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USBI > SEC Filings for USBI > Form 10-Q on 10-May-2013All Recent SEC Filings

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

Form 10-Q for UNITED SECURITY BANCSHARES INC


10-May-2013

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 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, 2012.

The emphasis of this discussion is a comparison of assets, liabilities and shareholders' equity as of March 31, 2013 to year-end 2012, while comparing income and expense for the three-month periods ended March 31, 2013 and 2012.

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, 2012.

COMPARING THE THREE MONTHS ENDED MARCH 31, 2013 TO THE THREE MONTHS ENDED MARCH
31, 2012

Net income for USBI in the first quarter of 2013 was $886,000, compared to net loss for USBI of $(1.2) million in the first quarter of 2012, resulting in an increase of basic net income (loss) per share from $(0.21) per share for the first quarter of 2012 to $0.15 per share for the same quarter of 2013.

For the three-month period ended March 31, 2013, the Bank had net income of $813,000, compared to net loss of $(1.4) million for the same quarter of 2012. 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.

Net income for ALC for the three-month period ending March 31, 2013 was $123,000, compared to $187,000 for the same quarter of 2012. Net income decreased when compared to the same three month period in 2012, primarily as a result of increased loss on the sale of OREO, offset somewhat by lower provisions for loan losses.

Interest income for USBI in the 2013 first quarter decreased $1.4 million, or 14.1%, compared to the first quarter of 2012. 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 and average volume of loans and investment securities. Interest income at the Bank for the 2013 first quarter decreased $1.2 million, or 21.4%, compared to the same period of 2012. This decrease was 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 in the Bank's market area.


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Cash flows from loans and investment securities were reinvested at lower rates, resulting in lower interest income. Interest income at ALC decreased $250,000 for the first quarter of 2013 compared to the same quarter in 2012, due primarily to a decrease in the average volume of loans. Management expects that difficult economic conditions and fierce competition among lenders for quality loans will continue to affect our ability to grow loans at the Bank and ALC.

Interest expense for USBI in the 2013 first quarter decreased $671,000, or 46.0%, compared to the first quarter of 2012. This decrease was 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.

Net interest income for USBI decreased $745,000, or 8.7%, in the first quarter of 2013 compared to the same period of 2012. The net interest margin increased from 6.01% for the first quarter of 2012 to 6.07% for the first quarter of 2013. Loan and investment yields declined for the quarter ended March 31, 2013 compared to the same quarter in 2012. 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 for USBI was $506,000, or 0.6% annualized of average loans, in the first quarter of 2013, compared to $2.2 million, or 3.8% annualized of average loans, in the first quarter of 2012. Charge-offs exceeded recoveries by $3.0 million for the 2013 first quarter, a decrease of approximately $719,000 over the same period in the prior year. The provision for loan losses at the Bank decreased to $38,000 for the three months ended March 31, 2013, compared to $1.5 million for the same period in 2012. The provision for loan losses at ALC decreased to $468,000 for the three months ended March 31, 2013, compared to $712,000 for the same period in 2012. Net charge offs at ALC for the first quarter of 2013 were $660,000, compared to $760,000 for the same quarter in 2012. Net charge offs at the Bank were $2.3 million in the first quarter of 2013 compared to $3.0 million in the first quarter of 2012.

Total non-interest income for USBI increased $349,000, or 27.4%, for the first quarter of 2013 compared to the same period in 2012. All other fees increased $396,000 for the three months ended March 31, 2013 compared to the same period of 2012. The increase was due primarily to higher other income that included a $484,000 prepayment penalty from the early payoff of a mortgage-backed pool, partially offset by lower service and other charges on deposit accounts.

Total non-interest expense decreased $2.1 million, or 21.7%, for the 2013 first quarter compared to the same period in 2012. Salary and employee benefits increased $248,000, when comparing the first quarter of 2013 to the same period in 2012. For the 2013 first quarter, impairment on other real estate decreased $2.6 million, and realized loss on the sale of other real estate increased $251,000. Management was able to reduce OREO in 2012 and in the first quarter of 2013, which resulted in lower impairment expense on OREO. If the economy remains weak and real estate values decline, however, further impairment and losses could occur.

Income tax provision for USBI in the first quarter of 2013 was $344,000, compared to income tax benefit of $982,000 in the first quarter of 2012. Management estimates the effective tax rate for the Company to be approximately 30.0% of pre-tax income for the quarter ended March 31, 2013.

COMPARING THE MARCH 31, 2013 STATEMENTS OF FINANCIAL CONDITION TO DECEMBER 31,
2012

In comparing consolidated financial condition at March 31, 2013 to December 31, 2012, total assets decreased $2.5 million to $564.6 million, while liabilities decreased $2.8 million to $495.6 million. Shareholders' equity increased $355,000 as a result of net income of $886,000, offset somewhat by a $531,000 decrease in accumulated other comprehensive income.

Investment securities increased $4.8 million, or 4.2%, during the first three months of 2013. Investments provide the Company with a stable form of liquidity while maximizing earnings yield. Loans, net of unearned income, decreased $18.9 million, from $356.7 million at December 31, 2012, to $337.8 million at March 31, 2013. Deposits decreased $2.3 million, or 0.5%, during the first three months of 2013. Loans, net of unearned income, at ALC decreased $4.7 million, from $75.1 million at December 31, 2012 to $70.4 million at March 31, 2013. Loans at the Bank, after consolidation eliminations, decreased $14.2 million from $281.6 million at December 31, 2012 to $267.4 million at March 31, 2013.


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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 March 31, 2013, the allowance for loan losses was $16.8 million, or 5.0% of loans net of unearned income, compared to $19.3 million, or 5.4% of loans net of unearned income, at December 31, 2012. The coverage ratio of the allowance for loan losses to non-performing assets decreased to 47.5% at March 31, 2013, compared to 50.1% at December 31, 2012. At March 31, 2013, loans on non-accrual decreased $2.5 million, accruing loans past due 90 days or more increased $292,000 and real estate acquired in settlement of loans decreased $904,000, each as compared to December 31, 2012.

Net charge-offs as of the quarter ended March 31, 2013 were $3.0 million, or 3.4% of average loans on an annualized basis, a decrease of 19.4%, or $719,000, from the charge-offs of $3.7 million, or 3.8% of average loans on an annualized basis, reported a year earlier. The provision for loan losses for the first three months of 2013 was $506,000, compared to $2.2 million at December 31, 2012.

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

                                                                   Consolidated
                                               March 31,           December 31,           March 31,
                                                 2013                  2012                 2012
Loans Accounted for on a Non-Accrual
Basis                                         $    21,114         $       23,618         $    17,945
Accruing Loans Past Due 90 Days or More             1,863                  1,571               1,868
Real Estate Acquired in Settlement of
Loans                                              12,382                 13,286              14,633

Total                                         $    35,359         $       38,475         $    34,446
Non-Performing Assets as a Percentage of
Net Loans and Other Real Estate                     10.10 %                10.40 %              8.58 %

                                                                       FUSB
                                               March 31,           December 31,           March 31,
                                                 2013                  2012                 2012
Loans Accounted for on a Non-Accrual
Basis                                         $    20,875         $       23,351         $    16,433
Accruing Loans Past Due 90 Days or More                -                      -                   58
Real Estate Acquired in Settlement of
Loans                                              11,259                 11,089              11,309

Total                                         $    32,134         $       34,440         $    27,800
Non-Performing Assets as a Percentage of
Net Loans and Other Real Estate                     11.53 %                11.77 %              8.72 %

                                                                      ALC
                                              March 31,          December 31,           March 31,
                                                2013                 2012                 2012
Loans Accounted for on a Non-Accrual
Basis                                        $       239         $         267         $     1,512
Accruing Loans Past Due 90 Days or More            1,863                 1,571               1,810
Real Estate Acquired in Settlement of
Loans                                              1,123                 2,197               3,324

Total                                        $     3,225         $       4,035         $     6,646
Non-Performing Assets as a Percentage
of Net Loans and Other Real Estate                  4.51 %                5.22 %              8.06 %


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Non-performing assets as a percentage of net loans and other real estate was 10.10% at March 31, 2013 and 10.40% at December 31, 2012. Loans on non-accrual status decreased $2.5 million, accruing loans past due 90 days or more increased $292,000 and real estate acquired in settlement of loans decreased $904,000 from December 31, 2012. The Company forecasts that adverse economic conditions and the weakened real estate market in the Company's market area will continue to put downward pressure on real estate collateral values and will impact our ability to reduce non-performing assets. Other real estate owned as of March 31, 2013 consisted of four residential properties totaling $448,748 and thirty-six commercial properties totaling $10.8 million at the Bank and forty residential properties totaling $822,140 and fifteen commercial properties totaling $301,325 at ALC. Every effort is made to dispose of these properties in a timely manner, but these efforts continue to be hampered by difficult economic conditions. Real estate values are depressed, and the real estate market remains weak 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 $169.4 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 March 31, 2013 and December 31, 2012, 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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