Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
UBFO > SEC Filings for UBFO > Form 10-Q/A on 25-Nov-2011All Recent SEC Filings

Show all filings for UNITED SECURITY BANCSHARES | Request a Trial to NEW EDGAR Online Pro

Form 10-Q/A for UNITED SECURITY BANCSHARES


25-Nov-2011

Quarterly Report


Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations

Overview

Certain matters discussed or incorporated by reference in this Quarterly Report of Form 10-Q are forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. Such risks and uncertainties include, but are not limited to, those described in Management's Discussion and Analysis of Financial Condition and Results of Operations. Such risks and uncertainties include, but are not limited to, the following factors: i) competitive pressures in the banking industry and changes in the regulatory environment; ii) exposure to changes in the interest rate environment and the resulting impact on the Company's interest rate sensitive assets and liabilities; iii) decline in the health of the economy nationally or regionally which could reduce the demand for loans or reduce the value of real estate collateral securing most of the Company's loans; iv) credit quality deterioration that could cause an increase in the provision for loan losses; v) Asset/Liability matching risks and liquidity risks; volatility and devaluation in the securities markets, vi) failure to comply with the regulatory agreements under which the Company is subject, vii) expected cost savings from recent acquisitions are not realized, and, viii) potential impairment of goodwill and other intangible assets. Therefore, the information set forth therein should be carefully considered when evaluating the business prospects of the Company. For additional information concerning risks and uncertainties related to the Company and its operations, please refer to the Company's Annual Report on Form 10-K for the year ended December 31, 2010.

United Security Bancshares (the "Company" or "Holding Company") is a California corporation incorporated during March of 2001 and is registered with the Board of Governors of the Federal Reserve System as a bank holding company under the Bank Holding Company Act of 1956, as amended. United Security Bank (the "Bank") is a wholly-owned bank subsidiary of the Company and was formed in 1987. References to the Company are references to United Security Bancshares (including the Bank). References to the Bank are to United Security Bank, while references to the Holding Company are to the parent-only, United Security Bancshares. The Company currently has eleven banking branches, which provide financial services in Fresno, Madera, Kern, and Santa Clara counties in the state of California.

Effective March 23, 2010, United Security Bancshares (the "Company") and its wholly owned subsidiary, United Security Bank (the "Bank"), entered into a formal written agreement (the "Agreement") with the Federal Reserve Bank of San Francisco. The Agreement was a result of a regulatory examination that was conducted by the Federal Reserve and the California Department of Financial Institutions in June 2009 and is intended to improve the overall condition of the Bank through, among other things, increased Board oversight; formal plans to monitor and improve processes related to asset quality, liquidity, funds management, capital, and earnings; and the prohibition of certain actions that might reduce capital, including the distribution of dividends or the repurchase of the Company's common stock. The Board of Directors and management believe that the Company is in compliance with the terms of the Agreement. (For more information on the Agreement see the "Regulatory Matters" section included in this Management's Discussion and Analysis of Financial Condition and Results of Operations.)

During May of 2010, the California Department of Financial Institutions issued a written order (the "Order") to the Bank as a result of a regulatory examination that was conducted by the Federal Reserve and the California Department of Financial Institutions in June 2009. The Order issued by the California Department of Financial Institutions is similar to the written agreement with the Federal Reserve Bank of San Francisco. The Board of Directors and management believe that the Company is in compliance with the terms of the Agreement. (For more information on the Agreement see the "Regulatory Matters" section included in this Management's Discussion and Analysis of Financial Condition and Results of Operations.)

Trends Affecting Results of Operations and Financial Position

The Company's overall operations are impacted by a number of factors, including not only interest rates and margin spreads, which impact results of operations, but also the composition of the Company's balance sheet. One of the primary strategic goals of the Company is to maintain a mix of assets that will generate a reasonable rate of return without undue risk, and to finance those assets with a low-cost and stable source of funds. Liquidity and capital resources must also be considered in the planning process to mitigate risk and allow for growth. Net interest income before provision for credit losses has declined between the three and six months ended June 30, 2011 and 2010, totaling $6.3 million for the three months ended June 30, 2011 as compared to $7.4 million for the three months ended June 30, 2010, and $12.5 million for the six months ended June 30, 2010 compared to $14.5 million for the six months ended June 30, 2010. The declines in net interest income between 2010 and 2011 were primarily the result of declines in the volume of interest-earning assets which, combined with decreases in yields on earning assets, more than outweighed the decrease in the Company's cost of funding between the two periods.


Table of Contents

Average interest-earning assets decreased approximately $46.7 million between the six-month periods ended June 30, 2010 and June 30, 2011. Components of the $46.7 million decrease in average earning assets between 2010 and 2011, included a decrease of $77.9 million in loans, and an additional $16.4 million decrease in investment securities. Offsetting these decreases between the six-month comparative periods, were increases of $47.7 million in federal funds sold and interest-bearing deposits in the Federal Reserve Bank combined. Average interest-bearing liabilities decreased approximately $72.9 million between the six-month periods ended June 30, 2010 and June 30, 2011, with a decrease of nearly $73.6 million in time deposits, as the Company has sought to reduce its reliance on brokered time deposits and other wholesale funding sources. During the last year, the Company's cost of interest-bearing liabilities has declined significantly as market rates of interest declined, with the average cost of interest-bearing liabilities dropping from .98% during the six months ended June 30, 2010, to 0.77% during the six months ended June 30, 2011.

The following table summarizes the year-to-date averages of the components of interest-earning assets as a percentage of total interest-earning assets and the components of interest-bearing liabilities as a percentage of total interest-bearing liabilities:

                                               YTD Average       YTD Average       YTD Average
                                                 6/30/11          12/31/10           6/30/10
Loans and Leases                                      77.01 %           80.42 %           83.88 %
Investment securities available for sale               9.05 %           10.16 %           11.04 %
Interest-bearing deposits in other banks               0.45 %            0.40 %            0.43 %
Interest-bearing deposits in FRB                      13.49 %            4.18 %            0.48 %
Federal funds sold                                     0.00 %            4.84 %            4.17 %
Total interest-earning assets                        100.00 %          100.00 %          100.00 %

NOW accounts                                          11.61 %           12.78 %           10.58 %
Money market accounts                                 29.36 %           23.57 %           22.55 %
Savings accounts                                       9.17 %            7.20 %            7.13 %
Time deposits                                         41.17 %           47.22 %           50.00 %
Other borrowings                                       6.21 %            7.16 %            7.62 %
Subordinated debentures                                2.48 %            2.07 %            2.12 %
Total interest-bearing liabilities                   100.00 %          100.00 %          100.00 %

Although residential real estate markets have shown signs of some improvement over the past year, the severe decline in residential construction and median home prices that began in 2008 continues to impact the Company's operations with high levels of nonperforming assets, increased expenses related to foreclosed properties, and decreased profit margins. Growth in the U.S. economy has been disappointing during both the first and second quarters of 2011, and it is anticipated by many economists that the recovery will be more prolonged than was anticipated late in 2010. Economic forecasts have been scaled back due to weaker consumer spending and business investment, along with a widening trade deficit and unemployment rates that still remain above 9.0%. Although the Company continues its business development and expansion efforts throughout its market area, increased attention has been placed on reducing nonperforming assets and providing customers options to work through this difficult economic period. Options have included a combination of rate and term concessions, as well as forbearance agreements with borrowers. While the level of nonperforming loans remains high, total nonperforming loans have actually decreased to a balance of $34.3 million at June 30, 2011 compared to $46.9 million reported at December 31, 2010.

As a result of the continued economic downturn, particularly in the real estate market, the Company has experienced declines in the loan portfolio between 2010 and 2011. During the six months ended June 30, 2011, the Company only experienced increases in commercial and industrial loans, but between June 30, 2010 and June 30, 2011, decreases were experienced in all loan categories. The greatest decreases over the past year have been experienced in real estate construction and development loans, real estate mortgage loans, and agricultural loans, as the Company has reduced its exposure to real estate markets which have been hard hit during the economic downturn. Loans decreased $17.8 million between December 31, 2010 and June 30, 2011, and decreased $71.3 million between June 30, 2010 and June 30, 2011. Real estate construction and development loans decreased $9.0 million between December 31, 2010 and June 30, 2011, and decreased $36.9 million between June 30, 2010 and June 30, 2011, as real estate construction remains depressed in the San Joaquin Valley and California overall. Agricultural loans decreased $8.8 million between December 31, 2010 and June 30, 2011, due in large part to a single agricultural loan that matured during the first quarter of 2011.


Table of Contents

Commercial real estate loans (a component of real estate mortgage loans) have grown as a percentage of total loans over the past year, amounting to 28.4%, 29.8%, and 26.4%, of the total loan portfolio at June 30, 2011, December 31, 2010, and June 30, 2010, respectively. Residential mortgage loans are not generally a large part of the Company's loan portfolio, but some residential mortgage loans have been made over the past several years to facilitate take-out loans for construction borrowers when they were not able to obtain permanent financing elsewhere. These loans are generally 30-year amortizing loans with maturities of between three and five years. Residential mortgages totaled $25.1 million or 5.9% of the portfolio at June 30, 2011, 23.8 million or 5.4% of the portfolio at December 31, 2010, and $27.0 million or 5.5% of the portfolio at June 30, 2010. Loan participations, both sold and purchased, have declined over the past several years as lending originations have slowed significantly and the loan participation market with it. As a result, loan participations purchased have declined from $21.4 million or 4.3% of the portfolio at June 30, 2010, to $17.0 million or 3.9% of the portfolio at December 31, 2010, to $13.2 million or 3.0% of the portfolio at June 30, 2011. In addition, loan participations sold have declined from $15.6 million or 3.2% of the portfolio at June 30, 2010, to $8.9 million or 2.0% of the portfolio at December 31, 2010, to $8.2 million or 1.9% of the portfolio at June 30, 2011.

With market rates of interest remaining at historically low levels, the Company continues to experience compressed net interest margins. The Company's net interest margin was 4.47% for the six months ended June 30, 2011, as compared to 4.81% for the six months ended June 30, 2010. With approximately 54% of the loan portfolio in floating rate instruments at June 30, 2011, the effects of low market rates continue to impact loan yields. The net interest margin has also been impacted by a decline in loan volume, the Company's highest yielding asset, which has been partially offset by an increase in overnight investments with the Federal Reserve Bank, a much lower yielding asset. The Company has successfully sought to mitigate the low-interest rate environment with loan floors included in new and renewed loans over the past several years. Loans yielded 5.97% during the six months ended June 30, 2011, as compared to 6.03% for the six months ended June 30, 2010. The Company's cost of funds has continued to decrease over the past year and has mitigated to some degree, the impact of declining yields on earning assets. The Company's average cost of funds was 0.77% for the six months ended June 30, 2011 as compared to 0.98% for the six months ended June 30, 2010. Wholesale borrowing and brokered deposit rates have remained low, resulting in overnight and short-term borrowing rates of less than 0.50% during much of the past year. The Company has benefited from the low interest rate environment, and continues to utilize short-term borrowing lines through the Federal Home Loan Bank. Although the Company does not intend to increase its current level of brokered deposits, and in fact as a result of the 2010 Agreement with the Federal Reserve Bank and Order with the California Department of Financial Institutions, continues to systematically reduce brokered deposit levels as they mature in the future, the $54.2 million in brokered deposits at June 30, 2011 continues to provide the Company with a low-cost source of deposits. The Company will continue to utilize these funding sources when required to maintain prudent liquidity levels, while seeking to increase core deposits when possible.

Total noninterest income of $2.3 million reported for the six months ended June 30, 2011 decreased $1.7 million or 42.3% as compared to the six months ended June 30, 2010. Noninterest income continues to be driven by customer service fees, which totaled $1.8 million for the six months ended June 30, 2011, representing a decrease of $203,000 or 10.3% over the $2.0 million in customer service fees reported for the six months ended June 30, 2010. The decline in customer service fees between 2010 and 2011 are primarily the result of decreases in overdraft fees, as well as business checking service fees. Customer service fees represented 76.5% and 49.2% of total noninterest income for the six months ended June 30, 2011, and 2010, respectively. Other changes in noninterest income between the six months ended June 30, 2010 and June 30, 2011, are largely the result of decreases of $769,000 in fair value gains recorded on the Company's junior subordinated debt, as well as a reduction of $511,000 in gains on the sale of loans between the two six-month periods.

Noninterest expense decreased approximately $76,000 or 0.5% between the six months ended June 30, 2010 and June 30, 2011. Decreases experienced during the six months ended June 30, 2011 were primarily the result of decreases in impairment charges related to investment securities and OREO, which were partially offset by increases in impaired legal expenses, OREO operating expenses, and salary expenses. Included in noninterest expense for the six months ended June 30, 2011 and 2010 are goodwill impairment charges of $1.5 million and $1.4 million, respectively, related to the Legacy merger completed during February 2007.

Effective September 30, 2009 and beginning with the quarterly interest payment due October 1, 2009, the Company deferred interest payments on the Company's $15.0 million of junior subordinated debentures relating to its trust preferred securities. This was the result of regulatory restraints which have precluded the Bank from paying dividends to the Holding Company. The Agreement with the Federal Reserve Bank entered into during March 2010 specifically prohibits the Company and the Bank from making any payments on the junior subordinated debt without prior approval of the Federal Reserve Bank. The terms of the debentures and trust indentures allow for the Company to defer interest payments for up to 20 consecutive quarters without default or penalty. During the period that the interest deferrals are elected, the Company will continue to record interest expense associated with the debentures. Upon the expiration of the deferral period, all accrued and unpaid interest will be due and payable. Under the terms of the debenture, the Company is precluded from paying cash dividends to shareholders or repurchasing its stock during the deferral period.


Table of Contents

The Company has not paid any cash dividends on its common stock since the second quarter of 2008 and does not expect to resume cash dividends on its common stock for the foreseeable future. Because the Company has elected to defer the quarterly payments of interest on its junior subordinated debentures issued in connection with the trust preferred securities as discussed above, the Company is prohibited under the subordinated debenture agreement from paying cash dividends on its common stock during the deferral period. In addition, pursuant to the Agreement entered into with the Federal Reserve Bank during March of 2010, the Company and the Bank are precluded from paying cash dividends without prior consent of the Federal Reserve Bank. On June 28, 2011, the Company's Board of Directors declared a one-percent (1%) quarterly stock dividend on the Company's outstanding common stock. The Company believes, given the current uncertainties in the economy and unprecedented declines in real estate valuations in our markets, it is prudent to retain capital in this environment, and better position the Company for future growth opportunities. Based upon the number of outstanding common shares on the record date of July 15, 2011, an additional 130,000 shares were issued to shareholders. For purposes of earnings per share calculations, the Company's weighted average shares outstanding and potentially dilutive shares used in the computation of earnings per share have been restated after giving retroactive effect to the 1% stock dividends to shareholders for all periods presented.

The Company has sought to maintain a strong, yet conservative balance sheet while continuing to reduce the level of nonperforming assets and improve liquidity during the six months ended June 30, 2011. Total assets decreased approximately $22.6 million during the six months ended June 30, 2011, including a decrease of $17.8 million in loans, a decrease of $2.1 million in interest-bearing deposits in other banks, and a decrease of $3.5 million in OREO. Decreases of $7.0 million in FHLB term borrowings between December 31, 2010 and June 30, 2011 were compounded by decreases of $9.9 million in total net deposits. Increases of $38.0 million in noninterest-bearing deposits during the six months ended June 30, 2011 were more than offset by decreases of $40.2 million in time deposits, and decreases of $9.7 million in NOW and money market accounts. The decrease in time deposits during the six-month period was the result of Company's continued efforts to reduce the level of brokered time deposits. Average loans comprised approximately 77% of overall average earning assets during the six months ended June 30, 2011, as compared to 84% of average earning assets during the six months ended June 30, 2010.

Nonperforming assets, which are primarily related to the real estate loan and property portfolio, remained high during the six months ended June 30, 2011, but decreased $16.2 million from a balance of $82.5 million at December 31, 2010 to a balance of $66.3 million at June 30, 2011. Nonaccrual loans totaling $20.8 million at June 30, 2011, decreased $13.6 million from the balance of $34.4 million reported at December 31, 2010. In determining the adequacy of the underlying collateral related to these loans, management monitors trends within specific geographical areas, loan-to-value ratios, appraisals, and other credit issues related to the specific loans. Valuations on these loans and the underlying collateral continued to deteriorate during much of 2009, 2010, and 2011, resulting in increased charge-offs and levels of impaired loans. Impaired loans decreased $14.0 million during the six months ended June 30, 2011 to a balance of $37.0 million at June 30, 2011. Other real estate owned through foreclosure decreased $3.5 million between December 31, 2010 and June 30, 2011. During the six months ended June 30, 2011, write-downs on, and sales of, other real estate owned through foreclosure more than offset the $1.5 million in loans transferred to other real estate owned during the period. As a result of these events, nonperforming assets as a percentage of total assets decreased from 12.17% at December 31, 2010 to 10.11% at June 30, 2011.

The following table summarizes various nonperforming components of the loan portfolio, the related allowance for loan and lease losses and provision for credit losses for the periods shown.

                                               June 30, 2011       December 31,
(in thousands)                                  (Restated)             2010           June 30, 2010
Provision for credit losses during period     $        10,051     $       12,475     $         2,150
Allowance as % of nonperforming loans                   41.71 %            35.19 %             38.24 %

Nonperforming loans as % total loans                     8.09 %            10.63 %              9.47 %
Restructured loans as % total loans                      5.41 %             5.65 %              5.88 %

Management continues to monitor economic conditions in the real estate market for signs of further deterioration or improvement which may impact the level of the allowance for loan losses required to cover identified losses in the loan portfolio. Greater focus has been placed on monitoring and reducing the level of problem assets, while working with borrowers to find more options, including loan restructures, to work through these difficult economic times. Restructured loans were comprised of 51 loans totaling $22.9 million at June 30, 2011, compared to 48 loans totaling $24.9 million at December 31, 2010.


Table of Contents

Provisions made to the allowance for credit losses, totaled $10.1 million during the six months ended June 30, 2011 as compared to $2.2 million for the six months ended June 30, 2010. Net loan and lease charge-offs during the six months ended June 30, 2011 totaled $12.7 million as compared to $5.1 million for the six months ended June 30, 2010, and $11.1 million for the year ended December 31, 2010. The Company charged-off, or had partial charge-offs on, approximately 39 loans during the six months ended June 30, 2011, compared to 21 loans during the six months ended June 30, 2010, and 74 loans during year ended December 31, 2010. The annualized percentage charge-offs to average loans were 6.0% and 2.1% for the six months ended June 30, 2011 and 2010, respectively, as compared to 2.2% for the year ended December 31, 2010.

Deposits decreased by $9.9 million during the six months ended June 30, 2011, with increases experienced in noninterest-bearing accounts and savings accounts, which were more than offset by decreases in time deposits, as well as NOW and money market accounts during the first six months of 2011. As with much of 2010, decreases in time deposits experienced during the six months ended June 30, 2011 were primarily the result of decreases in brokered wholesale deposits, as the Company continues to reduce its reliance on brokered deposits and other wholesale funding sources, while maintaining sufficient liquidity.

Brokered deposits have provided the Company a relatively inexpensive funding source over the past several years totaling $54.2 million or 9.9% of total deposits at June 30, 2011, as compared to $81.5 million or 14.6% of total deposits at December 31, 2010, and $112.9 million or 19.4% of total deposits at June 30, 2010. Brokered deposits and other wholesale funding sources were used to some degree to fund loan growth in 2007 and 2008, but the current state of the economy and the financial condition of the Company have made it increasingly important to continue to develop core deposits and reduce the Company's dependence on brokered and other wholesale funding sources, including lines of credit with the Federal Reserve Bank and the FHLB. The Company continues its efforts to develop core deposit growth with employee training throughout the entire organization and a deposit-gathering program that incents employees to bring in new deposits from our local market area and establish more extensive relationships with our customers. As part of its liquidity position improvement plan resulting from the formal agreement with the Federal Reserve Bank issued in March 2010, the Company has reduced its reliance on brokered deposits and will continue to do so over the next 12 months to achieve levels more comparable with peers, which is currently about 5% of total deposits. The Company will seek to replace maturing brokered deposits with core deposits, but may also control loan growth to help achieve that objective.

While the Company still has a higher percentage of brokered deposits than peers at June 30, 2011, efforts to restructure the balance sheet through reducing the level of total assets, and specifically real estate loans, are proving successful. Total wholesale borrowings and brokered deposits decreased nearly $34.3 million during the first six months of 2011, from a balance of $113.5 million at December 31, 2010, to a balance of $79.2 million at June 30, 2011.

Although balances declined during 2010, and continue to decline during 2011, overnight borrowings and other term credit lines will be utilized as deemed prudent, with borrowings totaling $25.0 million at June 30, 2011 as compared to $32.0 million at December 31, 2010. The average rate of those term borrowings was 0.34% at June 30, 2011, as compared to 0.35% at December 31, 2010. Although the Company continues to realize significant interest expense reductions by utilizing overnight and term borrowings lines, the use of such lines are monitored closely to ensure sound balance sheet management in light of the current economic and credit environment.

The cost of the Company's subordinated debentures issued by USB Capital Trust II has remained low as market rates have remained low during the first six months of 2011. With pricing at 3-month-LIBOR plus 129 basis points, the effective cost of the subordinated debt was 1.54% at June 30, 2011 as compared to 1.59% at December 31, 2010. Pursuant to fair value accounting guidance, the Company has recorded $223,000 in pretax fair value gains on its junior subordinated debt during the quarter ended June 31, 2011, and pretax fair value loss of $145,000 during the six months ended June 30, 2011, bringing the total cumulative gain recorded on the debt to $5.1 million at June 30, 2011.

. . .

  Add UBFO to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for UBFO - All Recent SEC Filings
Sign Up for a Free Trial to the NEW EDGAR Online Pro
Detailed SEC, Financial, Ownership and Offering Data on over 12,000 U.S. Public Companies.
Actionable and easy-to-use with searching, alerting, downloading and more.
Request a Trial      Sign Up Now


Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.