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

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
USBI > SEC Filings for USBI > Form 10-Q on 13-Nov-2013All Recent SEC Filings

Show all filings for UNITED SECURITY BANCSHARES INC

Form 10-Q for UNITED SECURITY BANCSHARES INC


13-Nov-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.

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


Table of Contents

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 September 30, 2013 to year-end 2012, while comparing income and expense for the three- and nine-month periods ended September 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 NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2013 TO THE THREE- AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2012

Net income for the Company in the third quarter of 2013 was $904,000, compared to net income for the Company of $1.2 million for the third quarter of 2012, resulting in a decrease of basic net income per share from $0.20 per share for the third quarter of 2012 to $0.15 per share for the same quarter of 2013. Net income for the Company for the nine-month period ended September 30, 2013 was $3.0 million, compared to net income for the Company of $1.3 million for the nine-month period of 2012. This resulted in an increase of basic net income per share from $0.22 per share to $0.49 per share for the nine-month periods ended September 30, 2012 and 2013, respectively.

For the three-month period ended September 30, 2013, the Bank had net income of $429,000, compared to net income of $695,000 for the same quarter of 2012. For the nine-month period ended September 30, 2013, the Bank had net income of $1.8 million, compared to net income of $166,000 for the same period in 2012. For the nine-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 September 30, 2013 was $537,000, compared to $603,000 for the same quarter of 2012. Net income for ALC for the nine-month periods ended both September 30, 2013 and 2012 was $1.3 million. The decline in net income for the third quarter of 2013 compared to the third quarter of 2012 resulted from an increase in the provision for loan losses and a decline in interest income, offset somewhat by a decline in non-interest expense. Net income for the nine-month period was impacted by a decline in interest income, offset by a decline in the provision for loan losses, an increase in non-interest income and a decline in non-interest expense, when compared to the nine-month period in 2012.

Interest income for the Company for the 2013 third quarter decreased $1.1 million, or 11.3%, compared to the third quarter of 2012. For the nine months ended September 30, 2013, interest income decreased $3.8 million, or 13.0%, 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 and a decrease in the average yield on loans and investment securities. Interest income at the Bank for the 2013 third quarter decreased $758,000, or 13.4%, compared to the third quarter of 2012. For the nine months ended September 30, 2013, interest income at the Bank decreased $3.3 million, or 18.0%, compared with the same period of 2012. Interest income at ALC for the third quarter of 2013 decreased $452,000, or 9.8%, compared to the third quarter of 2012. For the nine months ended September 30, 2013, interest income at ALC decreased $988,000, or 7.2%, 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 and 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 third quarter decreased $329,000, or 31.9%, compared to the third quarter of 2012. Interest expense decreased $1.4 million, or 39.3%, to $2.2 million for the first nine months of 2013, compared to $3.7 million for the first nine 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 current rates on deposits remain at record historical lows.


Table of Contents

Net interest income for the Company decreased $729,000, or 8.8%, for the third quarter of 2013, and decreased $2.4 million, or 9.2%, for the first nine months of 2013, compared to the same periods in 2012. The net interest margin declined from 6.07% for the nine months ended September 30, 2012 to 5.97% for the nine months ended September 30, 2013, and from 6.04% for the third quarter of 2012 to 5.89% for the third quarter of 2013. Loan and investment yields declined for the three- and nine-month periods ended September 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, however, no assurance is given regarding prevailing market rates.

The provision for loan losses for the Company was $240,000, or 0.3% annualized of average loans, in the third quarter of 2013, compared to $492,000, or 0.5% annualized of average loans, in the third quarter of 2012. The provision for loan losses decreased to $799,000 for the nine months ended September 30, 2013, compared to $3.2 million for the same period in 2012. Net charge-offs for the Company were $2.6 million for the 2013 third quarter and $10.8 million for the first nine months of 2013, compared to $760,000 and $5.6 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 $(300,000) for the 2013 third quarter and $(462,000) for the nine months ended September 30, 2013. Net charge-offs increased $1.8 million to $2.0 million for the third quarter of 2013 and increased $5.4 million to $9.0 million for the nine months ended September 30, 2013, when compared to the same periods in 2012.

The provision for loan losses at ALC increased to $540,000 for the third quarter of 2013, compared to $492,000 for the same period of 2012. For the nine-month period ending September 30, 2013, the provision for loan losses at ALC decreased $400,000 to $1.3 million, compared to $1.7 million for the same nine-month period in 2012. Net charge-offs for the third quarter of 2013 were $620,000, compared to $586,000 for the third quarter of 2012. For the nine-month period ended September 30, 2013, net charge-offs were $1.8 million, compared to $2.0 million for the first nine months of 2012.

Total non-interest income for the Company decreased $162,000, or 11.1% for the third quarter of 2013 and increased $84,000, or 2.1% for the first nine months of 2013. Service charges on deposit accounts decreased $53,000 for the third quarter of 2013, and decreased $136,000 for the nine-month period ended September 30, 2013, when compared to the same periods in 2012, primarily due to decreased fees generated from customer overdrafts and non-sufficient funds in the first three quarters of 2013. Other income increased $315,000 for the nine-month period ended September 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 for the Company decreased $197,000, or 2.6%, for the 2013 third quarter and decreased $2.6 million, or 10.5%, for the nine months ended September 30, 2013, compared to the same periods in 2012. Salary and employee benefits increased $596,000 when comparing third quarter 2013 to the same period in 2012, and increased $1.1 million for the nine months ended September 30, 2013 compared to the same period in 2012. The increase in salary and employee benefits was the result of salary related to additional staffing added during the period. For the 2013 third quarter, impairment on other real estate decreased $162,000, and realized loss on sale of OREO decreased $524,000. For the nine months ended September 30, 2013, impairment on OREO decreased $2.7 million, and realized loss on sale of OREO decreased $279,000. Management was able to reduce OREO in 2012 and in the first, second and third 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 third quarter of 2013 was $350,000, compared to income tax expense of $517,000 in the third quarter of 2012. For the nine-month period ended September 30, 2013, income tax expense was $1.2 million, compared to income tax expense of $157,000 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 September 30, 2013.


Table of Contents

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

In comparing consolidated financial condition at September 30, 2013 to December 31, 2012, total assets decreased $7.1 million to $560.0 million and liabilities decreased $7.9 million to $490.6 million. Shareholders' equity increased $0.8 million as a result of net income of $3.0 million, partially offset by a $2.3 million decrease in accumulated other comprehensive income.

Investment securities increased $43.1 million, or 37.9%, during the first nine months of 2013. Investments provide the Company with a stable form of liquidity while maximizing earnings yield. Loans, net of unearned income, decreased $42.6 million, from $356.7 million at December 31, 2012 to $314.1 million at September 30, 2013. Deposits decreased $13.0 million, or 2.7%, during the first nine months of 2013. Loans at ALC, net of unearned income, decreased $5.0 million, from $75.1 million at December 31, 2012 to $70.1 million at September 30, 2013. Loans at the Bank, after consolidation eliminations, decreased $37.7 million from $281.6 million at December 31, 2012 to $243.9 million at September 30, 2013.

Other assets declined $4.5 million from December 31, 2012 to September 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 nine-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 September 30, 2013, the allowance for loan losses was $9.3 million, or 3.0% 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 35.7% at September 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 ratio utilized in calculating the allowance for loan losses for the remaining portion of the loan portfolio, which is evaluated collectively for impairment, has also decreased. These factors have contributed to the decreased allowance for loan losses.

Net charge-offs for the nine-month period ended September 30, 2013 were $10.8 million, or 4.3% of average loans on an annualized basis, an increase of 96.4%, or $5.4 million, from charge-offs of $5.6 million, or 1.9% of average loans on an annualized basis, reported for the nine-month period ended September 30, 2012. The provision for loan losses for the nine months ended September 30, 2013 was $799,020, compared to $3.2 million for the same period of 2012.

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

                                                                         Consolidated
                                                  September 30,          December 31,          September 30,
                                                      2013                   2012                  2012
Loans Accounted for on a Non-Accrual Basis       $        12,750        $       23,618        $        31,575
Accruing Loans Past Due 90 Days or More                    1,853                 1,571                  2,088
Real Estate Acquired in Settlement of Loans               11,372                13,286                 13,608

Total                                            $        25,975        $       38,475        $        47,271
Non-Performing Assets as a Percentage of Net
Loans and Other Real Estate                                 8.00 %               10.40 %                12.50 %


Table of Contents
                                                                             FUSB
                                                  September 30,          December 31,          September 30,
                                                      2013                   2012                  2012
Loans Accounted for on a Non-Accrual Basis       $        12,544        $       23,351        $        30,067
Accruing Loans Past Due 90 Days or More                       -                     -                      56
Real Estate Acquired in Settlement of Loans               10,522                11,089                 11,021

Total                                            $        23,066        $       34,440        $        41,144
Non-Performing Assets as a Percentage of Net
Loans and Other Real Estate                                 9.07 %               11.77 %                13.77 %

                                                                             ALC
                                                  September 30,         December 31,          September 30,
                                                      2013                  2012                  2012
Loans Accounted for on a Non-Accrual Basis       $           206        $         267        $         1,507
Accruing Loans Past Due 90 Days or More                    1,853                1,571                  2,032
Real Estate Acquired in Settlement of Loans                  850                2,197                  2,587

Total                                            $         2,909        $       4,035        $         6,126
Non-Performing Assets as a Percentage of Net
Loans and Other Real Estate                                 4.10 %               5.22 %                 7.72 %

Non-performing assets as a percentage of net loans and other real estate was 8.0% at September 30, 2013 and 10.4% at December 31, 2012. Loans on non-accrual status decreased $10.9 million, accruing loans past due 90 days or more increased $282,000 and real estate acquired in settlement of loans decreased $1.9 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 September 30, 2013 consisted of six residential properties totaling $473,911 and thirty commercial properties totaling $10.0 million at the Bank, and thirty residential properties totaling $592,993 and thirteen commercial properties totaling $256,641 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 area. 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 interest 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 $163.0 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 September 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.


Table of Contents

  Add USBI to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for USBI - All Recent SEC Filings
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.