each loan's original
effective market interest rate. As a practical expedient,
impairment may be measured based on the loan's observable market
price or the fair value of the collateral if the loan is collateral
dependent. When the measure of the impaired loan is less than the
recorded investment in the loan, the impairment is recorded through
the provision added to the allowance for loan losses. One-to-four
family residential mortgages and consumer installment loans are
subjected to a collective evaluation for impairment, considers
delinquency and repossessive statistics, historical loss
experience, and other factors. Though management believes the
allowance for loan losses to be adequate, ultimate losses may vary
from their estimates. However, estimates are reviewed periodically,
and as adjustments become necessary, they are reported in earnings
during periods they become known.
The Bank's loan policy requires immediate recognition of a
loss if significant doubt exists as to the repayment of the
principal balance of a loan. Consumer installment loans at the Bank
and ALC are generally recognized as losses if they become 90 days
and 120 days or more delinquent, respectively. The only exception
to this policy occurs when the underlying value of the collateral
or the customer's financial position makes a loss unlikely.
A credit review of the Bank's individual loans is conducted
periodically by branch and by officer. A risk rating is assigned to
each loan and is reviewed at least annually. In assigning risk,
management takes into consideration the capacity of the borrower to
repay, collateral values, current economic conditions and other
factors.
Loan officers and other personnel handling loan transactions
undergo frequent training dedicated to improving the credit quality
as well as the yield of the loan portfolio. First United Security
Bank operates under a written loan policy which attempts to guide
lending personnel in maintaining a consistent lending function.
This policy is intended to aid loan officers and lending personnel
in making sound credit decisions and to assure compliance with
state and federal regulations. In addition, the intent of the loan
policy is to provide lending officers with a guide to making loans
which will provide an adequate return while providing services to
the communities and trade areas in which we are located.
The balance in the allowance for loan losses as of December
31, 1998, was $5.0 million. This increase of approximately
$1,000,000 over year end 1997 reflects the continuing evaluation of
the Bank's portfolio and the growth in Acceptance Loan Company.
Management considers this reserve adequate for coverage of losses
inherent in the loan portfolio. This allowance is 2% of total
loans.
The following table shows the Bank's loan distribution as of
December 31, 1998, 1997, 1996, 1995 and 1994.
December 31,
1998 1997 1996 1995 1994
(In Thousands of Dollars)
Commercial, Financial and
Agricultural $ 35,444 $ 35,036 $ 36,387 $ 33,696 $ 33,106
Real Estate 123,264 126,824 126,666 114,985 83,530
Installment 86,282 61,822 49,119 36,301 24,814
Total $244,990 $223,682 $212,172 $184,982 $141,450
The amounts of total loans (excluding installment loans)
outstanding at December 31, 1998, which, based on the remaining
scheduled repayments of principal, are due in (1) one year or less,
(2) more than one year but within five years, and (3) more than
five years, are shown in the following table.
Maturing
After One
Within But Within After
One Year Five Years Five Years Total
(In Thousands of Dollars)
Commercial, Financial, and Agricultural $ 25,571 $ 6,746 $ 3,127 $ 35,444
Real Estate -- Mortgage 59,526 43,109 20,629 123,264
Total $ 85,097 $ 49,855 $ 23,756 $158,708
Variable rate loans totaled approximately $36.8 million and
are included in the one-year category.
First United Security Bank and Acceptance Loan Company (a
wholly owned subsidiary of First United Security Bank) began the
year with a combined balance in the allowance for loan losses of
$4.0 million. Total loans charged off in 1998 totaled $2.6 million.
Recoveries on loans previously charged off totaled $345,000,
resulting in net loan losses of $2.2 million. Net loan losses for
1997 totaled $798,000. Management allocated and charged to
operations $3.2 million in 1998 as an addition to the allowance for
loan losses. This compares to $1.7 million charged to operations
for 1997. The balance of $5.0 million at year end 1998 represented
2.0% of total loans outstanding and is considered adequate for
losses inherent in the portfolio.
Total loans outstanding on December 31, 1998 were $245
million. Of this total, loans by ALC amounted to $71.2 million.
This represents 29.1% of total loans outstanding. Of the $5.0
million balance in the allowance for loan losses account at
December 31, 1998, $1.9 million or 38.0% is represented by reserves
maintained for ALC loans.
Non-Performing Assets
The following table presents information on non-performing
loans and real estate acquired in settlement of loans.
December 31,
1998 1997 1996 1995 1994
(In Thousands of Dollars)
Non-Performing Assets:
Loans Accounted for on a Non-Accrual Basis $3,460 $1,488 $1,797 $ 169 $ 571
Accruing Loans Past Due 90 Days or More 1,610(1) 1,285 1,122 1,390 612
Real Estate Acquired in Settlement of Loans 215 506 18 63 429
Total $5,285 $3,279 $2,937 $1,622 $1,612
Percent of Net Loans and Other Real Estate 2.25% 1.52% 1.44% 0.90% 1.16%
(1) Acceptance Loan Company represents 57.5% of accruing loans past
due 90 days or more.
Accruing loans past due 90 days or more at December 31, 1998,
totaled $1.6 million. These loans are well secured and taking into
consideration the collateral value and the financial strength of
the borrowers, management believed there would be no loss in these
accounts and allowed the loans to continue accruing. These loans 90
days and more past due, whether on accrual or non-accrual, are
reviewed by the Board of Directors each month. Loans past due 90
days and more on Acceptance Loan Company totaled $925,370 at
December 31, 1998, or 57.5% of all loans past due 90 days and more
and still accruing.
At December 31, 1998, the Company had one loan considered to
be impaired. The amount of this loan, which is on non-accrual, is
$486,826 and the related allowance is $243,000. The average
recorded investment in impaired loans during the year ended
December 31, 1998 was approximately $512,750. For the year ended
December 31, 1998, the Company did not recognize interest income on
the impaired loan during the period the loan was considered
impaired. The Company had approximately $539,000 considered to be
impaired at December 31, 1997.
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 2.25% at December 31, 1998.
Loans past due 90 days or more and still accruing are reviewed
closely by management and are 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
frequent training, our lending officers are directed by the Bank's
written loan policy to make loans within our trade area, to obtain
adequate down payments on purchase-money transactions, and to lend
within policy guidelines on other transactions. In addition, the
Bank's loan review officer conducts an independent review of
individual loans by branch and officer.
First United Security Bank discontinues the accrual of
interest on a loan when management has reason to believe the
financial condition of the borrower has deteriorated so that the
collection of interest is in doubt. When a loan is placed on
non-accrual, all unpaid accrued interest is reversed against
current income unless the collateral securing the loan is
sufficient to cover the accrued interest. Interest received on
non-accrual loans is generally either applied against the principal
or reported as interest income, according to management's judgement
as to whether the borrower can ultimately repay the loan. A loan
may be restored to accrual status if the obligation is brought
current, performs in accordance with the contract for a reasonable
period, and if management determines that the repayment of the
total debt is no longer in doubt.
It is the policy of First United Security Bank to charge-off
immediately as loss all amounts judged to be uncollectible.
Management is aware that certain losses may exist in the loan
portfolio which have not been specifically identified. The
allowance for loan losses is established for this reason. This
allowance was $5.0 million at year-end and represented 2% of total
loans outstanding. Management believes this allowance is adequate
to absorb loan losses inherent in the portfolio.
Allocation of Allowance for Loan Losses
The following table shows an allocation of the allowance for
loan losses for each of the five years indicated.
December 31,
1998 1997 1996 1995 1994
Percent Percent Percent Percent Percent
of Loans of Loans of Loans of Loans of Loans
in Each in Each in Each in Each in Each
Category Category Category Category Category
Allowance to Total Allowance to Total Allowance to Total Allowance to Total Allowance to Total
Allocation Loans Allocation Loans Allocation Loans Allocation Loans Allocation Loans
(In Thousands of Dollars)
Commercial,
Financial, and
Agricultural $ 748 15% $1,416 16% $1,097 17% $ 370 18% $ 286 23%
Real Estate 499 50 405 57 313 60 493 62 190 59
Installment 3,742 35 2,225 27 1,724 23 1,604 20 1,428 18
Totals $4,989 100% $4,046 100% $3,134 100% $2,467 100% $1,904 100%
Note: First Bank & Trust did not allocate Allowance for Loan Losses by category.
Percentages for United Security Bank were used 1994-1996.
The table above is based, in part, on the loan portfolio
make-up, the Bank's internal risk evaluation, historical
charge-offs, past-due loans, non-accrual loans and management's
judgment. The reallocation of a larger percentage of the
consolidated allowance for loan losses to installment loans
resulted from growth in the ALC loan portfolio and the increase in
net charge-offs in the portfolio discussed below.
Net charge-offs as shown in the "Summary of Loan Loss
Experience" below indicates the trend for the last five years. Net
loan charge-offs as a percentage of average loans increased from
.38% in 1997 to .97% in 1998.
December 31,
1998 1997 1996 1995 1994
(In Thousands of Dollars)
Balance at Beginning of Period $ 4,046 $ 3,134 $2,467 $1,904 $1,792
Charge-Offs:
Commercial, Financial, and Agricultural (94) (299) (246) (201) (41)
Real Estate -- Mortgage (111) (20) (21) (6) (10)
Installment (2,373) (694) (497) (179) (144)
Credit Cards (11) (26) (9) (8) (9)
$(2,589) $(1,039) $ (773) $ (394) $ (204)
Recoveries:
Commercial, Financial and Agricultural $ 120 $ 110 $ 96 $ 52 $ 38
Real Estate -- Mortgage 15 18 0 5 0
Installment 305 107 117 62 51
Credit Cards 5 6 4 8 3
$ 345 $ 241 $ 217 $ 127 $ 92
Net Charge-Offs (Deduction) $(2,244) $ (798) $ (556) $ (267) $ (112)
Additions Charged to Operations 3,187 1,710 800 255 224
Allowances Acquired 0 0 423** 575* 0
Balance at End of Period $ 4,989 $ 4,046 $3,134 $2,467 $1,904
Ratio of Net Charge-Offs During Period to
Average Loans Outstanding 0.97% 0.38% 0.28% 0.16% 0.08%
* Acquisition of Bibb County Branches by First Bank and Trust in 1995.
** Acquisition of Brent Banking Company by United Security Bank in 1996.
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,
1998 1997 1996
(In Thousands of Dollars)
Total Loans Accounted for on a Non-Accrual Basis $3,460 $1,488 $1,798
Interest Income that Would Have Been Recorded
under Original Terms 340 154 91
Interest Income Reported and Recorded During
the Year 298 108 37
Total loans on non-accrual increased by $1,972,000 from
December 31, 1997 to December 31, 1998. The majority of the loans
in this category are in process of liquidation or management has
commitments from the principals involved for reduction during the
year. Underlying collateral values support those loans which are
not already in liquidation. Management continues to emphasize asset
quality and expects a significant reduction in 1999 of the $3.5
million still on non-accrual at year-end 1998. The Company believes
that it has adequate reserves for losses inherent in this portion
of the portfolio.
Lending officers and other personnel involved in the lending
process receive ongoing training in compliance as well as asset
quality. The Company has no foreign loans. The Company does not
make loans on commercial property outside our market area without
prior approval of the Board of Directors or the Directors' Loan
Committee. The Company is conservative in its lending directives.
Industry Concentration Factors
The First United Security Bank trade area includes Clarke,
Choctaw, 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 the Alabama River Companies, Boise
Cascade, Fort James 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 as of December 31, 1998. The amount of
timber related loans decreased from $49.2 million in 1997 to $41.5
million in 1998. The percentage of timber related loans to gross
loans decreased from 22.0% to 17.3%. The growth in ALC loans of
$27.3 million during 1998 helped to lower timber industry
concentration.
Timber Total Percentage of
Related Loans Gross Loans Total Loans
$41.5 million $245.0 million 16.94%
Management understands the concern about concentration of
loans in timber and timber-related industries. However, we continue
to feel these risks are reduced by the diversification of product
production within these industries. Some of the mills and
industries specialize in paper and pulp, some in lumber and
plywood, some in poles and pilings, and others in wood and veneer.
We do not believe that this concentration is excessive or that it
represents a trend which might materially impact future earnings,
liquidity, or capital resources of the Bank. Management does
realize the Company is heavily dependent on the economic health of
the timber-related industries. The Company continues to benefit
from the area industries engaged in the growing, harvesting,
processing and marketing of timber and timber-related products. The
majority of the land in our trade area is used to grow pine and
hardwood timber. Agricultural production loans make up less than 1
% of the Company's total loan portfolio.
The Company's market area for Bibb County, Alabama, and
surrounding counties gives us an opportunity to diversify. With the
opening of the Mercedes Benz manufacturing plant in Vance, Alabama,
in 1997, we now have three offices within 25 miles of the plant
site. One office is located only 7 miles from the plant. This area
continues to be one of the fastest growing corridors in the state.
The Company plans to open another new office in the area in the
spring of this year.
Investments in Limited Partnerships
First United Security Bank invests in limited partnerships
that operate qualified affordable housing projects to receive tax
benefits in the form of tax deductions from operating losses and
tax credits. The Bank accounts for the investments under either the
equity or the cost method based on the percentage ownership and
influence over operations. The Company's interest in these
partnerships was $4,234,447 and $4,272,547 for 1998 and 1997,
respectively. Costs associated with the partnerships carried under
the equity method amounted to approximately $128,000 and $122,000
for 1998 and 1997, respectively. Management analyzes these
investments annually for potential impairment. The assets and
liabilities of these partnerships consist primarily of apartment
complexes and related mortgages. United Security's carrying value
approximates cost or its underlying equity in the net assets of the
partnerships. The Company has remaining cash commitments to these
partnerships at December 31, 1998 in the amount of $360,000.
Although these investments are considered non-earning assets they
do contribute to the bottom line in the form of Federal income tax
credits. These credits amounted to $480,000 in 1997 and are
estimated to be approximately $490,000 for 1998. Also, operating
losses related to these partnerships are available as deductions
for taxes on the Company's books.
Deposits
Average total deposits have declined 2% during the last three
years, with a 7% decline in 1998. This lower deposit level was
affected by the competitive interest rate environment, the sale of
one branch facility and the availability of other low rate funding.
Average non-interest bearing demand deposits have decreased
5.4% over the last three years, while the decline for 1998 was
9.2%. The ratio of average non-interest bearing deposits to average
total deposits remained relatively steady in 1998 at 12.2% from
12.5% in 1997 and 12.7% in 1996.
Average interest-bearing transaction accounts have decreased
13% during the last three years partly because the Bank
reclassified a portion of interest-bearing transaction accounts to
money market savings accounts, resulting in a 7.0% decline in 1997.
Nevertheless, interest-bearing transaction accounts continue to be
an important source of funds for the Bank, accounting for 18.6 % of
average total deposits in 1998.
During the last three years, average time deposits declined
2.9%. This represents a decrease of over $5 million. Average time
deposits decreased by 7% in 1998, compared to an increase of 4.2%
in 1997. Time deposits represented 56.1% of the total average
deposits in 1998 and 1997 compared to 56.7% in 1996. This decline
was a result of a repricing strategy to reduce the dependency on
mostly high cost price sensitive certificates of deposit.
Average savings deposits have grown 34.9% since 1996. Average
savings declined 4.7% in 1998. The ratio of average savings to
average total deposits increased to 13.0% in 1998 compared to 12.7%
in 1997 and 9.4% in 1996.
First United Security Bank's deposit base remains the primary
source of funding for the Bank. These deposits represented 73.1% of
the average earning assets in 1998 and 85.9% of the average earning
assets in 1997. As seen in the following table, overall rates on
the deposits increased to 3.89% in 1998, compared to 3.84% in 1997
and 3.98% in 1996. This rate change reflects a somewhat stable
interest rate environment. Emphasis continues to be placed on
placed on attracting consumer deposits. It is First United Security
Bank's intent to expand its consumer deposit base in order
to continue to fund asset growth through growth in demand deposits
and consumer certificates of deposit.
In June, 1996, Brent Banking Company was acquired
ition contributed approximately $33 mile in the conrion to the total
deposits; however, the average total calculation for 1996 was
limited to a partial year. Effective November 1997, approximately
$9.8 million in deposits were sold as directed by the United States
Department of Justice to facilitate the merger between First Bank
and Trust and United Security Bank. The sale of deposits had a
significant impact on the reduced average deposits in 1998.
Management, as part of an overall program to emphasize the
growth of transaction accounts, will introduce "on-line" banking
and a bill paying program as well as enhance the existing "Loyalty"
banking program and telephone banking. In addition, an increased
effort will be placed on promotions, direct mail campaigns and
cross selling efforts. This will be accomplished by remaining safe
and sound, emphasizing our products and providing quality service.
Other Interest-Bearing Liabilities -- Other interest-bearing
liabilities include all interest-bearing liabilities except
deposits, such as: federal funds purchased, securities sold under
agreement to repurchase (repurchase agreements), and Federal Home
Loan Bank advances. This category continues to be used as an
alternative source of funds. The $19.8 million or 57.1% average
increase in 1998 is due to an increase in volume of long term
advances from the Federal Home Loan Bank (FHLB). While deposit
rates increased slightly in 1998, the average rates on the other
liabilities declined by 51 basis points in 1998.
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,
1998 1997 1996
Amount Rate Amount Rate Amount Rate
(In Thousands of Dollars, Except Percentages)
Non-Interest Bearing DDA $ 39,308 $ 43,300 $ 41,543
Interest-Bearing DDA 59,794 2.32% 64,607 2.54% 69,461 2.74%
Savings Deposits 41,728 2.72 43,797 2.78 30,939 2.87
Time Deposits 180,128 5.44 193,738 5.37 185,588 5.51
Total $320,958 3.89% $345,442 3.84% $327,531 3.98%
Maturities of Time Certificates of Deposits and Other Time
Deposits of $100,000 or more outstanding at December 31, 1998, are
summarized as follows:
Time Other
Certificates Time
Maturities of Deposits Deposits Total
(In Thousands of Dollars)
3 Months or Less $12,985,179 $16,840,928 $19,826,107
Over 3 Through 6 Months 6,708,330 0 6,708,330
Over 6 Through 12 Months 5,665,526 0 5,665,526
Over 12 Months 15,189,138 0 15,189,138
Total $40,548,173 $16,840,928 $47,389,101
Investment Securities and Securities Available for Sale
Securities available for sale include Collateralized Mortgage
Obligations ("CMOs") of $101.3 million, other mortgage backed
securities of $31.3 million, state, county and municipal securities
of $23.8 million, and other securities of $3.1 million. The total
securities portfolio decreased $8.5 million or 4.9% from December
1997 to December 1998. The decrease is a result of increased loan
demand and general market conditions.
At December 1998, approximately $90.5 million in CMOs had
floating interest rates which reprice monthly and $10.8 million had
fixed interest rates.
Because of their liquidity, credit quality and yield
characteristics, the majority of the purchases of taxable
securities have been purchases of agency guaranteed mortgage-backed
obligations and collateralized mortgage obligations. The
mortgage-backed obligations in which United Security invests
represent an undivided interest in a pool of residential mortgages
or may be collateralized by a pool of residential mortgages
("mortgage-backed securities"). Mortgage-backed securities have
yield and maturity characteristics corresponding to the underlying
mortgages and are subject to any prepayments of principal due to
prepayment, refinancing, or foreclosure of the underlying
mortgages. Although maturities of the underlying mortgage loans may
range up to 30 years, amortization and prepayments substantially
shorten the effective maturities of mortgage-backed securities.
Transactions in these securities have focused on the three to seven
year average maturity range. Principal and interest payments also
add significant liquidity to the balance sheet. In 1997, there was
a continuing emphasis in CMOs, all of which are collateralized by
U. S. Government and Agency Mortgage Pools. The CMO market in
existence since 1983 was created to add liquidity to the
mortgage-backed security ("MBS") market by furnishing better
distribution of risk/reward profiles. Since CMOs are derived from
MBS pools, they are labeled mortgage derivatives.
Although the Federal Financial Institution Examination Council
no longer requires that all MBS derivatives be tested for
suitability as an investment in the portfolio of financial
institutions, First United Security Bank continues to run these
tests at purchase and periodically thereafter. The three tests
being performed are as follows:
#1 -- Average Life Test --
The expected average life of the security must be less than
or equal to 10 years.
#2 -- Average Life Sensitivity Test --
The average life of the security will not extend by more than
4 years or shorten by more than 6 years for immediate
Treasury curve shifts of +/- 300 basis points (3%).
#3 -- Price Sensitivity Test --
The estimated price of the security will not change by more
than 17% for immediate Treasury curve shifts of +/- 300 basis
points.
Securities that do not pass all three tests are designated
"high risk".
United Security held $37.7 million in securities which, at
December 31, 1998, were designated high risk. $5 million of these
securities were floating rate, and $24.8 million were inverse
floating rate securities and $7.9 million were fixed rate
securities. These securities were purchased and/or are being held
to hedge certain areas of interest rate risk in the portfolio and
balance sheet. There were unrealized losses in this portion of the
portfolio at December 31, 1998 of $800,000.
The overall securities portfolio is formally monitored on a
monthly basis, and assessments are made continually relative to
United Security's exposure to fluctuations in interest rates.
Changes in the level of earnings and fair values of securities are
generally attributable to fluctuations in interest rates, as well
as volatility caused by general uncertainty over the economy,
inflation, and future interest rate trends. MBS and CMOs present
some degree of additional risk in that mortgages collateralizing
these securities can be prepaid, thereby affecting the yield and
market value of the portfolio.
The composition of United Security's investment portfolio
reflects United Security's investment strategy of maximizing
portfolio yields commensurate with risk and liquidity
considerations. The primary objectives of United Security's
investment strategy are to maintain an appropriate level of
liquidity and provide a tool to assist in controlling United
Security's interest rate position while at the same time producing
adequate levels of interest income.
Fair market 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.12,620 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 19 in the "Notes to
Consolidated Financial Statements".
Investment Securities Available-for-Sale
The following table sets forth the carrying value of
investment securities at the dates indicated.
December 31,
1998 1997 1996
(In Thousands of Dollars)
Investment Securities Available for Sale:
U.S. Treasury and Agencies Securities $ 2,090 $ 2,096 $ 4,987
Obligations of States, Counties, and
Political Subdivisions 23,841 22,228 32,113
Mortgage-Backed Securities 132,588 144,310 145,098
Other Securities 3,076 2,245 3,336
Unrealized Gains (Losses) 4,514 1,620 1,672
Total $164,019 $172,499 $187,206
Investment Securities Available-for-Sale Maturity Schedule
Maturing
After One After Five
Within But Within But Within After
One Year Five Years 10 Years 10 Years
Amount Yield Amount Yield Amount Yield Amount Yield
(In Thousands of Dollars, Except Yields)
Investment Securities
Available for Sale:
U.S. Treasury and Agency
Securities $ 500 0.00% $ 0 0.00% $ 0 0.00% $ 1,560 0.00%
State, County and Municipal
Obligations 1,081 6.79% 3,994 6.88% 3,498 6.46% 16,955 5.53%
Mortgage-Backed
Securities 90 7.68% 35 3.97% 13,911 7.52% 121,350 6.67%
Other 3,094 7.18% 11 7.93% 0 0.00% 0 0.00%
Total $4,265 7.09% $4,040 6.85% $17,409 7.31% $138,305 6.53%
TOTAL $164,019 6.64%
*Available for Sale Securities are stated at Market Value and Market Yield
The maturities and weighted average yields of investment
securities available-for-sale at the end of 1998 are presented in
the preceding table based on stated maturity. While the average
stated maturity of the Mortgage Backed Securities (excluding CMO's)
was 25.40 years, the average life expected is 6.83 years. The
average stated maturity of the CMO portion of the portfolio was
23.02 years, and the average expected life was 4.06 years. The
average expected life of investment securities available-for-sale
was 5.02 years with an average yield of 6.64 percent.
Condensed Portfolio Maturity Schedule
Dollar Portfolio
Maturity Summary Amount Percentage
Maturing in 3 months or less $ 1,398,017 0.25%
Maturing in 3 months to 1 year 841,254 0.52
Maturing in 1 to 3 years 2,313,859 1.44
Maturing in 3 to 5 years 1,931,698 1.20
Maturing in 5 to 15 years 29,626,597 18.40
Maturing in over 15 years 125,880,884 78.19
Total $160,992,309 100.00%
The following Marketable Equity Securities have been excluded from
the above Maturity Summary due to no stated maturity date.
Federal Home Loan Bank Stock $2,795,400
Mutual Funds $2,710,014
Other Marketable Equity Securities $2,221,688
Condensed Portfolio Repricing Schedule
Dollar Portfolio
Repricing Summary Amount Percentage
Repricing in 30 days or less $192,105,929 57.21%
Repricing in 31 days to 1 year 841,254 0.52
Repricing in 1 to 3 years 2,313,859 1.44
Repricing in 3 to 5 years 1,726,891 1.07
Repricing in 5 to 15 years 17,801,650 11.06
Repricing in over 15 years 46,202,726 28.70
Total $160,992,309 100.00%
Repricing in 30 days or less does not include:
Mutual Funds $2,710,014
Repricing in 31 days to 1 year does not include:
Federal Home Loan Bank Stock $2,795,400
Other Marketable Equity Securities $ 221,688
The tables above reflect all securities at market value on December
31, 1998.
Securities Gains and Losses
Non-interest income from securities transactions, trading
account transactions, and associated option premium income
increased dramatically in 1998 compared to 1997, as can be seen in
the table below. The majority of the profits realized in 1998 were
generated through the sale of securities. Gains in the investment
securities area occurred in connection with United Security's asset
and liability management activities and strategies. Options income
and other off-balance sheet income declined 19.37% from $396,772 to
$319,918. Although this income should be considered non-recurring,
it is expected that $123,000 will be recognized in 1999. This
income which will be received in 1999 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 1998, 1997, and 1996:
1998 1997 1996
Investment Securities $ 410,987 $ 105,254 $ (186,802)
Trading Account 0 10,187 (2,031)
Total $ 410,987 $ 115,441 $ (188,833)
Gains in 1998 from sales of investment securities were net of
losses of $829,183. Volume of sales as well as other information on
securities is further discussed in Note 4 to the financial
statements.
Short-Term Borrowings
Purchased funds can be used to satisfy daily funding needs,
and when advantageous, for arbitrage. The following table shows
information for the last three years regarding the Bank's short-
and long-term borrowings consisting of U. S. Treasury demand notes
included in its Treasury, Tax, and Loan Account, securities sold
under repurchase agreements, Federal Fund purchases (one day
purchases), and other borrowings from the Federal Home Loan Bank.
Short-Term Long-Term
Borrowings Borrowings
Maturity Maturity
Less Than One Year
One Year or Greater
(In Thousands of Dollars)
Year Ended December 31,:
1998 $22,212 $55,847
1997 3,913 40,966
1996 22,443 9,088
Weighted Average Interest Rate at Year-end:
1998 4.41% 5.04%
1997 5.23% 5.83%
1996 5.44% 7.50%
Maximum Amount Outstanding at Any Month's End:
1998 $11,620 $55,906
1997 11,936 40,973
1996 43,310 9,164
Average Amount Outstanding During the Year:
1998 $3,929 $55,454
1997 3,210 30,296
1996 26,669 9,130
Weighted Average Interest Rate During the Year:
1998 5.87% 5.53%
1997 5.80% 5.83%
1996 5.49% 7.50%
During January of 1997, United Security converted Federal Home
Loan Bank short-term borrowings to long-term borrowings.
Balances in these accounts fluctuate dramatically on a
day-to-day basis. Rates on these balances also fluctuate daily, but
as reflected in the chart above, they generally depicit the current
interest rate environment.
Shareholders' Equity
United Security has always placed great emphasis on
maintaining its strong capital base. At December 31, 1998,
shareholders' equity totaled $60.5 million, or 13.5% of total
assets compared to 12.4% and 11.1% for the same periods in 1997
and 1996, 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 $41.8
million at the beginning of 1996 to $60.5 million at the end of
1998. All of this growth was the result of internally generated
retained earnings, with the exception of the market value
adjustment of $2.8 million made for the available for sale
investments as required by Statement of Financial Accounting
Standards No. 115 and $179,930 from treasury stock retirement and
stock options being exercised. The internal capital generation rate
(net income less cash dividends as a percentage of average
shareholders' equity) was 10.3% in 1998, 10.2% in 1997 and 12.6% in
1996.
United Security is required to comply with capital adequacy
standards established by the Federal Reserve and FDIC. Currently,
there are two basic measures of capital adequacy: a risk-based
measure and a leverage measure. The risk-based capital standards
are designed to make regulatory capital requirements more sensitive
to differences in risk profile among banks and bank holding
companies, to account for off-balance sheet exposure, and to
minimize disincentives for holding liquid assets. Assets and
off-balance sheet items are assigned to risk categories, each with
a specified risk weighting factor. The resulting capital ratios
represented capital as a percentage of total risk weighted assets
and off-balance sheet items.
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 regulatory
capital requirements. United Security's capital ratios at December
31, 1998, substantially exceeded all regulatory requirements.
Risk-Based Capital Requirements
Minimum United Security's
Regulatory Ratio at
Requirement December 31, 1998
Tier I Capital to Risk-Adjusted Assets 4.00% 16.20%
Total Capital to Risk-Adjusted Assets 8.00% 17.37%
Tier I Leverage Ratio 3.00% 12.07%
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 $2.7 million or $.76 per share in 1998 compared
to $.53 per share in 1997 and $.40 per share in 1996. The total
cash dividends represented a payout ratio of 31.4% in 1998 with a
payout ratio of 26.8% and 20.2% in 1997 and 1996 respectively. This
is the tenth 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,
1998 1997 1996
Return on Average Assets 1.95% 1.61% 1.70%
Return on Average Equity 14.94% 13.92% 15.83%
Cash Dividend Payout Ratio 31.40% 26.79% 20.21%
Average Equity to Average Assets Ratio 13.07% 11.55% 10.73%
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 $116.5 million at December 31, 1998.
Investment securities maturing or repricing in the same time
frame totaled $96 million or 58.5% of the investment portfolio at
year-end 1998. In addition, principal payments on mortgage backed
securities totaled $9.3 million in 1998. For repricing purposes,
$13.6 million 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, short-term, and long-term borrowings are additional
sources of liquidity. Liquidity management involves the continual
monitoring of the sources and uses of funds to maintain an
acceptable cash position. Long-term liquidity management focuses on
considerations related to the total balance sheet structure.
As shown in the Consolidated Statements of Cash Flows,
operating activities provided significant levels of funds in 1998,
1997 and 1996, due primarily to high levels of net income. In 1998,
other items providing cash from operating activities were
depreciation, provision for loan losses and amortization of
premiums and discounts. Cash flows from investing activities saw
most of the proceeds from maturities and prepayments on investment
securities being used to finance loan growth. Cash flows from
financing activities saw an increase in customer deposits and $2.7
million in dividends paid. Advances from the Federal Home Loan Bank
and other borrowings increased $11 million. Net cash and cash
equivalents increased $12.3 million as a result of the activities
mentioned above.
Although the majority of the securities portfolio has stated
maturities in excess of ten years, the entire portfolio consists of
securities that are readily marketable and which are easily
convertible into cash. However, management does not necessarily
rely upon the investment portfolio to generate cash flows to fund
loans, capital expenditures, dividends, debt repayment, etc.
Instead, these activities are funded by cash flows from operating
activities and increases in deposits and short-term borrowings. The
proceeds from sales and maturities of investments have been used
either to purchase additional investments or to fund loan growth.
United Security, at December 31, 1998, had long-term debt and
short-term borrowings that on average represent 13.5 percent of
total liabilities and equity.
United Security currently has up to $75 million in borrowing
capacity from the Federal Home Loan Bank and $17 million in
established Federal Funds Lines.
Interest rate sensitivity is a function of the repricing
characteristics of the portfolio of assets and liabilities. These
repricing characteristics are the time frames during which the
interest-bearing assets and liabilities are subject to changes in
interest rates, either at replacement or maturity, during the life
of the instruments. Sensitivity is measured as the difference
between the volume of assets and the volume of liabilities in the
current portfolio that are subject to repricing in future time
periods. These differences are known as interest sensitivity gaps
and are usually calculated for segments of time and on a cumulative
basis.
Changes in the mix of earning assets or supporting liabilities
can either increase or decrease the net interest margin without
affecting interest rate sensitivity. In addition, the interest rate
spread between an asset and its supporting liability can vary
significantly, while the timing of repricing for both the asset and
the liability remains the same, thus affecting net interest income.
It should be noted, therefore, that a matched interest-sensitive
position by itself will not ensure maximum net interest income.
Management continually evaluates the condition of the economy, the
pattern of market interest rates, and other economic data to
determine the types of investments that should be made and at what
maturities. Using this analysis, management from time to time
assumes calculated interest sensitivity gap positions to maximize
net interest income based upon anticipated movements in general
levels of interest rates.
Measuring Interest Rate Sensitivity: Gap analysis is a
technique used to measure interest rate sensitivity, an example of
which is presented below. Assets and liabilities are placed in gap
intervals based on their repricing dates. Assets and liabilities
for which no specific repricing dates exist are placed in gap
intervals based on management's judgment concerning their most
likely repricing behaviors. Derivatives used in interest rate
sensitivity management are also included in the applicable gap
intervals.
A net gap for each time period is calculated by subtracting
the liabilities repricing in that interval from the assets
repricing. A positive gap -- more assets repricing than liabilities
- -- will benefit net interest income if rates are rising and will
detract from net interest income in a falling rate environment.
Conversely, a negative gap -- more liabilities repricing than assets
- -- will benefit net interest income in a declining interest rate
environment and will detract from net interest income in a rising
interest rate environment.
Gap analysis is the simplest representation of United
Security's interest rate sensitivity. However, it cannot reveal the
impact of factors such as 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, 1998, as measured by gap analysis. Over
the next 12 months approximately $364,000 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 slightly from a rising rate
environment according to the table.
Interest Rate Sensitivity Analysis
December 31, 1998
(In Thousands of Dollars)
Total
0-3 4-12 1 Year 1-5 Over 5 Non-Rate
Months Months or Less Years Years Sensitive Total
Earning Assets:
Loans (Net of
Unearned Income) $ 72,706 $ 43,794 $116,500 $102,150 $21,399 $ 0 $240,049
Investment Securities 98,322 10,931 109,253 22,637 32,129 0 164,019
Interest Bearing Deposits
in Other Banks 928 0 928 0 0 928
Total Earning Assets $171,956 $ 54,725 $226,681 $124,787 $53,528 $ 0 $404,996
Percent of Total Earning
Assets 42.5% 13.5% 56.0% 30.8% 13.2% 100.0%
Interest-Bearing Liabilities:
Interest-Bearing Deposits
and Liabilities
Demand Deposits (1) $ 51,669 $ 0 $ 51,669 $ 12,917 $ 0 $ 0 $ 64,586
Savings Deposits (1) 19,901 0 19,901 19,901 0 0 39,802
Time Deposits 58,930 77,192 136,122 46,529 0 0 182,651
Other Liabilities 10,041 7,587 17,628 37,964 267 0 55,859
Non-Interest-Bearing
Liabilities
Demand Deposits 997 0 997 0 0 38,789 39,786
Equity 0 0 0 0 0 22,312 22,312
Total Funding Sources $141,538 $ 84,779 $226,317 $117,311 $ 267 $ 61,101 $404,996
Percent of Total
Funding Sources 34.9% 20.9% 55.9% 29.0% 0.1% 15.1% 100.0%
Interest Sensitivity Gap
(Balance Sheet) $ 30,418 $(30,054) $ (9,364 $ 37,476 $53,261 $(61,101) $ 0
Off-Balance Sheet $ (5,000) $ 0 $ (5,000) $ 5,000 $ 0 $ 0 $ 0
Interest Sensitive Gap $ 25,418 $(30,054) $ (4,636) $ 12,476 $53,261 $(61,101) $ 0
Cumulative Interest-
Sensitive Gap $ 25,418 $ (4,636) $ N/A $ 27,840 $61,101 $ 0 $ 0
Over 5
Total Years
0-3 4-12 1 Year 1-5 Non-Rate
Months Months or Less Years Sensitive Total
Ratio of Earning Assets
to Funding Sources and
Off-Balance Sheet 1.17% 0.65% 0.98% 1.11% 0.87% 1.00%
Cumulative Ratio 1.17% 0.98% N/A 1.02% 1.00% 1.00%
(1) Management adjustments reflects the Company's anticipated
repricing sensitivity of non-maturity deposit products.
Historically, balances on non-maturity deposit accounts have
remained relatively stable despite changes in market interest
rates. Management has classified certain of these accounts as
non-rate sensitive based on management's historical pricing
practices and runoff experience. Approximately 20% of the
interest-bearing demand deposit account balances and 50% of the
savings account balances are classified as over one year.
Certain interest-sensitive assets and liabilities are included
in the table based on historical repricing experience and expected
prepayments in the case of Mortgage Backed Securities rather than
contractual maturities. Non-accruing loans are included in loans at
the contractual maturity.
United Security also uses additional tools to monitor and
manage interest rate risk sensitivity. These tools include income
simulation analysis and duration analysis. Both analyses are
methods of estimating earnings at risk and capital at risk under
varying interest rate conditions. They are used to test the
sensitivity of net interest income and stockholders' equity to the
level of interest and include adjustments for the expected timing
and the magnitude of assets and liability cash flows. Also, these
measures capture adjustments for the lag