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USBI > SEC Filings for USBI > Form 10-Q on 14-Nov-2011All Recent SEC Filings

Show all filings for UNITED SECURITY BANCSHARES INC

Form 10-Q for UNITED SECURITY BANCSHARES INC


14-Nov-2011

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and financial information are presented to aid in an understanding of the current consolidated financial position, changes in financial position, results of operations and cash flows of United Security Bancshares, Inc. (the "Company" or "USBI"). The Company is the parent holding company of First United Security Bank (the "Bank" or "FUSB"). The Bank operates a finance company, Acceptance Loan Company, Inc. ("ALC"). The Company has no operations of any consequence other than the ownership of its subsidiaries.

The accounting principles and reporting policies of the Company, and the methods of applying these principles, conform with accounting principles generally accepted in the United States of America ("GAAP") and with general practices within the financial services industry. Critical accounting policies relate to securities, loans, allowance for loan losses, derivatives and hedging. A description of these estimates, which significantly affect the determination of consolidated financial position, results of operations and cash flows, is set forth in Note 2, "Summary of Significant Accounting Policies," of the Notes to Consolidated Financial Statements in the Company's Annual Report on Form 10-K for the year ended December 31, 2010, as amended.

The emphasis of this discussion is a comparison of assets, liabilities and shareholders' equity as of September 30, 2011 to year-end 2010, while comparing income and expense for the three- and nine-month periods ended September 30, 2011 and 2010.

All yields and ratios presented and discussed herein are based on the accrual basis and not on the tax-equivalent basis, unless otherwise indicated.

This information should be read in conjunction with the Company's unaudited consolidated financial statements and related notes appearing elsewhere in this report and Management's Discussion and Analysis of Financial Condition and Results of Operations appearing in the Company's Annual Report on Form 10-K for the year ended December 31, 2010, as amended.

COMPARING THE THREE- AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2011 TO THE THREE- AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2010

Net loss attributable to USBI during the third quarter of 2011 was $1.3 million, compared to net income attributable to USBI of $0.4 million for the same period of 2010, resulting in a decrease of basic net income (loss) attributable to USBI per share from $0.06 to $(0.22). Net income attributable to USBI decreased from $3.3 million for the nine months ended September 30, 2010 to $0.4 million for the nine months ended September 30, 2011, resulting in a decrease in basic net income attributable to USBI per share to $0.07 from $0.55. Annualized return on assets was 0.1% for the first nine months of 2011, compared to 0.7% for the same period during 2010. Average return on shareholders' equity decreased to 0.7% for the first nine months of 2011 from 5.3% during the first nine months of 2010.

For the three-month period ended September 30, 2011, the Bank had net loss of $1.3 million, compared to net income of $59,000 for the same quarter in 2010. For the nine-month period ended September 30, 2011, the Bank had net loss of $3,000, compared to net income of $165,000 for the same period in 2010. Decreases in net income for the Bank resulted from higher provisions for loan losses as a result of higher charge-offs in both periods. These charge-offs resulted mainly from the foreclosure of several commercial real estate loans as real estate values continue to decline and market conditions continue to be depressed. The impairment loss on other real estate owned of $3.0 million realized in the third quarter of 2011 also contributed to the decrease in net income.

Net income attributable to ALC for the three-month period ending September 30, 2011 was $82,000, compared to $331,000 for the same quarter of 2010. For the nine-month period ended September 30, 2011, net income attributable to ALC was $720,000, compared to $3.3 million in 2010. In the second quarter of 2010, net income at ALC benefited from the net proceeds in the amount of $3.8 million from a settlement in connection with a fidelity insurance policy issued by The Cincinnati Insurance Company.

Interest income for the 2011 third quarter decreased $718,000, or 6.3%, compared to the third quarter of 2010. The decrease in interest income was primarily due to a decrease in interest earned on loans and investment securities resulting from an overall decrease in the average yield on loans and investment securities. For the nine months ending September 30, 2011, interest income decreased $2.1 million, or 6.2%, compared with the same period last year. This decrease in interest income was primarily due to a decrease in interest earned on loans resulting from an overall decrease in the average yield on loans and a decrease in the average yield and volume of investment


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securities. Interest income at the Bank for the 2011 third quarter decreased $264,000 compared to the third quarter of 2010. For the nine months ended September 30, 2011, interest income at the Bank decreased $228,000, compared to the same period in 2010. These decreases were due to an overall decrease in the average yield and average volume of loans and investment securities. Loan demand continues to be weak due to continuing difficult economic conditions. Cash flows from loans and investment securities were reinvested at lower rates, resulting in lower interest income. Interest income at ALC increased $273,000 for the third quarter of 2011 compared to the same quarter in 2010. Interest income at ALC increased $661,000 for the nine-month period ended September 30, 2011 compared to the same period in 2010.

Interest expense for the Company for the 2011 third quarter decreased $725,000, or 29.6%, compared to the third quarter of 2010. Interest expense decreased $2.5 million, or 32.0%, to $5.4 million for the first nine months of 2011, compared to $7.9 million for the first nine months of 2010. These decreases were the result of lower interest rates paid on certificates of deposit and borrowed funds for these periods in 2011. As longer term certificates of deposit mature, they reprice at lower rates, as rates on deposits and borrowed funds remain at record lows.

Net interest income increased $7,000, or 0.1%, for the third quarter of 2011 and increased $427,000, or 1.7%, for the first nine months of 2011 compared to the same periods in 2010, respectively. The net interest margin improved from 5.74% for the nine months ended September 30, 2010 to 6.18% for the nine months ended September 30, 2011 and from 6.01% for the third quarter of 2010 to 6.19% for the third quarter of 2011. Loan and investment yields declined for the three- and nine-month periods ended September 30, 2011 compared to the same periods in 2010. The cost of funds declined due to a decline in interest rates paid on interest bearing deposits and borrowed funds. Asset yields and funds costs have stabilized, and the net interest margin is expected to remain near current levels until the Federal Reserve adjusts rates.

The provision for loan losses was $2.3 million, or 2.2% annualized of average loans, in the third quarter of 2011, compared to $1.4 million, or 1.4% annualized of average loans, in the third quarter of 2010. The provision for loan losses decreased to $5.2 million for the nine months ended September 30, 2011, compared to $6.8 million for the same period in 2010. The annualized provision as a percent of average loans was 1.7% and 2.2% for the first nine months of 2011 and 2010, respectively. Charge-offs exceeded recoveries by $10.9 million for the nine months ended September 30, 2011, an increase of approximately $3.8 million over the same period in the prior year. See "CREDIT QUALITY." The provision for loan losses at the Bank decreased to $3.3 million for the nine months ended September 30, 2011, compared to $5.4 million for the same period in 2010. For the quarter ended September 30, 2011, the provision for loan losses at the Bank was $1.6 million, an increase from $908,000 for the same quarter of 2010. Despite continued weakness in residential and commercial real estate and high unemployment levels in our market areas, the year-to-date net charge-offs and the provisions for loan losses have declined when compared to the first nine months of 2010. The provision for loan losses at ALC increased to $1.9 million for the nine months ended September 30, 2011, compared to $1.4 million for the same period in 2010. For the quarter ended September 30, 2011, the provision for loan losses at ALC was $688,000, compared to $478,000 for the third quarter of 2010. While non-performing loans at ALC declined, net charge-offs, primarily in the consumer portfolio, increased, requiring increased provision for loan losses for both the three and nine months ended September 30, 2011 compared to the same periods in 2010. Net charge-offs were $1.9 million and $2.0 million for September 30, 2010 and September 30, 2011, respectively.

Total non-interest income for the Company increased $37,000, or 2.4%, for the third quarter of 2011 and decreased $3.7 million, or 42.7%, for the first nine months of 2011 compared to the same periods in 2010, respectively. Service charges and fees on deposit accounts decreased $83,000 for the 2011 third quarter and $94,000 for the nine months ended September 30, 2011, compared to the same periods in 2010, respectively. Credit life insurance income decreased $14,000 for the 2011 third quarter and decreased $16,000 for the nine months ended September 30, 2011, compared to the same periods in 2010, respectively. All other fees decreased $3.6 million for the nine months ended September 30, 2011 compared to the same period of 2010 as a result of the settlement with The Cincinnati Insurance Company of $4.2 million in the first quarter of 2010.

Total non-interest expense increased $1.7 million, or 19.2%, for the 2011 third quarter and increased $2.7 million, or 11.7%, for the nine months ended September 30, 2011 compared to the same periods in 2010. Salary and employee benefits increased $341,000, when comparing the third quarter of 2011 to the same period in 2010, and increased $676,000 for the nine months ended September 30, 2011 compared to the same period in 2010. For the 2011 third quarter, impairment on other real estate increased $925,000, and realized loss on the sale of other real estate increased $199,000. Legal and professional fees decreased $38,000 for the 2011 third quarter and decreased $476,000 for the nine month period ended September 30, 2011 when compared to the same periods in 2010. All other expense increased $431,000 for the 2011 third quarter and $868,000 for the nine month period ending September 30, 2011 when compared to the same periods in 2010.


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Income tax benefit for the third quarter of 2011 was $979,000, compared to income tax benefit of $100,000 in the third quarter of 2010. Income tax expense declined from $1.2 million in 2010 to a benefit of $411,000 in 2011. The decrease during the first nine months of 2011 compared to 2010 resulted from lower levels of taxable income. Management estimates the effective tax rate for the Company to be approximately 30.0% of pre-tax income for the period ending December 31, 2011.

COMPARING THE SEPTEMBER 30, 2011 STATEMENTS OF FINANCIAL CONDITION TO DECEMBER
31, 2010

In comparing consolidated financial condition at September 30, 2011 to December 31, 2010, total assets increased $17.1 million to $638.8 million, while liabilities increased $14.1 million to $561.3 million. Shareholders' equity increased $2.9 million as a result of an increase in other comprehensive income of $1.4 million, earnings in excess of dividends of $172,000 and a $1.4 million increase related to the deconsolidation of a variable interest entity (see Note 7 to the Condensed Consolidated Financial Statements).

Investment securities increased $4.3 million, or 3.2%, during the first nine months of 2011. Investments provide the Company with a stable form of liquidity while maximizing earnings yield. Loans, net of unearned income, decreased $10.8 million, from $408.4 million at December 31, 2010 to $397.6 million at September 30, 2011. Loan growth at the Bank has been flat due to the slowdown in construction and real estate development in the trade areas served by the Company and the Bank. Deposits increased $27.8 million, or 5.5%, during the first nine months of 2011. Loans, net of unearned income at ALC decreased $2.3 million, from $84.6 million at December 31, 2010 to $82.3 million at September 30, 2011. Loans at the Bank, after consolidation eliminations, decreased $8.5 million from $323.8 million at December 31, 2010 to $315.3 million at September 30, 2011.

The Company maintains the allowance for loan losses at a level deemed adequate by management to absorb possible losses from loans in the portfolio. In determining the adequacy of the allowance for loan losses, management considers numerous factors, including, but not limited to, management's estimate of:
(a) future economic conditions, (b) the financial condition and liquidity of certain loan customers and (c) collateral values of property securing certain loans. Because these factors and others involve the use of management's estimation and judgment, the allowance for loan losses is inherently subject to adjustment at future dates. Unfavorable changes in the factors used by management to determine the adequacy of the allowance, including increased loan delinquencies and subsequent charge-offs, or the availability of new information, could require additional provisions, in excess of normal provisions, to the allowance for loan losses in future periods. There can be no assurance that loan losses in future periods will not exceed the allowance for loan losses or that additions to the allowances will not be required.

At September 30, 2011, the allowance for loan losses was $15.3 million, or 3.8% of loans net of unearned income, compared to $9.8 million, or 2.4% of loans net of unearned income, at September 30, 2010, and $20.9 million, or 5.1% of loans net of unearned income, at December 31, 2010. The coverage ratio of the allowance for loan losses to non-performing assets decreased to 33.2% at September 30, 2011, compared to 47.1% at December 31, 2010. At September 30, 2011, loans on non-accrual increased $6.3 million, accruing loans past due 90 days or more decreased $2.2 million and real estate acquired in settlement of loans decreased $2.6 million, each as compared to December 31, 2010.

Net charge-offs as of the quarter ended September 30, 2011 were $10.9 million, or 3.5% of average loans on an annualized basis, an increase of 54.4%, or $3.8 million, from the charge-offs of $7.0 million, or 2.3% of average loans on an annualized basis, reported a year earlier. The provision for loan losses for the first nine months of 2011 was $5.2 million, compared to $6.8 million in the first nine months of 2010.

Non-performing assets were as follows (dollars in thousands):

                                                                    Consolidated
                                             September 30,          December 31,          September 30,
                                                 2011                   2010                  2010
Loans Accounted for on a Non-Accrual
Basis                                       $        19,901        $       13,572        $         9,286
Accruing Loans Past Due 90 Days or More               3,083                 5,237                  5,020
Real Estate Acquired in Settlement of
Loans                                                22,993                25,632                 27,992

Total                                       $        45,977        $       44,441        $        42,298
Non-Performing Assets as a Percentage
of Net Loans and Other Real Estate                    10.93 %               10.24 %                 9.73 %


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                                                                        FUSB
                                             September 30,          December 31,          September 30,
                                                 2011                   2010                  2010
Loans Accounted for on a Non-Accrual
Basis                                       $        18,537        $       12,276        $         7,613
Accruing Loans Past Due 90 Days or More                 383                 2,612                  2,450
Real Estate Acquired in Settlement of
Loans                                                17,688                19,002                 21,378

Total                                       $        36,608        $       33,890        $        31,441
Non-Performing Assets as a Percentage
of Net Loans and Other Real Estate                    10.99 %                9.89 %                 9.17 %

                                                                        ALC
                                             September 30,          December 31,          September 30,
                                                 2011                   2010                  2010
Loans Accounted for on a Non-Accrual
Basis                                       $         1,364        $        1,296        $         1,673
Accruing Loans Past Due 90 Days or More               2,700                 2,625                  2,570
Real Estate Acquired in Settlement of
Loans                                                 5,305                 6,630                  6,614

Total                                       $         9,369        $       10,551        $        10,857
Non-Performing Assets as a Percentage
of Net Loans and Other Real Estate                    10.69 %               11.56 %                11.84 %

Non-performing assets as a percentage of net loans and other real estate was 10.9% at September 30, 2011 and 10.2% at December 31, 2010. Loans on non-accrual status increased $6.3 million, accruing loans past due 90 days or more decreased $2.2 million and real estate acquired in settlement of loans decreased $2.6 million from December 31, 2010. The substantial increase in non-accrual loans resulted from placing twelve commercial real estate loans totaling $19.7 million on non-accrual status in the first nine months of 2011. As these loans have progressed through the collection process, $4.7 million has been charged-off, $1.7 million has been reclassified as other real estate acquired in settlement of loans and $3.2 million has been restored to accruing status. The Company forecasts that adverse economic conditions and the severely depressed real estate market will continue to put downward pressure on real estate collateral values and will impact our ability to reduce non-performing assets. Other real estate acquired as of September 30, 2011 consisted of seventeen residential properties totaling $209,848 and sixty-six commercial properties totaling $17.5 million at the Bank, and one hundred thirty-three residential properties totaling $4.8 million and eighteen commercial properties totaling $552,924 at ALC. Every effort is made to dispose of these properties in a timely manner, but these efforts continue to be hampered by poor economic conditions. Real estate values continue to decline, and the real estate market remains severely depressed in all of our market areas. Management reviews these non-performing assets and reports to the Board of Directors of the Bank monthly. Loans past due 90 days or more and still accruing are reviewed by management and are allowed to continue accruing only when management believes that underlying collateral values and the financial strength of the borrowers are sufficient to protect the Bank from loss. If at any time management determines that there may be a loss of interest or principal, these loans will be changed to non-accrual status and their asset values downgraded.

LIQUIDITY AND CAPITAL RESOURCES

The Bank's primary sources of funds are customer deposits, FHLB advances, repayments of loan principal and interest from loans and investments. While scheduled principal repayments on loans and mortgage-backed securities are a relatively predictable source of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions and competition, making them less predictable. The Bank manages the pricing of its deposits to maintain a desired deposit balance. In addition, the Bank invests in short-term interest-earning assets, which provide liquidity to meet lending requirements.

The Bank currently has up to $171.3 million in borrowing capacity from the FHLB and $7.8 million in established federal funds lines.

The Bank is required to maintain certain levels of regulatory capital. At September 30, 2011 and December 31, 2010, the Company and the Bank were in compliance with all regulatory capital requirements.

Management is not aware of any condition that currently exists that would have an adverse effect on the liquidity, capital resources or operation of the Company. However, the Company is a defendant in certain claims and legal actions arising in the ordinary course of business. See Note 13 to Item 1, "Guarantees, Commitments and Contingencies," for a discussion of such claims and legal actions.


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