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USBI > SEC Filings for USBI > Form 10-Q on 14-Aug-2013All Recent SEC Filings

Show all filings for UNITED SECURITY BANCSHARES INC

Form 10-Q for UNITED SECURITY BANCSHARES INC


14-Aug-2013

Quarterly Report


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

The following discussion and consolidated 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. ("USBI"). USBI 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"). USBI has no operations of any consequence other than the ownership of its subsidiaries.


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The accounting principles and reporting policies of USBI and its subsidiaries (collectively, "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 USBI'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 June 30, 2013 to year-end 2012, while comparing income and expense for the three- and six-month periods ended June 30, 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 USBI's Annual Report on Form 10-K for the year ended December 31, 2012.

COMPARING THE THREE- AND SIX-MONTH PERIODS ENDED JUNE 30, 2013 TO THE THREE- AND SIX-MONTH PERIODS ENDED JUNE 30, 2012

Net income for the Company in the second quarter of 2013 was $1.2 million, compared to net income for the Company of $1.4 million for the second quarter of 2012, resulting in a decrease of basic net income per share from $0.23 per share during the second quarter of 2012 to $0.20 per share in the same quarter of 2013.

For the three-month period ended June 30, 2013, the Bank had net income of $548,000, compared to net income of $868,000 for the same quarter of 2012. The decline in income for the second quarter of 2013 compared to the same quarter of 2012 was primarily the result of a $1.2 million decline in interest income, offset somewhat by a $442,000 decrease in interest expense. The decline in interest income resulted from an overall decrease in the average volume and yield on loans. For the six-month period ended June 30, 2013, the Bank had net income of $1.4 million, compared to net loss of $528,000 for the same period in 2012. For the six-month period, the increase in net income for the Bank resulted primarily from lower impairment charges on other real estate owned ("OREO") and lower provisions for loan losses.

Net income for ALC for the three-month period ended June 30, 2013 was $663,000, compared to $496,000 for the same quarter of 2012. For the six-month period ended June 30, 2013, net income for ALC was $786,000, compared to $682,000 for the same period in 2012. Improvement in both periods for ALC resulted from lower provisions for loan losses.

Interest income for the Company in the 2013 second quarter decreased $1.3 million, or 13.5%, compared to the second quarter of 2012. For the six months ended June 30, 2013, interest income decreased $2.7 million, or 13.8%, compared with the same period in 2012. The decrease in interest income during these periods was primarily due to a decrease in interest earned on loans resulting from an overall decrease in the average volume of loans and the decrease in the average yield on loans and investment securities. Interest income at the Bank for the 2013 second quarter decreased $1.1 million, or 20.0%, compared to the second quarter of 2012. For the six months ended June 30, 2013, interest income decreased $2.2 million, or 20.7%, compared with the same period of 2012. Interest income at ALC for the second quarter of 2013 decreased $286,000, or 6.2%, compared to the second quarter of 2012. For the six months ended June 30, 2013, interest income at ALC decreased $535,000, or 5.8%, compared with the same period of 2012. The decreases in interest income at the Bank and ALC were due to an overall decrease in the average volume of loans and a decrease in yield on loans. Interest income on investment securities decreased due to the decrease in the average yield of investment securities. Loan demand continues to be weak due to continuing challenging economic conditions in the Company's market area.

Interest expense for the Company in the 2013 second quarter decreased $440,000, or 37.4%, compared to the second quarter of 2012. Interest expense decreased $1.1 million, or 42.1%, to $1.5 million for the first six months of 2013, compared to $2.6 million for the first six months of 2012. These decreases resulted from decreased volume of certificates of deposit, as well as lower interest rates paid on certificates of deposit. As longer term certificates of deposit mature, they reprice at lower rates, as rates on deposits remain at record historical lows.

Net interest income for the Company decreased $876,000, or 10.2%, for the second quarter of 2013, and decreased $1.6 million, or 9.5%, for the first six months of 2013, compared to the same periods in 2012, respectively. The net interest margin declined from 6.09% for the six months ended June 30, 2012 to 6.02% for the six months ended June


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30, 2013, and from 6.16% for the second quarter of 2012 to 5.97% for the second quarter of 2013. Loan and investment yields declined for the three- and six-month periods ended June 30, 2013, compared to the same periods in 2012. The cost of funds declined due to a decline in interest rates paid on interest bearing deposits. 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 the Company was $53,000, or 0.06% annualized of average loans, in the second quarter of 2013, compared to $468,000, or 0.5% annualized of average loans, in the second quarter of 2012. For the six months ended June 30, 2013, the provision for loan losses decreased to $559,000, compared to $2.7 million for the same period in 2012. The annualized provision as a percent of average loans was 0.33% for the first six months of 2013, compared to 1.4% for the same period in 2012. Net charge-offs at the Company level were $5.2 million for the 2013 second quarter and $8.2 million for the first six months of 2013, compared to $1.1 million and $4.8 million for the same periods in 2012. The substantial increase in net charge-offs resulted from the actual charge-down of several large commercial real estate loans at the Bank that had been identified as non-performing, with the appropriate allowance allocated, and no additional provision was required.

The provision for loan losses at the Bank was a negative provision of $(200,000) for the 2013 second quarter and $(162,000) for the six months ended June 30, 2013. Net charge-offs increased $4.2 million to $4.7 million for the second quarter of 2013 and increased $3.6 million to $7.0 million for the six months ended June 30, 2013, when compared to the same periods in 2012.

The provision for loan losses at ALC decreased to $253,000 for the second quarter of 2013, compared to $448,000 for the same period of 2012. For the six-month period ended June 30, 2013, the provision was $721,000, compared to $1.2 million for the same period in 2012. Net charge-offs for the second quarter of 2013 were $562,000, compared to $620,000 for the second quarter of 2012. For the six-month period ended June 30, 2013, net charge-offs were $1.2 million, compared to $1.4 million for the first six months of 2012.

Total non-interest income for the Company decreased $103,000, or 7.7%, for the second quarter of 2013 and increased $246,000, or 9.4%, for the first six months of 2013. Service charges on deposit accounts decreased $45,000 for the second quarter of 2013, and decreased $83,000 for the six-month period ended June 30, 2013, when compared to the same periods in 2012, primarily due to decreased fees generated from customer overdrafts and non-sufficient funds in both quarters of 2013. Other income increased $391,000 for the six-month period ended June 30, 2013 compared to the same period in 2012. This increase is attributable to a non-recurring prepayment penalty of $484,000 from the early payoff of a mortgage-backed pool received in the first quarter of 2013.

Total non-interest expense decreased $264,000, or 3.5%, for the 2013 second quarter and decreased $2.4 million, or 13.9%, for the six months ended June 30, 2013, compared to the same periods in 2012. Salary and employee benefits increased $251,000 when comparing the second quarter of 2013 to the second quarter of 2012 and increased $498,000 for the six months ended June 30, 2013 compared to the same period in 2012. For the 2013 second quarter, impairment on other real estate increased $135,000, and realized loss on sale of OREO increased $6,000. For the six months ended June 30, 2013, impairment on OREO decreased $2.5 million, and realized loss on sale of OREO increased $245,000. Management was able to reduce OREO in 2012 and in the first and second quarters 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 expense for the second quarter of 2013 was $512,000, compared to $623,000 for the same period of 2012. For the six-month period ended June 30, 2013, income tax expense was $856,000, compared to a tax benefit of $360,000 for the same period of 2012. Management estimates the effective tax rate for the Company to be approximately 30.0% of pre-tax income for the period ended June 30, 2013.

COMPARING THE JUNE 30, 2013 STATEMENTS OF FINANCIAL CONDITION TO DECEMBER 31,
2012

In comparing consolidated financial condition at June 30, 2013 to December 31, 2012, total assets decreased $11.4 million to $555.7 million, while liabilities decreased $11.8 million to $486.7 million. Shareholders' equity increased $364,000 as a result of net income of $2.1 million, offset somewhat by a $1.7 million decrease in accumulated other comprehensive income.

Investment securities increased $24.0 million, or 21.1%, during the first six months of 2013. Investments provide the Company with a stable form of liquidity while maximizing earnings yield. Loans, net of unearned income, decreased $33.1 million, from $356.7 million at December 31, 2012 to $323.6 million at June 30, 2013. Deposits decreased $10.9 million, or 2.2%, during the first six months of 2013. Loans, net of unearned income, at ALC


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decreased $3.7 million, from $75.1 million at December 31, 2012 to $71.4 million at June 30, 2013. Loans at the Bank, after consolidation eliminations, decreased $29.4 million, from $281.6 million at December 31, 2012 to $252.2 million at June 30, 2013.

Other assets declined $3.3 million from December 31, 2012 to June 30, 2013. This reduction resulted primarily from a $2.9 million income tax refund receivable and a $465,000 refund receivable from prepaid FDIC assessments as of December 31, 2012. All other components of other assets remained fairly consistent for the six month period.

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 June 30, 2013, the allowance for loan losses was $11.6 million, or 3.6% 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 40.3% at June 30, 2013, compared to 50.1% at December 31, 2012. The level of non-performing and impaired loans has decreased since December 31, 2012 through collections, charge-offs and upgrades. The impairment and reserve required by loans evaluated individually for impairment has decreased. In addition, the historical loss ratios utilized in calculating the allowance for loan losses for the remaining portion of the loan portfolio, which is evaluated collectively for impairment, have also decreased. These factors have contributed to the decreased allowance for loan losses.

Net charge-offs for 2013 as of June 30, 2013 were $8.2 million, or 4.8% of average loans on an annualized basis, an increase of 41.5%, or $3.4 million, from the charge-offs of $4.8 million, or 2.5% of average loans on an annualized basis, reported a year earlier as of June 30, 2012. The provision for loan losses for the six months ended June 30, 2013 was $559,000, compared to $2.7 million for the same period of 2012.

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

                                                                   Consolidated
                                                 June 30,          December 31,         June 30,
                                                   2013                2012               2012
Loans Accounted for on a Nonaccrual Basis        $  14,847        $       23,618        $  17,533
Accruing Loans Past Due 90 Days or More              1,674                 1,571            1,661
Real Estate Acquired in Settlement of Loans         12,377                13,286           15,005

Total                                            $  28,898        $       38,475        $  34,199
Non-Performing Assets as a Percentage of Net
Loans and Other Real Estate                           8.60 %               10.40 %           8.76 %

                                                                      FUSB
                                                June 30,          December 31,         June 30,
                                                  2013                2012               2012
Loans Accounted for on a Nonaccrual Basis       $  14,618        $       23,351        $  16,087
Accruing Loans Past Due 90 Days or More                -                     -                41
Real Estate Acquired in Settlement of Loans        11,602                11,089           12,004

Total                                           $  26,220        $       34,440        $  28,132
Non-Performing Assets as a Percentage of
Net Loans and Other Real Estate                      9.94 %               11.77 %           9.11 %


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                                                                        ALC
                                                 June 30,          December 31,           June 30,
                                                   2013                2012                 2012
Loans Accounted for on a Nonaccrual Basis       $      229         $         267         $    1,446
Accruing Loans Past Due 90 Days or More              1,674                 1,571              1,620
Real Estate Acquired in Settlement of
Loans                                                  775                 2,197              3,001

Total                                           $    2,678         $       4,035         $    6,067
Non-Performing Assets as a Percentage of
Net Loans and Other Real Estate                       3.71 %                5.22 %            11.22 %

Non-performing assets as a percentage of net loans and other real estate was 8.60% at June 30, 2013 and 10.40% at December 31, 2012. Loans on nonaccrual status decreased $8.8 million, accruing loans past due 90 days or more increased $103,000 and real estate acquired in settlement of loans decreased $0.9 million from December 31, 2012. The Company forecasts that challenging 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 the Company's ability to reduce non-performing assets. OREO as of June 30, 2013 consisted of six residential properties totaling $473,911 and thirty-three commercial properties totaling $11.1 million at the Bank and thirty-one residential properties totaling $505,413 and fifteen commercial properties totaling $269,326 at ALC. Every effort is made to dispose of these properties in a timely manner, but these efforts continue to be hampered by current economic conditions. Real estate values are depressed, and the real estate market remains weakened in all of the Company's 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 nonaccrual 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 $166.7 million in borrowing capacity from the FHLB and $17.8 million in established federal funds lines.

USBI and the Bank are required to maintain certain levels of regulatory capital. At June 30, 2013 and December 31, 2012, USBI 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, USBI and its subsidiaries are defendants 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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