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USBI > SEC Filings for USBI > Form 10-Q on 13-Nov-2012All Recent SEC Filings

Show all filings for UNITED SECURITY BANCSHARES INC

Form 10-Q for UNITED SECURITY BANCSHARES INC


13-Nov-2012

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 and results of operations 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 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, 2011.

The emphasis of this discussion is a comparison of assets, liabilities and shareholders' equity as of September 30, 2012 to year-end 2011, while comparing income and expense for the three- and nine-month periods ended September 30, 2012 and 2011, respectively.

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, 2011.


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COMPARING THE THREE- AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2012 TO THE THREE- AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2011

Net income attributable to USBI in the third quarter of 2012 was $1.2 million, compared to net loss attributable to USBI of $1.3 million for the third quarter of 2011, resulting in an increase of basic net income per share from $(0.22) per share for the third quarter of 2011 to $0.20 per share for the same quarter of 2012.

For the three-month period ended September 30, 2012, the Bank had net income of $695,000, compared to net loss of $1.3 million for the same quarter of 2011. For the nine-month period ended September 30, 2012, the Bank had net income of $166,000, compared to net loss of $3,000 for the same period in 2011. For the nine-month period, the increase in net income for the Bank resulted primarily from lower impairment charges on other real estate owned and lower provisions for loan losses. The impairments in 2011 and the first quarter of 2012 resulted mainly from foreclosed property associated with commercial real estate loans. Further declines in market values would require additional impairment charges, however, substantially all of the other real estate at the Bank was reappraised in the first quarter of 2012, and management does not anticipate significant charges in the fourth quarter of the year.

Net income for ALC for the three-month period ended September 30, 2012 was $603,000, compared to $82,000 for the same quarter of 2011. For the nine-month period ended September 30, 2012, net income for ALC was $1.3 million, compared to $720,000 for the same period in 2011. Improvement in both periods for ALC primarily resulted from lower provisions for loan losses.

Interest income for USBI for the 2012 third quarter decreased $1.4 million, or 12.8%, compared to the third quarter of 2011. For the nine months ended September 30, 2012, interest income decreased $2.7 million, or 8.4%, compared with the same period in 2011. The decrease in interest income during the periods was primarily due to a decrease in interest earned on loans and investment securities resulting from an overall decrease in the average yield and average volume of loans and investment securities.

Interest income at the Bank for the 2012 third quarter decreased $1.2 million, or 20.8%, compared to the same period in 2011. For the nine months ended September 30, 2012, interest income decreased $2.7 million, or 14.8%, compared with the same period of 2011. These decreases were due to an overall decrease in the average yield and average volume of loans and investment securities. At the Bank, average loans for the third quarter of 2012 declined $31.9 million when compared to the same quarter in 2011. For the nine-month period ended September 30, 2012, loans at the Bank declined $23.3 million when compared to the same period in 2011. Loan demand continues to be weak due to continuing difficult economic conditions. Also at the Bank, average investment securities declined $23.7 million for the third quarter of 2012 and $19.9 million for the nine-month period ended September 30, 2012, when compared to the same periods in 2011. Cash flows from loans and investment securities were reinvested at lower rates, resulting in lower interest income.

Average loans for the third quarter of 2012 at ALC declined $3.7 million compared to the same period in 2011. For the third quarter of 2012, loans secured by real estate declined $5.8 million, and consumer loans increased $2.1 million at ALC. The increased yield on consumer loans was not sufficient to offset the decreased income on the real estate loans, and, as a result, the third quarter 2012 interest income declined $127,000. For the nine-month period ended September 30, 2012, average loans declined $3.0 million at ALC, with consumer loans increasing $3.1 million and real estate loans declining $6.1 million compared to the same period in 2011. The increased yield on the increased consumer loans offset the loss of interest income on the real estate loans, resulting in an increase of $12,000 in interest income for the nine-month period ending September 30, 2012 when compared to the same period in 2011. Management expects real estate loans at ALC to continue to decline due to efforts to focus on traditional consumer finance activities at ALC.

Interest expense for USBI in the 2012 third quarter decreased $696,000, or 40.3%, compared to the third quarter of 2011. Interest expense decreased $1.7 million, or 31.7%, to $3.7 million for the first nine months of 2012, compared to $5.4 million for the first nine months of 2011. These decreases were the result of lower interest rates paid on certificates of deposit and borrowed funds. As longer term certificates of deposit mature, they reprice at lower rates, as rates on deposits and borrowed funds remain at record lows. If the current rate environment continues, interest expense should continue to decline as compared to the prior year expense, until market interest rates increase.

Net interest income for USBI decreased $675,000, or 7.5%, for the third quarter of 2012, and decreased $959,000, or 3.6%, for the first nine months of 2012, compared to the same periods in 2011, respectively. The net interest margin declined from 6.18% for the nine months ended September 30, 2011 to 6.07% for the nine months ended September 30, 2012, and from 6.19% for the third quarter of 2011 to 6.04% for the third quarter of 2012. Loan and investment yields declined for the three- and nine-month periods ended September 30, 2012 compared to the same periods in 2011. The cost of funds declined due to a decline in interest rates paid on interest bearing deposits and borrowed funds. We believe that 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 for USBI was $492,000, or 0.5% annualized of average loans, in the third quarter of 2012, compared to $2.3 million, or 2.2% annualized of average loans, in the third quarter of 2011. The provision for loan losses decreased to $3.2 million for the nine months ended September 30, 2012, compared to $5.2 million for the same period in 2011. The annualized provision as a percent of average loans was 1.1% and 1.7% for the first nine months of 2012 and 2011. No provision for loan losses was required at the Bank for the 2012 third quarter.


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The provision for loan losses at the Bank for the nine months ended September 30, 2012 decreased to $1.5 million, as compared to $3.3 million for the same period in 2011. Net charge-offs at the Bank decreased $5.3 million for the nine months ended September 30, 2012, and decreased $5.2 million in the quarter ended September 30, 2012, when compared to the same periods in 2011. The provision for loan losses at ALC decreased to $492,000 for the third quarter of 2012, compared to $688,000 for the same period in 2011. For the nine-month period ending September 30, 2012, the provision for loan losses at ALC decreased $247,000 to $1.7 million, compared to $1.9 million for the same nine-month period in 2011. At the Company level, net charge-offs were $5.6 million for the nine-month period ended September 30, 2012 and $10.9 million for the same period in 2011. Net charge-offs year-to-date as of September 30, 2012 were $3.6 million for the Bank and $2.0 million for ALC. Net charge-offs have declined when compared to the two previous years. The largest losses experienced in the previous two years were in one type of loan - real estate development. Of the loan loss provision expensed in 2010, 65.3%, or $12.5 million, was in the loan category of speculative real estate loan or undeveloped land or residential lots. Of the loan loss provision expensed in 2011, 44.0%, or $8.3 million, was in the loan category of real estate development loans, raw land or residential lots. It is now the Bank's policy to no longer make residential or commercial real estate development loans except in rare instances where it is in the Bank's best interest to do so. The Company has identified non-performing loans in the real estate development category, measured the impairment and established a reserve for loan losses that management believes to be adequate to absorb future losses. Management is making every effort to improve the Bank's position relative to these impaired loans by acquiring more collateral or modifying terms to prevent further exposure. Although uncertainty in the economic outlook still exists, management believes that loss exposure in this segment of the portfolio is identified, reserved against and adequately monitored to ensure that changes are promptly addressed in the analysis of overall reserve adequacy.

Total non-interest expense decreased $3.0 million, or 28.6%, for the 2012 third quarter, and decreased $1.3 million, or 5.1%, for the nine months ended September 30, 2012, compared to the same periods in 2011. Salary and employee benefits decreased $384,000 when comparing third quarter 2012 to the same period in 2011, and decreased $326,000 for the nine months ended September 30, 2012 compared to the same period in 2011. For the 2012 third quarter, impairment on other real estate decreased $2.6 million, and realized loss on sale of other real estate owned increased $244,000. For the nine months ended September 30, 2012, impairment on other real estate owned decreased $601,000, and realized loss on sale of other real estate owned increased $196,000.

Total non-interest expense at the Bank declined $2.6 million, or 34.0%, for the third quarter of 2012, and declined $1.4 million, or 7.7%, for the nine months ended September 30, 2012, compared to the same periods in 2011. Salary and employee benefits declined $415,000 for the third quarter of 2012 compared to the third quarter of 2011. For the nine months ended September 30, 2012, salary and employee benefits declined $640,000 compared to the same period in 2011. Impairment on other real estate owned declined $2.4 million for the 2012 third quarter and $239,000 for the nine months ended September 30, 2012, compared with the same periods last year. Realized loss on the sale of other real estate owned increased $282,000 for the third quarter of 2012 and $46,000 for the nine-month period ended September 30, 2012, compared to the same periods in 2011. Appraisals on foreclosed properties, which were updated in the first quarter of 2012, reflected decreased values, primarily on commercial real estate, and required the impairment charges. There remains approximately $2.0 million in foreclosed property that is scheduled to be reappraised in the fourth quarter of this year. These updated appraisals could result in decreased market values, which would require additional impairment charges.

At ALC, total non-interest expense increased $449,000, or 14.9%, for the 2012 third quarter, and increased $54,000, or 0.7%, for the nine months ended September 30, 2012, compared to the same periods in 2011. Salary and employee benefits increased $31,000 when comparing the 2012 third quarter to the same period in 2011, and increased $315,000 for the nine-months ended September 30, 2012 compared to the same period in 2011. For the 2012 third quarter, impairment on other real estate decreased $192,000, and realized loss on sale of other real estate owned decreased $38,000, both as compared to the same period in 2011. For the nine-months ended September 30, 2012, impairment on other real estate owned decreased $361,000, and realized loss on sale of other real estate owned increased $150,000, both as compared to the same period in 2011.

All other non-interest expenses for both the Bank and ALC remained fairly consistent for the third quarter and nine-month periods in 2012 when compared to the same periods in 2011.

Income tax expense for the third quarter of 2012 was $517,000, compared to income tax benefit of $979,000 in the third quarter of 2011. Income tax benefit of $411,000 for the nine months ended September 30, 2011 increased to a tax expense of $157,000 for the same period in 2012. Management estimates the effective tax rate for the Company to be approximately 31.0% of pre-tax income for the period ended September 30, 2012.

COMPARING THE SEPTEMBER 30, 2012 STATEMENTS OF FINANCIAL CONDITION TO DECEMBER
31, 2011

In comparing consolidated financial condition at September 30, 2012 to December 31, 2011, total assets decreased $37.5 million to $584.3 million, and liabilities decreased $39.4 million to $516.2 million. Shareholders' equity increased $1.9 million as a result of net income of $1.3 million, an increase in accumulated other comprehensive income of $466,000 and reissuance of treasury stock of $85,000.

Investment securities for USBI decreased $8.6 million, or 7.0%, during the first nine months of 2012. Investments provide the Company with a stable form of liquidity while maximizing earnings yield. Loans, net of unearned income, decreased $38.7 million, from $403.4 million at December 31, 2011 to $364.6 million at September 30, 2012. Deposits decreased $20.4 million, or 3.9%, during the first nine months of 2012. Loans, net of unearned income at ALC, decreased $4.9 million, from $81.7 million at December 31, 2011 to $76.8 million at September 30, 2012. Loans, net of unearned income at the Bank, after consolidation eliminations, decreased $33.8 million from $321.6 million at December 31, 2011 to $287.8 million at September 30, 2012. Depressed market conditions and weak loan demand may continue to affect the Company's ability to generate loan growth, and loan volume could continue to decline.

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


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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, 2012, the allowance for loan losses was $19.9 million, or 5.5% of loans net of unearned income, compared to $22.3 million, or 5.5% of loans net of unearned income, at December 31, 2011. The coverage ratio of the allowance for loan losses to non-performing assets decreased to 42.1% at September 30, 2012, compared to 62.5% at December 31, 2011. The increase in non-accrual loans resulted from one large loan relationship that reached 90 days past due, which required it to be placed on non-accrual status. This relationship was included in the ASC 310 analysis at December 31, 2011, and the September 30, 2012 analysis did not indicate that any additional impairment or provision for loan losses was required. At September 30, 2012, loans on non-accrual increased $15.1 million, accruing loans past due 90 days or more decreased $244,000, and real estate acquired in settlement of loans decreased $3.2 million, each as compared to December 31, 2011. The balance in the allowance for loan losses related to loans evaluated collectively for impairment declined from $11.2 million at December 31, 2011 to $8.3 million at September 30, 2012. The decline resulted in part from a decline in historical losses for these loans, and from a decline in recorded investments in these loans of $34.6 million compared to December 31, 2011. Net charge-offs at ALC declined $43,000 for the nine-month period ended September 30, 2012 when compared with the same period in 2011. Net charge-offs at the Bank declined $5.3 million for the nine-month period ended September 30, 2012 when compared with the same period in 2011. The portion of the allowance for loan losses related to loans evaluated individually for impairment increased from $11.1 million at December 31, 2011 to $11.6 million at September 30, 2012. The recorded investment in these loans declined from $61.9 million at December 31, 2011 to $58.0 million at September 30, 2012.

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

                                                                  Consolidated
                                           September 30,          December 31,          September 30,
                                               2012                   2011                  2011
Loans Accounted for on a Non-Accrual
Basis                                     $        31,575        $       16,502        $        19,901
Accruing Loans Past Due 90 Days or
More                                                2,088                 2,332                  3,083
Real Estate Acquired in Settlement of
Loans                                              13,608                16,774                 22,993

Total                                     $        47,271        $       35,608        $        45,977
Non-Performing Assets as a Percentage
of Net Loans and Other Real Estate                  12.50 %                8.48 %                10.93 %

                                                                      FUSB
                                           September 30,          December 31,          September 30,
                                               2012                   2011                  2011
Loans Accounted for on a Non-Accrual
Basis                                     $        30,067        $       14,616        $        18,537
Accruing Loans Past Due 90 Days or
More                                                   56                   224                    383
Real Estate Acquired in Settlement of
Loans                                              11,021                12,606                 17,688

Total                                     $        41,144        $       27,446        $        36,608
Non-Performing Assets as a Percentage
of Net Loans and Other Real Estate                  13.77 %                8.21 %                10.99 %

                                                                       ALC
                                           September 30,          December 31,           September 30,
                                               2012                   2011                   2011
Loans Accounted for on a Non-Accrual
Basis                                     $         1,507         $       1,886         $         1,364
Accruing Loans Past Due 90 Days or
More                                                2,032                 2,108                   2,700
Real Estate Acquired in Settlement
of Loans                                            2,587                 4,168                   5,305

Total                                     $         6,126         $       8,162         $         9,369
Non-Performing Assets as a
Percentage of Net Loans and Other
Real Estate                                          7.72 %                9.50 %                 10.69 %

Non-performing assets as a percentage of net loans and other real estate was 12.5% at September 30, 2012 and 8.5% at December 31, 2011. Loans on non-accrual status increased $15.1 million, accruing loans past due 90 days or


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more decreased $244,000 and real estate acquired in settlement of loans decreased $3.2 million from December 31, 2011. The increase in non-accrual loans was primarily due to one large loan relationship, which reached 90 days past due and was required to be placed on non-accrual status. Although there can be no assurance that various factors will not cause a different result, we are optimistic that the past due status of this loan relationship is temporary in nature and that this relationship will return to accrual status in the fourth quarter with all interest and fees paid at that time. Other real estate owned as of September 30, 2012 consisted of five residential properties totaling $251,412 and thirty-nine commercial properties totaling $10.8 million at the Bank, and seventy-five residential properties totaling $2.3 million and fourteen commercial properties totaling $293,022 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, and the real estate market remains 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 $175.3 million in borrowing capacity from the FHLB and $17.8 million in established federal funds lines.

The Bank is required to maintain certain levels of regulatory capital. At September 30, 2012 and December 31, 2011, 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 14 to Item 1, "Guarantees, Commitments and Contingencies," for a discussion of such claims and legal actions.

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