XNAS:USBI Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

XNAS:USBI (): Fair Value Estimate
Premium
XNAS:USBI (): Consider Buying
Premium
XNAS:USBI (): Consider Selling
Premium
XNAS:USBI (): Fair Value Uncertainty
Premium
XNAS:USBI (): Economic Moat
Premium
XNAS:USBI (): Stewardship
Premium
 
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2012

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                  to                 

Commission File Number: 0-14549

 

 

United Security Bancshares, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Delaware   63-0843362

(State or Other Jurisdiction of

Incorporation or Organization)

 

(IRS Employer

Identification No.)

131 West Front Street  
Post Office Box 249  
Thomasville, AL   36784
(Address of Principal Executive Offices)   (Zip Code)

(334) 636-5424

(Registrant’s Telephone Number, Including Area Code)

N/A

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.)    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class

  

Outstanding at May 11, 2012

Common Stock, $0.01 par value

   6,036,792 shares

 

 

 


Table of Contents

UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES

 

         PAGE  
 

PART I. FINANCIAL INFORMATION

  
ITEM 1.  

FINANCIAL STATEMENTS

  
  Condensed Consolidated Statements of Financial Condition at March 31, 2012 (Unaudited) and December 31, 2011      4   
  Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2012 and 2011 (Unaudited)      5   
  Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended March 31, 2012 and 2011 (Unaudited)      6   
  Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2012 and 2011 (Unaudited)      7   
 

Notes to Condensed Consolidated Financial Statements (Unaudited)

     8   
ITEM 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS      31   
ITEM 3.  

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     34   
ITEM 4.  

CONTROLS AND PROCEDURES

     35   
 

PART II. OTHER INFORMATION

  
ITEM 1.  

LEGAL PROCEEDINGS

     36   
ITEM 1A.  

RISK FACTORS

     36   
ITEM 2.  

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

     36   
ITEM 6.  

EXHIBITS

     36   
Signature Page      37   

 

2


Table of Contents

FORWARD-LOOKING STATEMENTS

Statements contained in this Quarterly Report on Form 10-Q that are not historical facts are forward-looking statements (as defined in the Private Securities Litigation Reform Act of 1995). In addition, United Security Bancshares, Inc. and its subsidiaries (the “Company” or “USBI”), through its senior management, from time to time makes forward-looking statements concerning its expected future operations and performance and other developments. The words “estimate,” “project,” “intend,” “anticipate,” “expect,” “believe” and similar expressions are indicative of forward-looking statements. Such forward-looking statements are necessarily estimates reflecting the Company’s best judgment based upon current information and involve a number of risks and uncertainties, and various factors could cause results to differ materially from those contemplated by such forward-looking statements. Such factors could include those identified from time to time in the Company’s Securities and Exchange Commission (“SEC”) filings and other public announcements, including the risk factors described in Part I, Item 1A of the Company’s Annual Report on Form 10-K, for the year ended December 31, 2011. With respect to the adequacy of the allowance for loan losses for the Company, these factors include, but are not limited to, the rate of growth (or lack thereof) in the economy, the relative strength and weakness in the consumer and commercial credit sectors and in the real estate markets and collateral values. Forward-looking statements speak only as of the date they are made, and the Company undertakes no obligation to revise forward-looking statements to reflect circumstances or events that occur after the dates on which the forward-looking statements are made, except as required by law.

 

3


Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(In Thousands of Dollars, Except Per Share Data)

 

     March 31,     December 31,  
     2012     2011  
     (Unaudited)        

ASSETS

  

Cash and Due from Banks

   $ 11,844      $ 9,491   

Interest-Bearing Deposits in Other Banks

     58,082        43,306   
  

 

 

   

 

 

 

Total Cash and Cash Equivalents

     69,926        52,797   

Investment Securities Available-for-Sale, at fair market value

     113,647        122,170   

Investment Securities Held-to-Maturity, at cost

     5,161        1,170   

Federal Home Loan Bank Stock, at cost

     2,861        2,861   

Loans, net of allowance for loan losses of $20,771 and $22,267, respectively

     365,849        381,085   

Premises and Equipment, net

     9,083        9,050   

Cash Surrender Value of Bank-Owned Life Insurance

     13,020        12,922   

Accrued Interest Receivable

     3,542        3,958   

Investment in Limited Partnerships

     1,437        1,456   

Other Real Estate Owned

     14,633        16,774   

Other Assets

     18,264        17,567   
  

 

 

   

 

 

 

Total Assets

   $ 617,423      $ 621,810   
  

 

 

   

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

  

Deposits

   $ 533,660      $ 527,073   

Accrued Interest Expense

     675        790   

Short-Term Borrowings

     225        356   

Long-Term Debt

     10,000        20,000   

Other Liabilities

     7,903        7,384   
  

 

 

   

 

 

 

Total Liabilities

     552,463        555,603   
  

 

 

   

 

 

 

Commitments and Contingencies (See Note 13)

    

Shareholders’ Equity:

    

Common Stock, par value $0.01 per share, 10,000,000 shares authorized; 7,322,560 shares issued; 6,017,732 and 6,015,737 shares outstanding, respectively

     73        73   

Surplus

     9,259        9,259   

Accumulated Other Comprehensive Income, net of tax

     2,936        3,004   

Retained Earnings

     73,854        75,091   

Less Treasury Stock: 1,304,828 and 1,306,823 shares at cost, respectively

     (21,150     (21,208

Noncontrolling Interest

     (12     (12
  

 

 

   

 

 

 

Total Shareholders’ Equity

     64,960        66,207   
  

 

 

   

 

 

 

Total Liabilities and Shareholders’ Equity

   $ 617,423      $ 621,810   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these Condensed Consolidated Statements.

 

4


Table of Contents

UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In Thousands of Dollars, Except Per Share Data)

 

     Three Months Ended  
     March 31,  
     2012     2011  
     (Unaudited)  

INTEREST INCOME:

    

Interest and Fees on Loans

   $ 9,083      $ 9,087   

Interest on Investment Securities

     927        1,357   
  

 

 

   

 

 

 

Total Interest Income

     10,010        10,444   

INTEREST EXPENSE:

    

Interest on Deposits

     1,375        1,597   

Interest on Borrowings

     85        270   
  

 

 

   

 

 

 

Total Interest Expense

     1,460        1,867   
  

 

 

   

 

 

 

NET INTEREST INCOME

     8,550        8,577   

PROVISION FOR LOAN LOSSES

     2,215        1,305   
  

 

 

   

 

 

 

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES

     6,335        7,272   

NON-INTEREST INCOME:

    

Service and Other Charges on Deposit Accounts

     628        716   

Credit Life Insurance Income

     119        122   

Other Income

     527        351   
  

 

 

   

 

 

 

Total Non-Interest Income

     1,274        1,189   

NON-INTEREST EXPENSE:

    

Salaries and Employee Benefits

     3,764        3,570   

Occupancy Expense

     447        476   

Furniture and Equipment Expense

     310        303   

Impairment on Other Real Estate

     2,834        484   

Loss on Sale of Other Real Estate

     194        339   

Other Expense

     2,279        2,263   
  

 

 

   

 

 

 

Total Non-Interest Expense

     9,828        7,435   
  

 

 

   

 

 

 

INCOME (LOSS) BEFORE INCOME TAXES

     (2,219     1,026   

PROVISION FOR (BENEFIT FROM) INCOME TAXES

     (982     207   
  

 

 

   

 

 

 

NET INCOME (LOSS)

   $ (1,237   $ 819   
  

 

 

   

 

 

 

BASIC AND DILUTED NET INCOME (LOSS) PER SHARE

   $ (0.21   $ 0.14   
  

 

 

   

 

 

 

DIVIDENDS PER SHARE

   $ —        $ 0.04   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these Condensed Consolidated Statements.

 

5


Table of Contents

UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In Thousands of Dollars)

 

     Three Months Ended  
     March 31,  
     2012     2011  
     (Unaudited)  

Net income (loss)

   $ (1,237   $ 819   
  

 

 

   

 

 

 

Other comprehensive income (loss):

    

Change in unrealized holding gains (losses) on available-for-sale securities arising during period, net of tax (benefit) of $(41) and $95, respectively

     (68     158   
  

 

 

   

 

 

 

Other comprehensive income (loss)

     (68     158   
  

 

 

   

 

 

 

Total comprehensive income (loss)

   $ (1,305   $ 977   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these Condensed Consolidated Statements.

 

6


Table of Contents

UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands of Dollars)

 

     Three Months Ended  
     March 31,  
     2012     2011  
     (Unaudited)  

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net income (loss)

   $ (1,237   $ 819   
  

 

 

   

 

 

 

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation

     180        175   

Amortization of premiums and discounts, net

     315        150   

Provision for loan losses

     2,215        1,305   

Impairment of OREO

     2,834        484   

Loss on sale of OREO

     194        339   

Loss on sale of fixed assets, net

     —          89   

Net other operating activities

     85        1,418   
  

 

 

   

 

 

 

Total adjustments

     5,823        3,960   
  

 

 

   

 

 

 

Net cash provided by operating activities

     4,586        4,779   
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Proceeds from maturities and prepayments of investment securities, available-for- sale

     13,091        12,027   

Proceeds from maturities and prepayments of investment securities, held-to- maturity

     1,170        —     

Proceeds from the sale of other real estate

     1,257        1,972   

Purchase of premises and equipment, net

     (213     —     

Purchase of investment securities available-for-sale

     (4,993     (9,192

Purchase of investment securities held-to-maturity

     (5,161     —     

Net change in loan portfolio

     10,877        (1,250
  

 

 

   

 

 

 

Net cash provided by investing activities

     16,028        3,557   
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Net increase in customer deposits

     6,587        16,700   

Dividends paid

     —          (241

Increase (decrease) in borrowings

     (10,131     168   

Purchase of treasury stock

     59        (2
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     (3,485     16,625   
  

 

 

   

 

 

 

NET INCREASE IN CASH AND CASH EQUIVALENTS

     17,129        24,961   
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS, beginning of period

     52,797        13,531   
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS, end of period

   $ 69,926      $ 38,492   
  

 

 

   

 

 

 

SUPPLEMENTAL DISCLOSURES:

    

Cash paid for:

    

Interest

   $ 1,575      $ 2,130   

Income Taxes

     70        3   

NON-CASH TRANSACTIONS:

    

Other real estate acquired in settlement of loans

   $ 2,143      $ 2,987   

The accompanying notes are an integral part of these Condensed Consolidated Statements.

 

7


Table of Contents

UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. GENERAL

The accompanying unaudited interim condensed consolidated financial statements include the accounts of United Security Bancshares, Inc. and its subsidiaries (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”). All significant intercompany transactions and accounts have been eliminated.

The unaudited interim condensed consolidated financial statements, in the opinion of management, reflect all adjustments necessary for a fair presentation of consolidated financial position, results of operations and cash flows for the periods presented. Such adjustments are of a normal, recurring nature. The results of operations for any interim period are not necessarily indicative of results expected for the fiscal year ending December 31, 2012. While certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”), management believes that the disclosures herein are adequate to make the information presented not misleading. These unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011. The accounting policies followed by the Company are 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. In preparing the unaudited interim condensed consolidated financial statements, management evaluated subsequent events through the date on which the unaudited interim condensed consolidated financial statements were issued.

2. RECENT ACCOUNTING PRONOUNCEMENTS

In April 2011, the FASB issued ASU No. 2011-03, Reconsideration of Effective Control for Repurchase Agreements. ASU No. 2011-03 affects all entities that enter into agreements to transfer financial assets that both entitle and obligate the transferor to repurchase or redeem the financial assets before their maturity. The amendments in ASU No. 2011-03 remove from the assessment of effective control the criterion relating to the transferor’s ability to repurchase or redeem financial assets on substantially the agreed terms, even in the event of default by the transferee. ASU No. 2011-03 also eliminates the requirement to demonstrate that the transferor possesses adequate collateral to fund substantially all the cost of purchasing replacement financial assets. The guidance is effective prospectively for new transactions or modifications of existing transactions as of the first interim or annual period beginning on or after December 15, 2011. ASU 2011-03 became effective for the Company on January 1, 2012 and did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The standards set forth in ASU 2011-04 supersede most of the accounting guidance currently found in Topic 820 of FASB’s ASC, previously known as Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements. The amendments improve comparability of fair value measurements presented and disclosed in financial statements prepared with GAAP and International Financial Reporting Standards (“IFRS”). The amendments also clarify the application of existing fair value measurement requirements. These amendments include (1) the application of the highest and best use and valuation premise concepts, (2) measuring the fair value of an instrument classified in a reporting entity’s shareholders’ equity and (3) disclosing quantitative information about the unobservable inputs used within the Level 3 hierarchy. This ASU became effective for the Company’s interim and annual periods beginning after December 15, 2011 and did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows. See Note 5 for the newly-required disclosures.

 

8


Table of Contents

In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income, which amends existing standards to allow an entity the option to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. Under both options, an entity is required to present each component of net income along with total net income; each component of other comprehensive income along with a total for other comprehensive income; and a total amount for comprehensive income. Any changes pursuant to the options allowed in the amendments should be applied retrospectively. This guidance is effective for fiscal years and interim reporting periods within those years beginning after December 15, 2011. The Company adopted this new guidance with first quarter 2012 financial reporting. In January 2012, the FASB issued accounting guidance that indefinitely defers the effective date of certain provisions concerning the presentation of comprehensive income. The guidance indefinitely defers the requirement to present reclassification adjustments by component in both the statement where net income is presented and the statement where other comprehensive income is presented. See the consolidated statements of comprehensive income for further details.

In December 2011, the FASB issued ASU 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities. The amendments in this Update affect all entities that have financial instruments and derivative instruments that are either (1) offset in accordance with either Section 210-20-45 or Section 815-10-45 or (2) subject to an enforceable master netting arrangement or similar agreement. The requirements amend the disclosure requirements on offsetting in Section 210-20-50. This information will enable users of an entity’s financial statements to evaluate the effect or potential effect of netting arrangements on an entity’s financial position, including the effect or potential effect of rights of setoff associated with certain financial instruments and derivative instruments in the scope of this Update. An entity is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented. The Company is evaluating the impact that adoption will have on its consolidated financial statements.

3. NET INCOME (LOSS)

Basic net income (loss) per share is computed by dividing net income (loss) by the weighted average shares during the three-month periods ended March 31, 2012 and 2011. Diluted net income (loss) per share for the three-month periods ended March 31, 2012 and 2011 is computed based on the weighted average shares outstanding during the period plus the dilutive effect of all potentially dilutive instruments outstanding. There were no outstanding potentially dilutive instruments during the periods ended March 31, 2012 or 2011, and, therefore, basic and diluted weighted average shares outstanding were the same.

 

9


Table of Contents

The following table represents the basic and diluted net income (loss) per share calculations for the three-month periods ended March 31, 2012 and 2011 (in thousands of dollars, except per share data):

 

For the Three Months Ended:

   Net
Income
(Loss)
    Weighted
Average
Shares
Outstanding
     Basic and
Diluted Net
Income (Loss)
Per

Share
 

March 31, 2012

   $ (1,237     6,017,088       $ (0.21

March 31, 2011

   $ 819        6,010,858       $ 0.14   

4. COMPREHENSIVE INCOME (LOSS)

Comprehensive income (loss) consists of net income (loss) and the change in the unrealized gains or losses on the Company’s available-for-sale securities portfolio arising during the period. In the calculation of comprehensive income (loss), certain reclassification adjustments are made to avoid double counting items that are displayed as part of net income (loss) for a period that also had been displayed as part of other comprehensive income (loss) in that period or earlier periods.

5. FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company follows the provisions of ASC Topic 820, Fair Value Measurements and Disclosures, which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements.

ASC Topic 820 requires disclosure of fair value information about financial instruments, whether or not recognized on the face of the consolidated statements of financial condition, for which it is practicable to estimate that value. The assumptions used in the estimation of the fair value of the Company’s financial instruments are detailed below. Where quoted prices are not available, fair values are based on estimates using discounted cash flows and other valuation techniques. The use of discounted cash flows can be significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. The following disclosures should not be considered a surrogate of the liquidation value of the Company, but rather represent a good-faith estimate of the increase or decrease in value of financial instruments held by the Company since purchase, origination or issuance.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between willing market participants at the measurement date. In determining fair value, the Company uses various methods, including market, income and cost approaches. Based on these approaches, the Company often utilizes certain assumptions that market participants would use in pricing the asset or liability, including assumptions about risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated or generally unobservable inputs. The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Based on the observability of the inputs used in the valuation techniques, the Company is required to provide the following information according to the fair value hierarchy. The fair value hierarchy ranks the quality and reliability of the information used to determine fair values. Assets and liabilities carried at fair value will be classified and disclosed in one of the following three categories:

 

   

Level 1 — Valuations for assets and liabilities traded in active exchange markets, such as the New York Stock Exchange. Level 1 also includes equity securities in banks that are publicly traded. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

 

   

Level 2 — Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from third-party pricing services for identical or similar assets or liabilities.

 

   

Level 3 — Valuations for assets and liabilities that are derived from other valuation methodologies, including option pricing models, discounted cash flow models and similar techniques, and not based on market exchange, dealer or broker-traded transactions. Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities.

 

10


Table of Contents

The following methods and assumptions were used by the Company in estimating the fair value of its financial instruments:

Cash, due from banks and federal funds sold: The carrying amount of cash, due from banks and federal funds sold approximates fair value.

Federal Home Loan Bank: Based on the redemption provision of the Federal Home Loan Bank (“FHLB”), the stock has no quoted market value and is carried at cost.

Securities: Fair values of securities are based on quoted market prices where available. If quoted market prices are not available, estimated fair values are based on market prices of comparable instruments.

Accrued interest: The carrying amount of accrued interest approximates fair value.

Loans, net: For variable-rate loans, fair values are based on carrying values. Fixed-rate commercial loans, other installment loans and certain real estate mortgage loans were valued using discounted cash flows. The discount rate used to determine the present value of these loans is based on interest rates currently being charged by the Company on comparable loans as to credit risk and term.

Demand and savings deposits: The fair values of demand deposits are equal to the carrying value of such deposits. Demand deposits include non-interest bearing demand deposits, savings accounts, NOW accounts and money market demand accounts.

Time deposits: The fair values of relatively short-term time deposits are equal to their carrying values. Discounted cash flows are used to value long-term time deposits. The discount rate used is based on interest rates currently being offered by the Company on comparable deposits as to amount and term.

Short-term borrowings: These borrowings may consist of federal funds purchased, securities sold under agreements to repurchase, and the floating rate borrowings from the FHLB account. Due to the short-term nature of these borrowings, fair values approximate carrying values.

Long-term debt: The fair value of this debt is estimated using discounted cash flows based on the Company’s current incremental borrowing rate for similar types of borrowing arrangements as of March 31, 2012 and December 31, 2011.

Off-balance sheet instruments: The carrying amount of commitments to extend credit and standby letters of credit approximates fair value. The carrying amount of the off-balance sheet financial instruments is based on fees currently charged to enter into such agreements.

Financial assets measured at fair value on a recurring basis at March 31, 2012 and December 31, 2011 is summarized below.

 

     Fair Value Measurements at March 31, 2012 Using  
     Totals at
March  31,
2012
     Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 
     (In Thousands of Dollars)  

Mortgage-backed securities

   $ 91,664       $ —         $ 91,664       $ —     

Obligations of states, counties and political subdivisions

     15,394         —           15,394         —     

Obligations of U.S. government sponsored agencies

     6,504         —           6,504         —     

U.S. treasury securities

     75         —           75         —     

Equity securities

     10         10         —           —     

 

11


Table of Contents
     Fair Value Measurements at December 31, 2011 Using  
     Totals at
December 31,
2011
     Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 
     (In Thousands of Dollars)  

Mortgage-backed securities

   $ 99,691       $ —         $ 99,691       $ —     

Obligations of states, counties and political subdivisions

     15,885         —           15,885         —     

Obligations of U.S. government sponsored agencies

     6,509         —           6,509      

U.S. treasury securities

     75         —           75         —     

Equity securities

     10         10         —           —     

Assets Measured at Fair Value on a Recurring Basis

The following is a description of the valuation methodologies used for instruments measured at fair value on a recurring basis and recognized in the accompanying balance sheet, as well as the general classification of such instruments pursuant to the valuation hierarchy.

Available-for-Sale Securities

Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities would include highly liquid government bonds, mortgage products and exchange traded equities. Level 2 securities include U.S. agency securities, mortgage-backed agency securities, obligations of states and political subdivisions and certain corporate, asset-backed and other securities. Level 2 fair values are obtained from quoted prices of securities with similar characteristics. In certain cases, where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy. Currently, all of the Company’s available-for-sale securities are considered to be Level 2 securities, except for $10,303 and $10,284 for March 31, 2012 and December 31, 2011, respectively, in equity securities that are considered to be Level 1 securities.

Financial Assets Measured at Fair Value on a Nonrecurring Basis

The Company is required to measure certain assets at fair value on a nonrecurring basis, including impaired loans. Loan impairment is reported when full payment under the loan terms is not expected. Impaired loans are carried at the present value of estimated future cash flows using the loan’s existing rate or the fair value of collateral if the loan is collateral dependent. A portion of the allowance for loan losses is allocated to impaired loans if the value of such loans is deemed to be less than the unpaid balance. If these allocations cause the allowance for loan losses to increase, such increase is reported as a component of the provision for loan losses. Loan losses are charged against the allowance when management believes that the uncollectibility of a loan is confirmed. Loans, net of specific allowances, subject to this evaluation amounted to $14,351,838 and $16,245,779 as of March 31, 2012 and December 31, 2011, respectively. This valuation would be considered Level 3, consisting of appraisals of underlying collateral and discounted cash flow analysis.

Non-Financial Assets and Non-Financial Liabilities Measured at Fair Value

The Company has no non-financial assets or non-financial liabilities measured at fair value on a recurring basis. Certain non-financial assets and non-financial liabilities measured at fair value on a non-recurring basis include foreclosed assets (upon initial recognition or subsequent impairment), non-financial assets and non-financial liabilities measured at fair value in the second step of a goodwill impairment test and intangible assets and other non-financial long-lived assets measured at fair value for impairment assessment.

During 2012, certain foreclosed assets, upon initial recognition, were remeasured and reported at fair value through a charge-off to the allowance for loan losses based upon the fair value of the foreclosed asset. The fair value of a foreclosed asset, upon initial recognition, is estimated using Level 2 inputs based on observable market data or Level 3 inputs based on customized discounting criteria. Foreclosed assets measured at fair value upon initial recognition totaled $103,177 and $5,115,994 (utilizing Level 3 valuation inputs) for the periods ended March 31, 2012 and

 

12


Table of Contents

December 31, 2011, respectively. In connection with the measurement and initial recognition of the foregoing foreclosed assets, the Company has recognized charge-offs of the allowance for possible loan losses totaling approximately $105,582 and $2,514,983 for the periods ended March 31, 2012 and December 31, 2011, respectively. Foreclosed assets totaling $8,475,621 and $14,157,679 were remeasured at fair value at March 31, 2012 and December 31, 2011, respectively, resulting in impairment loss of $2,833,696 and $6,389,774 at March 31, 2012 and December 31, 2011, respectively.

The following table presents detailed information regarding assets and liabilities measured at fair value using significant unobservable inputs (Level 3) as of March 31, 2012. The table includes the valuation techniques and the significant unobservable inputs utilized. The range of each unobservable input as well as the weighted average within the range utilized at March 31, 2012 is included. Following the table is a description of the valuation technique and the sensitivity of the technique to changes in the significant unobservable input.

 

     Level 3 Significant Unobservable Input Assumptions  
(Dollars in thousands)    Fair value
March 31,
2012
     Valuation Technique    Unobservable Input    Quantitative Range of
Unobservable Inputs and
Weighted-Average
 

Nonrecurring fair value measurements:

           

Impaired loans

   $ 14,352       Multiple data points, including discount to appraised value of collateral based on recent market activity    Appraisal compatibility adjustment (discount)      6% - 9

Foreclosed property and other real estate

   $ 103      

Discount to appraised value of property based on recent market activity for sales of similar properties

   Appraisal compatibility adjustment (discount)      6% - 9

NON-RECURRING FAIR VALUE MEASUREMENTS USING SIGNIFICANT UNOBSERVABLE INPUTS

Impaired loans

Impaired loans are valued based on multiple data points indicating the fair value for each loan. The primary data point for non-performing loans is a discount to the appraised value of the underlying collateral. Management establishes this discount or comparability adjustment based on recent sales of similar property types. As liquidity in the market increases or decreases, the comparability adjustment and the resulting asset valuation are impacted.

Foreclosed property and other real estate

Foreclosed property and other real estate are valued based on offered quotes as available. If no sales contract is pending for a specific property, management establishes a comparability adjustment to the appraised value based on historical activity considering proceeds for properties sold versus the corresponding appraised value. Increases or decreases in realization for properties sold impact the comparability adjustment for similar assets remaining on the balance sheet.

The estimated fair value and related carrying or notional amounts of the Company’s financial instruments at March 31, 2012 and December 31, 2011 were as follows:

 

     March 31, 2012      December 31, 2011  
     Carrying
Amount
     Estimated
Fair Value
     Carrying
Amount
     Estimated
Fair Value
 
     (In Thousands of Dollars)  

Assets:

           

Cash and cash equivalents

   $ 69,926       $ 69,926       $ 52,797       $ 52,797   

Investment securities available-for-sale

     113,647         113,647         122,170         122,170   

Investment securities held-to-maturity

     5,161         5,161         1,170         1,170   

Federal Home Loan Bank stock

     2,861         2,861         2,861         2,861   

Accrued interest receivable

     3,542         3,542         3,958         3,958   

Loans, net of unearned

     365,849         368,931         381,085         383,879   

Liabilities:

           

Deposits

     533,660         535,715         527,073         528,741   

Short-term borrowings

     225         225         356         356   

Long-term debt

     10,000         10,287         20,000         20,383   

Accrued interest payable

     675         675         790         790   

6. INVESTMENT SECURITIES

Details of investment securities available-for-sale and held-to-maturity at March 31, 2012 and December 31, 2011 are as follows:

 

     Available-for-Sale  
     March 31, 2012  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Estimated
Fair Value
 
     (In Thousands of Dollars)  

Mortgage-backed securities

   $ 88,261       $ 3,558       $ (155   $ 91,664   

Obligations of states, counties and political subdivisions

     14,113         1,281         —          15,394   

Obligations of U.S. government sponsored agencies

     6,491         13         —          6,504   

U.S. treasury securities

     75         —           —          75   

Equity securities

     9         1         —          10   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 108,949       $ 4,853       $ (155   $ 113,647   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

     Held-to-Maturity  
     March 31, 2012  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Estimated
Fair
Value
 
     (In Thousands of Dollars)  

Obligations of states, counties and political subdivisions

   $ 5,161       $ —         $ —         $ 5,161   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

13


Table of Contents
     Available-for-Sale  
     December 31, 2011  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Estimated
Fair Value
 
     (In Thousands of Dollars)  

Mortgage-backed securities

   $ 96,104       $ 3,903       $ (316   $ 99,691   

Obligations of states, counties and political subdivisions

     14,684         1,201         —          15,885   

Obligations of U.S. government sponsored agencies

     6,490         19         —          6,509   

U.S. treasury securities

     75         —           —          75   

Equity securities

     10         —           —          10   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 117,363       $ 5,123       $ (316   $ 122,170   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

     Held-to-Maturity  
     December 31, 2011  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Estimated
Fair
Value
 
     (In Thousands of Dollars)  

Obligations of states, counties and political subdivisions

   $ 1,170       $ 1       $ —         $ 1,171   
  

 

 

    

 

 

    

 

 

    

 

 

 

The scheduled maturities of investment securities available-for-sale and held-to-maturity at March 31, 2012 are presented in the following table:

 

     Available-for-Sale      Held-to-Maturity  
     Amortized
Cost
     Estimated
Fair
Value
     Amortized
Cost
     Estimated
Fair
Value
 
     (In Thousands of Dollars)  

Maturing within one year

   $ 390       $ 392       $ —         $ —     

Maturing after one to five years

     5,249         5,449         —           —     

Maturing after five to fifteen years

     60,632         63,569         5,161         5,161   

Maturing after fifteen years

     42,669         44,227         —           —     

Equity securities and Preferred Stock

     9         10         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 108,949       $ 113,647       $ 5,161       $ 5,161   
  

 

 

    

 

 

    

 

 

    

 

 

 

For purposes of the maturity table, mortgage-backed securities, which are not due at a single maturity date, have been allocated over maturity groupings based on the weighted-average contractual maturities of underlying collateral. The mortgage-backed securities generally mature earlier than their weighted-average contractual maturities because of principal prepayments.

The following table reflects the Company’s investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at March 31, 2012 and December 31, 2011. Management evaluates securities for other-than-temporary impairment no less frequently than quarterly and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer and (3) whether the Company does not intend to sell these securities, and it is not more likely than not that the Company will be required to sell the securities before recovery of their amortized cost bases. At March 31, 2012 and 2011, based on the aforementioned considerations, management did not record other-than-temporary impairment on any security that was in an unrealized loss position.

 

14


Table of Contents
     Available-for-Sale  
     March 31, 2012  
     Less than 12 Months     12 Months or More  
     Fair Value      Unrealized
Losses
    Fair Value      Unrealized
Losses
 
     (In Thousands of Dollars)  

Mortgage-backed securities

   $ 13,084       $ (110   $ 738       $ (45
  

 

 

    

 

 

   

 

 

    

 

 

 

 

     Available-for-Sale  
     December 31, 2011  
     Less than 12 Months     12 Months or More  
     Fair Value      Unrealized
Losses
    Fair Value      Unrealized
Losses
 
     (In Thousands of Dollars)  

Mortgage-backed securities

   $ 16,318       $ (276   $ 811       $ (39
  

 

 

    

 

 

   

 

 

    

 

 

 

As of March 31, 2012, four debt securities had been in a loss position for more than twelve months, and five debt securities had been in a loss position for less than twelve months. The losses for all securities are considered to be a direct result of the effect that the current interest rate environment has on the value of debt securities and not related to the creditworthiness of the issuers. Further, the Company has the current intent and ability to retain its investments in the issuers for a period of time sufficient to allow for any anticipated recovery in fair value. Therefore, the Company has not recognized any other-than-temporary impairments.

Investment securities available-for-sale with a carrying value of $72.0 million and $80.0 million at March 31, 2012 and December 31, 2011, respectively, were pledged to secure public deposits and for other purposes.

There were no gross gains and losses realized on securities for March 31, 2012 and 2011, respectively.

7. INVESTMENTS IN LIMITED PARTNERSHIPS

The Company has limited partnership investments in affordable housing projects for which it provides funding as a limited partner and receives tax credits related to its investments in the projects based on its partnership share. The Company has invested in limited partnerships of affordable housing projects as investments in funds that invest solely in affordable housing projects. The Company has determined that these structures require valuation as a variable interest entity (“VIE”) under ASC Topic 810 Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities. The Company consolidates one of the funds in which it has a 99.9% limited partnership interest. The resulting financial impact to the Company of the consolidation was a net increase to total assets of approximately $148,510 as of March 31, 2012. The remaining limited partnership investments are unconsolidated and are accounted for under the cost method as allowed under ASC Topic 325 Accounting for Tax Benefits Resulting from Investments in Affordable Housing

 

15


Table of Contents

Projects. The Company amortizes the excess of carrying value of the investment over its estimated residual value during the period in which tax credits are allocated to the investors. The Company’s maximum exposure to future loss related to these limited partnerships is limited to the $1,496,718 recorded investment.

The assets and liabilities of these partnerships consist primarily of apartment complexes and related mortgages. The Bank’s carrying value approximates cost or its underlying equity in the net assets of the partnerships. Market quotations are not available for any of the aforementioned partnerships. Management has no knowledge of intervening events since the date of the partnerships’ financial statements that would have had a material effect on the Company’s consolidated financial position, results of operations, or cash flows.

The Bank had no remaining cash commitments to these partnerships at March 31, 2012.

8. LOANS AND ALLOWANCE FOR LOAN LOSSES

At March 31, 2012 and December 31, 2011, the composition of the loan portfolio by reporting segment and portfolio segment was as follows:

 

     March 31, 2012  
     FUSB      ALC      Total  
     (In Thousands of Dollars)  

Real estate loans:

        

Construction, land development and other land loans

   $ 40,361       $ —         $ 40,361   

Secured by 1-4 family residential properties

     42,156         38,490         80,646   

Secured by multi-family residential properties

     26,302         —           26,302   

Secured by non-farm, non-residential properties

     142,225         —           142,225   

Other

     813         —           813   

Commercial and industrial loans

     37,616         —           37,616   

Consumer loans

     17,673         45,110         62,783   

Other loans

     587         —           587   
  

 

 

    

 

 

    

 

 

 

Total loans

     307,733         83,600         391,333   

Less: Unearned Interest

     250         4,463         4,713   

Allowance for loan losses

     17,243         3,528         20,771   
  

 

 

    

 

 

    

 

 

 

Net loans

   $ 290,240       $ 75,609       $ 365,849   
  

 

 

    

 

 

    

 

 

 

 

16


Table of Contents
     December 31, 2011  
     FUSB      ALC      Total  
     (In Thousand of Dollars)  

Real estate loans:

        

Construction, land development and other land loans

   $ 40,311       $ —         $ 40,311   

Secured by 1-4 family residential properties

     43,691         40,532         84,223   

Secured by multi-family residential properties

     26,722         —           26,722   

Secured by non-farm, non-residential properties

     147,518         —           147,518   

Other

     820         —           820   

Commercial and industrial loans

     43,060         —           43,060   

Consumer loans

     18,886         45,688         64,574   

Other loans

     910         —           910   
  

 

 

    

 

 

    

 

 

 

Total loans

   $ 321,918       $ 86,220       $ 408,138   

Less: Unearned Interest

     277         4,509         4,786   

Allowance for loan losses

     18,691         3,576         22,267   
  

 

 

    

 

 

    

 

 

 

Net loans

   $ 302,950       $ 78,135       $ 381,085   
  

 

 

    

 

 

    

 

 

 

The Company grants commercial, real estate and installment loans to its customers. Although the Company has a diversified loan portfolio, 74.2% of the portfolio is concentrated in loans secured by real estate.

Portfolio Segments

The Company has divided the loan portfolio into eight portfolio segments, each with different risk characteristics and methodologies for assessing the risk described as follows:

Construction, land development and other land loans – Commercial construction, land and land development loans include the development of residential housing projects, loans for the development of commercial and industrial use property and loans for the purchase and improvement of raw land. These loans are secured in whole or in part by the underlying real estate collateral and are generally guaranteed by the principals of the borrower.

Secured by 1–4 family residential properties – These loans include conventional mortgage loans on one-to-four family residential properties. These properties may serve as the borrower’s primary residence, vacation home or investment property. Also included in this portfolio are home equity loans and lines of credit. This type of lending, which is secured by a first or second mortgage on the borrower’s residence, allows customers to borrow against the equity in their home.

Secured by multi-family residential properties – These are mortgage loans secured by apartment buildings.

Secured by non-farm, non-residential properties – Commercial real estate loans include loans secured by commercial and industrial properties, office or mixed-use facilities, strip shopping centers or other commercial property. These loans are generally guaranteed by the principals of the borrower.

Other real estate loans – Other real estate loans are loans primarily for agricultural production, secured by mortgages on farm land.

Commercial and industrial loans – Includes loans to commercial customers for use in normal business to finance working projects. These credits may be loans and lines to financially strong borrowers, secured by inventories, equipment or receivables, and are generally guaranteed by the principals of the borrower.

Consumer loans – Includes a variety of secured and unsecured personal loans, including automobile loans, loans for household and personal purpose and all other direct consumer installment loans.

Other loans – Other loans comprise overdrawn checking accounts reclassified to loans and overdraft lines of credit.

Related Party Loans

In the ordinary course of business, the Bank makes loans to certain officers and directors of the Company, the Bank and ALC, including companies with which they are associated. These loans are made on the same terms as those prevailing for comparable transactions with others. Such loans do not represent more than normal risk of

 

17


Table of Contents

collectibility, nor do they present other unfavorable features. The amounts of such related party loans and commitments at March 31, 2012, December 31, 2011 and March 31, 2011 were $2,801,019, $3,036,740 and $2,471,909, respectively. During the period ended March 31, 2012, new loans to these parties totaled $13,283, and repayments were $249,004. During the period ended December 31, 2011, new loans to these parties totaled $1,301,901, and repayments were $426,665. During the period ended March 31, 2011, new loans to these parties totaled $402,342, and repayments were $68,963.

Allowance for Loan Losses

Changes in the allowance for loan losses by reporting segment and portfolio segment were as follows:

 

     FUSB  
     March 31, 2012  
     Commercial      Commercial
Real Estate
     Consumer     Residential
Real Estate
     Other     Total  
     (In Thousands of Dollars)  

Beginning balance

   $ 889       $ 16,533       $ 306      $ 684       $ 279      $ 18,691   

Charge-offs

     476         2,434         22        115         2        3,059   

Recoveries

     81         1         23        2         —          107   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Net charge-offs

     395         2,433         (1     113         2        2,952   

Provision

     144         1,567         (45     114         (276     1,504   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Ending balance

   $ 638       $ 15,667       $ 262      $ 685       $ (9   $ 17,243   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

     ALC  
     March 31, 2012  
     Commercial      Commercial
Real Estate
     Consumer      Residential
Real Estate
     Other      Total  
     (In Thousands of Dollars)  

Beginning balance

   $ —         $ —         $ 2,542       $ 1,034       $ —         $ 3,576   

Charge-offs

     —           —           773         238         —           1,011   

Recoveries

     —           —           232         20         —           252   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net charge-offs

     —           —           541         218         —           759   

Provision

     —           —           491         220         —           711   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance

   $ —         $ —         $ 2,492       $ 1,036       $ —         $ 3,528   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     FUSB & ALC  
     March 31, 2012  
     Commercial      Commercial
Real Estate
     Consumer      Residential
Real Estate
     Other     Total  
     (In Thousands of Dollars)  

Beginning balance

   $ 889       $ 16,533       $ 2,848       $ 1,718       $ 279      $ 22,267   

Charge-offs

     476         2,434         795         353         2        4,070   

Recoveries

     81         1         255         22         —          359   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Net charge-offs

     395         2,433         540         331         2        3,711   

Provision

     144         1,567         446         334         (276     2,215   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Ending balance

   $ 638       $ 15,667       $ 2,754       $ 1,721       $ (9   $ 20,771   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

     FUSB  
     December 31, 2011  
     Commercial      Commercial
Real Estate
     Consumer      Residential
Real Estate
     Other      Total  
     (In Thousands of Dollars)  

Beginning balance

   $ 988       $ 15,206       $ 375       $ 359       $ 99       $ 17,027   

Charge-offs

     407         12,915         420         973         3         14,718   

Recoveries

     152         45         120         172         —           489   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net charge-offs

     255         12,870         300         801         3         14,229   

Provision

     156         14,198         230         1,126         183         15,893   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance

   $ 889       $ 16,534       $ 305       $ 684       $ 279       $ 18,691   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

18


Table of Contents
     ALC  
     December 31, 2011  
            Commercial             Residential                
     Commercial      Real Estate      Consumer      Real Estate      Other      Total  
     (In Thousands of Dollars)  

Beginning balance

   $ —         $ —         $ 2,663       $ 1,246       $ —         $ 3,909   

Charge-offs

     —           —           2,993         1,049         —           4,042   

Recoveries

     —           —           708         92         —           800   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net charge-offs

     —           —           2,285         957         —           3,242   

Provision

     —           —           2,165         744         —           2,909   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance

   $ —         $ —         $ 2,543       $ 1,033       $ —         $ 3,576   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     FUSB & ALC  
     December 31, 2011  
            Commercial             Residential                
     Commercial      Real Estate      Consumer      Real Estate      Other      Total  
     (In Thousands of Dollars)  

Beginning balance

   $ 988       $ 15,206       $ 3,038       $ 1,605       $ 99       $ 20,936   

Charge-offs

     407         12,915         3,413         2,022         3         18,760   

Recoveries

     152         45         828         264         —           1,289   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net charge-offs

     255         12,870         2,585         1,758         3         17,471   

Provision

     156         14,198         2,395         1,870         183         18,802   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance

   $ 889       $ 16,534       $ 2,848       $ 1,717       $ 279       $ 22,267   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Impaired Loan Evaluations

The following table details loans individually evaluated for impairment at March 31, 2012 and December 31, 2011.

 

     March 31, 2012      December 31, 2011  
     Loans Evaluated Individually for
Impairment
     Loans Evaluated Individually for
Impairment
 
     Recorded
Investment
     Balance in
Allowance for
Loan Losses
     Recorded
Investment
     Balance in
Allowance for
Loan Losses
 
     (In Thousands of Dollars)      (In Thousands of Dollars)  

Real estate loans:

           

Construction, land development and other land loans

   $ 20,869       $ 7,236       $ 19,674       $ 6,800   

Secured by 1-4 family residential properties

     186         —           186         —     

Secured by multi-family residential properties

     2,884         —           2,884         —     

Secured by non-farm, non-residential properties

     29,331         1,901         37,569         3,775   

Other

     —           —           —           —     

Commercial and industrial loans

     1,307         208         1,603         509   

Consumer loans

     —           —           —           —     

Other loans

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 54,577       $ 9,345       $ 61,916       $ 11,084   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

19


Table of Contents

The following table details loans collectively evaluated for impairment at March 31, 2012 and December 31, 2011.

 

     March 31, 2012      December 31, 2011  
     Loans Evaluated Collectively for
Impairment
     Loans Evaluated Collectively for
Impairment
 
     Recorded
Investment
     Balance in
Allowance for
Loan Losses
     Recorded
Investment
     Balance in
Allowance for
Loan Losses
 
     (In Thousands of Dollars)      (In Thousands of Dollars)  

Real estate loans:

           

Construction, land development and other land loans

   $ 19,492       $ 2,283       $ 20,637       $ 2,873   

Secured by 1-4 family residential properties

     79,765         1,721         84,037         113   

Secured by multi-family residential properties

     23,179         174         23,838         170   

Secured by non-farm, non-residential properties

     112,895         4,021         109,949         2,965   

Other

     813         3         820         1,555   

Commercial and industrial loans

     36,298         430         41,457         380   

Consumer loans

     59,631         2,754         64,574         2,848   

Other loans

     381         40         909         279   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 332,454       $ 11,426       $ 346,221       $ 11,183   
  

 

 

    

 

 

    

 

 

    

 

 

 

Credit Quality Indicators

The Bank has established a credit risk rating system to assess and manage the risk in the loan portfolio. It establishes a uniform framework and common language for assessing and monitoring risk in the portfolio.

The following is a guide for an 8-grade system of credit risk:

 

  1. Minimal Risk: Borrowers in this category have the lowest risk of any resulting loss. Borrowers are of the highest quality, presently and prospectively.

 

  2. Better Than Average Risk: Borrowers in the high end of medium range between borrowers who are definitely sound and those with minor risk characteristics.

 

  3. Moderate Risk: Borrowers in this category have little chance of resulting in a loss. This category should include the average loan, under average economic conditions.

 

  4. Acceptable Risk: Borrowers in this category have a limited chance of resulting in a loss.

 

  5.

Special Mention (Potential Weakness): Borrowers in this category exhibit potential credit weaknesses or downward trends deserving bank management’s close attention. If left uncorrected, these potential weaknesses may result in the deterioration of the repayment prospects for the asset or in our credit position at some future date. Special Mention loans are not adversely classified and do not expose our institution to sufficient risk to warrant adverse classification.

 

20


Table of Contents
  Included in Special Mention assets could be workout or turnaround situations, as well as those borrowers previously rated 2-4 who have shown deterioration, for whatever reason, indicating a downgrading from the better grade. The Special Mention rating is designed to identify a specific level of risk and concern about a loan’s and/or borrower’s quality. Although a Special Mention asset has a higher probability of default than previously rated categories, its default is not imminent.

 

  6. Substandard (Definite Weakness – Loss Unlikely): These are borrowers with defined weaknesses that jeopardize the orderly liquidation of debt. A substandard loan is inadequately protected by the current sound worth and paying capacity of the obligor or by the collateral pledged, if any. Normal repayment from the borrower is in jeopardy, although no loss of principal is envisioned. There is a distinct possibility that a partial loss of interest and/or principal will occur if the deficiencies are not corrected. Loss potential, while existing in the aggregate amount of substandard assets, does not have to exist in individual assets classified substandard.

 

  7. Doubtful: Borrowers classified doubtful have all the weaknesses found in substandard borrowers with the added provision that the weaknesses make collection of debt in full, based on currently existing facts, conditions and values, highly questionable and improbable. Serious problems exist to the point where partial loss of principal is likely. The possibility of loss is extremely high, but, because of certain important, reasonably specific pending factors that may work to strengthen the assets, the loans’ classification as estimated losses is deferred until a more exact status may be determined. Pending factors include proposed merger, acquisition or liquidation procedures, capital injection, perfecting liens on additional collateral and refinancing plans. Additional factors include whether management has a demonstrated history of failing to live up to agreements, unethical or dishonest business practices and/or conviction on criminal charges.

 

  8. Loss: Borrowers deemed incapable of repayment of unsecured debt. Loans to such borrowers are considered uncollectible and of such little value that continuance as active assets of the bank is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off these worthless assets, even though partial recovery may be affected in the future.

The table below illustrates the carrying amount of loans by credit quality indicator at March 31, 2012 (in thousands of dollars).

 

     FUSB  
     Pass
1-4
     Special
Mention
5
     Substandard
6
     Doubtful
7
     Total  

Loans secured by real estate:

              

Construction, land development and other land loans

   $ 17,182       $ 377       $ 22,768       $ 34       $ 40,361   

Secured by 1-4 family residential properties

     37,189         424         4,543         —           42,156   

Secured by multi-family residential properties

     23,418         —           2,884         —           26,302   

Secured by non-farm, non-residential properties

     103,611         5,291         33,323         —           142,225   

Other

     813         —           —           —           813   

Commercial and industrial loans

     34,842         497         2,277         —           37,616   

Consumer loans

     16,307         195         1,171         —           17,673   

Other loans

     586         —           1         —           587   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 233,948       $ 6,784       $ 66,967       $ 34       $ 307,733   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     ALC  
     Performing      Nonperforming      Total  

Loans secured by real estate:

        

Secured by 1-4 family residential properties

   $ 37,034       $ 1,456       $ 38,490   

Consumer loans

     43,244         1,866         45,110   
  

 

 

    

 

 

    

 

 

 

Total

   $ 80,278       $ 3,322       $ 83,600   
  

 

 

    

 

 

    

 

 

 

 

21


Table of Contents

The table below illustrates the carrying amount of loans by credit quality indicator at December 31, 2011 (in thousands of dollars).

 

     FUSB  
     Pass
1-4
     Special
Mention
5
     Substandard
6
     Doubtful
7
     Total  

Loans secured by real estate:

              

Construction, land development and other land loans

   $ 18,047       $ 699       $ 21,327       $ 238       $ 40,311   

Secured by 1-4 family residential properties

     38,573         627         4,445         46         43,691   

Secured by multi-family residential properties

     23,838         —           2,884         —           26,722   

Secured by non-farm, non-residential properties

     105,590         11,579         30,349         —           147,518   

Other

     820         —           —           —           820   

Commercial and industrial loans

     39,676         845         2,498         41         43,060   

Consumer loans

     17,617         383         867         19         18,886   

Other loans

     909         —           1         —           910   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 245,070       $ 14,133       $ 62,371       $ 344       $ 321,918   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     ALC  
     Performing      Nonperforming      Total  

Loans secured by real estate:

        

Secured by 1-4 family residential properties

   $ 38,550       $ 1,982       $ 40,532   

Consumer loans

     43,675         2,013         45,688   
  

 

 

    

 

 

    

 

 

 

Total

   $ 82,225       $ 3,995       $ 86,220   
  

 

 

    

 

 

    

 

 

 

The following table provides an aging analysis of past due loans and nonaccruing loans by class at March 31, 2012 (in thousands of dollars).

 

     FUSB  
     Past Due                       
            Greater than                    Current      Total  
     30-89 Days      90 Days      Total      Nonaccrual      Loans      Loans  

Loans secured by real estate:

                 

Construction, land development and other land loans

   $ 3,323       $ —         $ 3,323       $ 3,105       $ 33,933       $ 40,361   

Secured by 1-4 family residential properties

     1,079         —           1,079         742         40,335         42,156   

Secured by multi-family residential properties

     —           —           —           2,884         23,418         26,302   

Secured by non-farm, non-residential properties

     5,791         58         5,849         8,908         127,468         142,225   

Other

     —           —           —           —           813         813   

Commercial and industrial loans

     1,281         —           1,281         620         35,715         37,616   

Consumer loans

     482         —           482         174         17,017         17,673   

Other loans

     10         —           10         —           577         587   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total past due loans

   $ 11,966       $ 58       $ 12,024       $ 16,433       $ 279,276       $ 307,733   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     ALC  
     Past Due                       
            Greater than                    Current      Total  
     30-89 Days      90 Days      Total      Nonaccrual      Loans      Loans  

Loans secured by real estate:

                 

Secured by 1-4 family residential properties

   $ 459       $ 1,177       $ 1,636       $ 279       $ 36,575       $ 38,490   

Consumer loans

     1,055         633         1,688         1,233         42,189         45,110   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total past due loans

   $ 1,514       $ 1,810       $ 3,324       $ 1,512       $ 78,764       $ 83,600   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

22


Table of Contents

The following table provides an aging analysis of past due loans and nonaccruing loans by class at December 31, 2011 (in thousands of dollars).

 

     FUSB  
     Past Due                       
            Greater than                    Current      Total  
     30-89 Days      90 Days      Total      Nonaccrual      Loans      Loans  

Loans secured by real estate:

                 

Construction, land development and other land loans

   $ 3,094       $ —         $ 3,094       $ 3,087       $ 34,130       $ 40,311   

Secured by 1-4 family residential properties

     1,324         38         1,362         879         41,450         43,691   

Secured by multi-family residential properties

     —           —           —           2,884         23,838         26,722   

Secured by non-farm, non- residential properties

     1,281         88         1,369         7,563         138,586         147,518   

Other

     —           —           —           —           820         820   

Commercial and industrial loans

     1,459         13         1,472         129         41,459         43,060   

Consumer loans

     670         72         742         74         18,070         18,886   

Other loans

     3         13         16         —           894         910   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total past due loans

   $ 7,831       $ 224       $ 8,055       $ 14,616       $ 299,247       $ 321,918   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     ALC  
     Past Due                       
            Greater than                    Current      Total  
     30-89 Days      90 Days      Total      Nonaccrual      Loans      Loans  

Loans secured by real estate:

                 

Secured by 1-4 family residential properties

   $ 1,135       $ 1,462       $ 2,597       $ 520       $ 37,415       $ 40,532   

Consumer loans

     1,310         646         1,956         1,367         42,365         45,688   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total past due loans

   $ 2,445       $ 2,108       $ 4,553       $ 1,887       $ 79,780       $ 86,220   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

23


Table of Contents

Impaired Loans

At March 31, 2012, the carrying amount of impaired loans consisted of the following (in thousands of dollars):

 

     March 31, 2012  
     Carrying
Amount
     Unpaid
Principal
Balance
     Related
Allowances
 

Impaired loans with no related allowance recorded

        

Loans secured by real estate

        

Construction, land development and other land loans

   $ 6,844       $ 6,844       $ —     

Secured by 1-4 family residential properties

     186         186         —     

Secured by multi-family residential properties

     2,884         2,884         —     

Secured by non-farm, non-residential properties

     20,866         20,866         —     

Commercial and industrial

     100         100         —     
  

 

 

    

 

 

    

 

 

 

Total loans with no related allowance recorded

   $ 30,880       $ 30,880       $ —     
  

 

 

    

 

 

    

 

 

 

Impaired loans with an allowance recorded

        

Loans secured by real estate

        

Construction, land development and other land loans

   $ 14,025       $ 14,025       $ 7,236   

Secured by non-farm, non-residential properties

     8,465         8,465         1,901   

Commercial and industrial

     1,207         1,207         208   
  

 

 

    

 

 

    

 

 

 

Total loans with an allowance recorded

   $ 23,697       $ 23,697       $ 9,345   
  

 

 

    

 

 

    

 

 

 

Total impaired loans

        

Loans secured by real estate

        

Construction, land development and other land loans

   $ 20,869       $ 20,869       $ 7,236   

Secured by 1-4 family residential properties

     186         186         —     

Secured by multi-family residential properties

     2,884         2,884         —     

Secured by non-farm, non-residential properties

     29,331         29,331         1,901   

Commercial and industrial

     1,307         1,307         208   
  

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 54,577       $ 54,577       $ 9,345   
  

 

 

    

 

 

    

 

 

 

 

24


Table of Contents

At December 31, 2011, the carrying amount of impaired loans consisted of the following (in thousands of dollars):

 

     December 31, 2011  
     Carrying
Amount
     Unpaid
Principal
Balance
     Related
Allowances
 

Impaired loans with no related allowance recorded

        

Loans secured by real estate

        

Construction, land development and other land loans

   $ 7,005       $ 7,005       $ —     

Secured by 1-4 family residential properties

     186         186         —     

Secured by multi-family residential properties

     2,884         2,884         —     

Secured by non-farm, non-residential properties

     24,411         24,411         —     

Commercial and industrial

     100         100         —     
  

 

 

    

 

 

    

 

 

 

Total loans with no related allowance recorded

   $ 34,586       $ 34,586       $ —     
  

 

 

    

 

 

    

 

 

 

Impaired loans with an allowance recorded

        

Loans secured by real estate

        

Construction, land development and other land loans

   $ 12,669       $ 12,669       $ 6,800   

Secured by non-farm, non-residential properties

     13,159         13,159         3,775   

Commercial and industrial

     1,502         1,502         509   
  

 

 

    

 

 

    

 

 

 

Total loans with an allowance recorded

   $ 27,330       $ 27,330       $ 11,084   
  

 

 

    

 

 

    

 

 

 

Total impaired loans

        

Loans secured by real estate

        

Construction, land development and other land loans

   $ 19,674       $ 19,674       $ 6,800   

Secured by 1-4 family residential properties

     186         186         —     

Secured by multi-family residential properties

     2,884         2,884         —     

Secured by non-farm, non-residential properties

     37,569         37,569         3,775   

Commercial and industrial

     1,603         1,603         509   
  

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 61,916       $ 61,916       $ 11,084   
  

 

 

    

 

 

    

 

 

 

The average net investment in impaired loans and interest income recognized and received on impaired loans are as follows (in thousands of dollars):

 

     March 31, 2012  
     Average
Recorded
     Interest
Income
     Interest
Income
 
     Investment      Recognized      Received  

Loans secured by real estate

        

Construction, land development and other land loans

   $ 19,819       $ 189       $ 194   

Secured by 1-4 family residential properties

     186         —           —     

Secured by multi-family residential properties

     2,884         —           —     

Secured by non-farm, non-residential properties

     34,199         314         402   

Commercial and industrial

     1,435         11         8   
  

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 58,523       $ 514       $ 604   
  

 

 

    

 

 

    

 

 

 

 

     December 31, 2011  
     Average
Recorded
     Interest
Income
     Interest
Income
 
     Investment      Recognized      Received  

Loans secured by real estate

        

Construction, land development and other land loans

   $ 12,173       $ 649       $ 687   

Secured by 1-4 family residential properties

     37         —           —     

Secured by multi-family residential properties

     3,313         —           1,587   

Secured by non-farm, non-residential properties

     32,572         1,429         —     

Commercial and industrial

     1,634         140         141   
  

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 49,729       $ 2,218       $ 2,415   
  

 

 

    

 

 

    

 

 

 

 

25


Table of Contents

Loans on which the accrual of interest has been discontinued amounted to $17,945,045 and $16,502,314 at March 31, 2012 and December 31, 2011, respectively. If interest on those loans had been accrued, such income would have approximated $343,866 and $1,459,843 for March 31, 2012 and December 31, 2011, respectively. Interest income actually recorded on those loans amounted to $5,702 and $35,519 for March 31, 2012 and December 31, 2011, respectively. Accruing loans past due 90 days or more amounted to $1,868,394 and $2,331,718 for March 31, 2012 and December 31, 2011, respectively.

Troubled Debt Restructuring

Loans are considered restructured loans if concessions have been granted to borrowers that are experiencing financial difficulty. The concessions granted generally involve the modification of terms of the loan, such as changes in payment schedule or interest rate, which generally would not otherwise be considered. Restructured loans can involve loans remaining on nonaccrual, moving to nonaccrual or continuing on accrual status, depending on the individual facts and circumstances of the borrower. Nonaccrual restructured loans are included and treated with all other nonaccrual loans. In addition, all accruing restructured loans are being reported as troubled debt restructurings. Generally, restructured loans remain on nonaccrual until the customer has attained a sustained period of repayment performance under the modified loan terms (generally a minimum of six months). However, performance prior to the restructuring, or significant events that coincide with the restructuring, are considered in assessing whether the borrower can meet the new terms and whether the loan should be returned to or maintained on nonaccrual status. If the borrower’s ability to meet the revised payment schedule is not reasonably assured, the loan remains on nonaccrual. Based on the above, the Company had $1,817,336 and $1,821,696 of non-accruing loans that were restructured and remained on nonaccrual status at March 31, 2012 and December 31, 2011, respectively. In addition, the Company had $1,995,002 and $2,488,060 of restructured loans that were restored to accrual status based on a sustained period of repayment performance at March 31, 2012 and December 31, 2011, respectively.

The following table provides the number of loans modified in a troubled debt restructuring by loan portfolio during the periods ended March 31, 2012 and December 31, 2011, and the recorded investment and unpaid principal balance as of March 31, 2012 and December 31, 2011.

 

     March 31, 2012      December 31, 2011  
            Pre-Modification      Post-             Pre-Modification      Post-  
            Outstanding      Modification             Outstanding      Modification  
     Number      Principal      Principal      Number      Principal      Principal  
     of Loans      Balance      Balance      of Loans      Balance      Balance  
     (In Thousands of Dollars)  

Loans secured by real estate:

                 

Construction, land development and other land loans

     9       $ 3,182       $ 1,995         9       $ 3,182       $ 2,488   

Secured by non-farm, non-residential properties

     3         2,583         1,745         3         2,583         1,747   

Commercial loans

     2         80         72         2         80         75   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     14       $ 5,845       $ 3,812         14       $ 5,845       $ 4,310   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Restructured loan modifications may include payment schedule modifications, interest rate concessions, maturity date extensions, modification of note structure, principal reduction or some combination of these concessions. During the periods ended March 31, 2012 and December 31, 2011, restructured loan modifications of loans secured by real estate, commercial and industrial loans primarily included maturity date extensions and payment schedule modifications.

The change in troubled debt restructuring as of March 31, 2012 was as follows:

 

    March 31,
2012
     December 31,
2011
     Change  
    (In Thousands of Dollars)  

Loans secured by real estate:

       

Construction, land development and other land loans

    $1,995       $ 2,488       $ (493

Secured by non-farm, non-residential properties

    1,745         1,747         (2

Commercial and industrial loans

    72         75         (3
 

 

 

    

 

 

    

 

 

 

Total

    $3,812       $ 4,310       $ (498
 

 

 

    

 

 

    

 

 

 

 

26


Table of Contents

All loans $500,000 and over modified in a troubled debt restructuring are evaluated for impairment. The nature and extent of impairment of restructured loans, including those that have experienced a subsequent payment default, is considered in the determination of an appropriate level of allowance for loan losses. This evaluation resulted in an allowance for loan losses for such loans of $414,223 and $494,352 for March 31, 2012 and December 31, 2011, respectively.

9. SHORT-TERM BORROWINGS

Short-term borrowings consist of federal funds purchased and securities sold under repurchase agreements. Federal funds purchased generally mature within one to four days. There were no federal funds purchased outstanding at March 31, 2012 or December 31, 2011. Treasury tax and loan deposits are withdrawal on demand. There were no treasury tax and loan deposits outstanding at March 31, 2012 and December 31, 2011.

Securities sold under repurchase agreements, which are secured borrowings, generally are reflected at the amount of cash received in connection with the transaction. The Company may be required to provide additional collateral based on the fair value of the underlying securities. The Company monitors the fair value of the underlying securities on a daily basis. Securities sold under repurchase agreements at March 31, 2012 and December 31, 2011 were $225,177 and $355,787, respectively.

At March 31, 2012, the Bank had $7.8 million in available federal fund lines from correspondent banks.

10. LONG-TERM DEBT

The Company uses FHLB advances as an alternative to funding sources with similar maturities such as certificates of deposit or other deposit programs. These advances generally offer more attractive rates when compared to other mid-term financing options. They are also flexible, allowing the Company to quickly obtain the necessary maturities and rates that best suit its overall asset/liability strategy. At March 31, 2012 and December 31, 2011, investment securities and mortgage loans amounting to $11,287,179 and $22,564,364, respectively, were pledged to secure these borrowings.

At March 31, 2012, the Bank had $175.2 million in available credit from the FHLB.

11. INCOME TAXES

The Company files a consolidated income tax return with the federal government and the state of Alabama. ALC files a Mississippi state income tax return on its Mississippi branches. The Company is currently open to audit under the statute of limitations by the Internal Revenue Service and the states in which it files for the years ended December 31, 2008 through 2011.

As of March 31, 2012, the Company had no unrecognized tax benefits related to Federal or state income tax matters and does not anticipate any material increase or decrease in unrecognized tax benefits relative to any tax positions taken prior to March 31, 2012. As of March 31, 2012, the Company had accrued no interest and no penalties related to uncertain tax positions.

The consolidated tax provision differed from the amount computed by applying the federal statutory income tax rate of 34%, as described in the following table:

 

     March 31,
2012
    March 31,
2011
 
     (In Thousands of Dollars)  

Income tax (benefit) expense at federal statutory rate

   $ (755   $ 348   

Increase (decrease) resulting from:

    

Tax-exempt interest

     (84     (98

State income tax (benefit) expense, net of federal income tax benefit

     (103     33   

Low income housing tax credits

     —          —     

Other

     (40     (76
  

 

 

   

 

 

 

Total

   $ (982   $ 207   

 

27


Table of Contents

12. SEGMENT REPORTING

Under ASC Topic 280, Segment Reporting, certain information is disclosed for the two reportable operating segments of the Company. The reportable segments were determined using the internal management reporting system. These segments are composed of the Company’s and the Bank’s significant subsidiaries. The accounting policies for each segment are the same as those described 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 period ended December 31, 2011. The segment results include certain overhead allocations and intercompany transactions that were recorded at current market prices. All intercompany transactions have been eliminated to determine the consolidated balances. The results for the two reportable segments of the Company are included in the following table:

 

                  All              
     FUSB     ALC      Other     Eliminations     Consolidated  
     (In Thousands of Dollars)  

For the three months ended March 31, 2012

           

Net interest income

   $ 4,986      $ 3,560       $ 4      $ —        $ 8,550   

Provision for loan losses

     1,503        712         —          —          2,215   

Total non-interest income

     1,013        325         (1,321     1,257        1,274   

Total non-interest expense

     6,996        2,866         149        (183     9,828   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     (2,500     307         (1,466     1,440        (2,219

(Benefit from) provision for income taxes

     (1,104     120         2        —          (982
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ (1,396   $ 187       $ (1,468   $ 1,440      $ (1,237
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Other significant items:

           

Total assets

   $ 618,675      $ 83,233       $ 71,056      $ (155,541   $ 617,423   

Total investment securities

     118,733        —           75        —          118,808   

Total loans, net

     358,930        75,609         —          (68,690     365,849   

Goodwill

     —          —           —          —          —     

Investment in subsidiaries

     1,306        —           65,492        (66,793     5   

Fixed asset addition

     53        160         —          —          213   

Depreciation and amortization expense

     141        39         —          —          180   

Total interest income from external customers

     5,442        4,568         —          —          10,010   

Total interest income from affiliates

     1,008        —           4        (1,012     —     

 

28


Table of Contents
                   All               
     FUSB      ALC      Other      Eliminations     Consolidated  
     (In Thousands of Dollars)  

For the three months ended March 31, 2011:

             

Net interest income

   $ 5,375       $ 3,192       $ 10       $ —        $ 8,577   

Provision for loan losses

     819         486         —           —          1,305   

Total non-interest income

     1,068         175         1,061         (1,115     1,189   

Total non-interest expense

     5,032         2,384         195         (176     7,435   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Income before income taxes

     592         497         876         (939     1,026   

Provision for income taxes

     14         190         3         —          207   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Net income

   $ 578       $ 307       $ 873       $ (939   $ 819   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Other significant items:

             

Total assets

   $ 629,007       $ 87,749       $ 90,586       $ (167,983   $ 639,359   

Total investment securities

     134,047         —           308         —          134,355   

Total loans, net

     385,173         77,912         —           (78,649     384,436   

Goodwill

     3,111         —           987         —          4,098   

Investment in subsidiaries

     1,384         13         76,187         (77,566     18   

Fixed asset addition

     —           —           —           —          —     

Depreciation and amortization expense

     143         32         —           —          175   

Total interest income from external customers

     5,950         4,492         2         —          10,444   

Total interest income from affiliates

     1,300         —           9         (1,309     —     

13. GUARANTEES, COMMITMENTS AND CONTINGENCIES

The Bank’s exposure to credit loss in the event of nonperformance by the other party for commitments to make loans and standby letters of credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making these commitments as it does for on-balance sheet instruments. For interest rate swap transactions and commitments to purchase or sell securities for forward delivery, the contract or notional amounts do not represent exposure to credit loss. The Bank controls the credit risk of these derivative instruments through credit approvals, limits and monitoring procedures. Certain derivative contracts have credit risk for the carrying value plus the amount to replace such contracts in the event of counterparty default. All of the Bank’s financial instruments are held for risk management and not for trading purposes. During the period ended March 31, 2012, there were no credit losses associated with derivative contracts.

In the normal course of business, there are outstanding commitments and contingent liabilities, such as commitments to extend credit, letters of credit and others, that are not included in the consolidated financial statements. The financial instruments involve, to varying degrees, elements of credit and interest rate risk in excess of amounts recognized in the financial statements. A summary of these commitments and contingent liabilities is presented below:

 

     March 31,      December 31,  
     2012      2011  
     (In Thousands of Dollars)  

Standby Letters of Credit

   $ 1,173         $  1,172   

Commitments to Extend Credit

   $ 39,694         $45,736   

Standby letters of credit are contingent commitments issued by the Bank generally to guarantee the performance of a customer to a third party. The Bank has recourse against the customer for any amount that it is required to pay to a third party under a standby letter of credit. Revenues are recognized over the lives of the standby letters of credit. The potential amount of future payments that the Bank could be required to make under its standby letters of credit at both March 31, 2012 and December 31, 2011 was $1.2 million, representing the Bank’s total credit risk.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each

 

29


Table of Contents

customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management’s credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment and income-producing commercial properties.

Commitments to purchase securities for delayed delivery require the Bank to purchase a specified security at a specified price for delivery on a specified date. Similarly, commitments to sell securities for delayed delivery require the Bank to sell a specified security at a specified price for delivery on a specified date. Market risk arises from potential movements in security values and interest rates between the commitment and delivery dates. At March 31, 2012 and December 31, 2011 there were no outstanding commitments to purchase and sell securities for delayed delivery.

Litigation

On September 27, 2007, Malcomb Graves Automotive, LLC (“Graves Automotive”), Malcomb Graves and Tina Graves filed a lawsuit in the Circuit Court of Shelby County, Alabama against the Company, the Bank, ALC and their respective directors and officers seeking an unspecified amount of compensatory and punitive damages. A former employee of ALC, Corey Mitchell, was named as a co-defendant, and ALC and the Bank filed a crossclaim against him seeking, among other relief, defense and indemnification for any damages suffered in the underlying lawsuit. The underlying complaint alleged that the defendants committed fraud in misrepresenting to Graves Automotive the amounts that Graves Automotive owed on certain loans and failing to credit Graves Automotive properly for certain loans. The defendants moved to compel arbitration, and the trial court denied the defendants’ motion. The defendants appealed this decision, and, on September 29, 2010, the Alabama Supreme Court affirmed the trial court’s denial of defendants’ motion. Following the return of the case to the active docket, on November 30, 2010, ALC and the Bank moved to dismiss the lawsuit. In response to this motion to dismiss, on June 15, 2011, the Circuit Court dismissed all claims against the Company, the Bank and their respective directors and officers and all claims that were brought by Malcomb Graves and Tina Graves in their individual capacities. The Circuit Court also dismissed Graves Automotive’s claims for conversion and negligent supervision against ALC and ordered Graves Automotive to re-plead its fraud allegations against ALC with more particularity. On September 15, 2011, Graves Automotive filed a third amended complaint in response to the Circuit Court’s June 15, 2011 order. In its third amended complaint, Graves Automotive asserted claims against ALC for breach of contract, fraud, unjust enrichment and conversion. ALC moved to dismiss the third amended complaint on many of the same grounds as set forth in its previous motion to dismiss. On October 13, 2011, the Circuit Court dismissed Graves Automotive’s conversion claim and again ordered Graves Automotive to re-plead its fraud claims with more particularity, this time within 60 days. On December 12, 2011, Graves Automotive filed its fourth amended complaint, this time asserting only two counts, breach of contract and unjust enrichment. Despite removing the fraud claims, the fourth amended complaint still requests punitive damages. On January 11, 2012, ALC filed a motion to dismiss the fourth amended complaint and to strike Graves Automotive’s request for punitive damages. This motion remains pending. ALC continues to deny the allegations against it in the underlying lawsuit and intends to vigorously defend itself in this matter. Given the pendency of ALC’s motion and the lack of discovery conducted, it is too early to assess the likelihood of a resolution of the remaining claims in this matter or the possibility of an unfavorable outcome.

On February 17, 2011, Wayne Allen Russell, Jr. (“Russell”) filed a lawsuit in the Circuit Court of Tuscaloosa County, Alabama against the Bank and Bill Morgan, who currently serves as the Bank’s Business Development Officer. The allegations in the lawsuit relate to a mortgage on a parcel of real estate, executed by Russell in favor of the Bank as security for a loan, and certain related transactions, including foreclosure proceedings executed by the Bank. Additionally, on June 17, 2011, Mr. Russell’s wife, Rebecca Russell, in response to a lawsuit filed against Ms. Russell by the Bank, filed a counterclaim against the Bank seeking compensatory and punitive damages, asserting that she was induced to mortgage a rental dwelling owned by her, the proceeds of which were paid upon certain obligations owed to the Bank by her husband, and that the Bank had orally agreed to refinance her loan as a part of an alleged refinancing promise by the Bank with respect to the obligations of Mr. Russell. The Court granted the motion to strike the jury demand in both cases and has consolidated the matters for a non-jury trial. Once the consolidation order is entered, the Bank intends to seek the dismissal of Mr. Russell’s complaint and Ms. Russell’s counterclaim. Although the defendants intend to vigorously defend themselves in these matters, it is too early to assess the likelihood of a resolution of these matters or the possibility of an unfavorable outcome.

USBI and its subsidiaries also are parties to other litigation, and USBI intends to vigorously defend itself in all such litigation. In the opinion of USBI, based on review and consultation with legal counsel, the outcome of such other litigation should not have a material adverse effect on USBI’s consolidated financial statements or results of operations.

 

30


Table of Contents

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 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 March 31, 2012 to year-end 2011, while comparing income and expense for the three-month periods ended March 31, 2012 and 2011.

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.

COMPARING THE THREE MONTHS ENDED MARCH 31, 2012 TO THE THREE MONTHS ENDED MARCH 31, 2011

Net loss for USBI in the first quarter of 2012 was $(1.2) million, compared to net income of $819,000 for the first quarter of 2011, resulting in a decrease of basic net income (loss) per share from $0.14 per share during the first quarter of 2011 to $(0.21) in the same quarter of 2012 .

For the three-month period ended March 31, 2012, the Bank had net loss of $(1.4) million, compared to net income of $578,000 for the same quarter of 2011. Decreases in net income for the Bank resulted from higher provisions for loan losses as a result of higher charge-offs and impairment on other real estate owned. These charge-offs and impairments resulted mainly from commercial real estate loans and foreclosed property associated with commercial real estate loans, as real estate values continue to decline and market conditions continue to be depressed.

Net income for ALC in the three-month period ending March 31, 2012 was $187,000, compared to $307,000 for the same quarter of 2011. Net income declined when compared to the same three-month period of 2011, primarily due to increased provision for loan losses of $224,000.

Interest income for USBI in the 2012 first quarter decreased $434,000, or 4.2%, compared to the first quarter of 2011. 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 2012 first quarter decreased $511,000, compared to 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. Loan demand continues to be weak due to continuing difficult economic conditions. Cash flows from loans and investment securities were reinvested at lower rates, resulting in lower interest income. Interest income at ALC increased $77,000 for the first quarter of 2012 compared to the same quarter in 2011. This increase at ALC resulted from an increase in average consumer loans. The increase in yield on these loans off-set the loss of interest income on decreased real estate loans.

Interest expense for USBI in the 2012 first quarter decreased $407,000, or 21.8%, compared to the first quarter of 2011. 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 $27,000, or 0.3%, in the first quarter of 2012 compared to the same period of 2011. The net interest margin declined from 6.24% for the first quarter of 2011 to 6.01% for the first quarter of 2012.

 

31


Table of Contents

Loan and investment yields declined for the quarter ended March 31, 2012 compared to the same quarter in 2011. 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 $2.2 million, or 3.8% annualized of average loans, in the first quarter of 2012, compared to $1.3 million, or 2.2% annualized of average loans, in the first quarter of 2011. The annualized provision as a percent of average loans was 2.2% for the first quarter of 2012. Charge-offs exceeded recoveries by $3.7 million for the 2012 first quarter, an increase of approximately $1.5 million over the same period in the prior year. The provision for loan losses at the Bank increased to $1.5 million for the three months ended March 31, 2012, compared to $819,000 for the same period in 2011. Due to continued weakness in residential and commercial real estate and high unemployment levels in our market areas, the year-to-date net charge-offs and the provisions for loan losses have increased when compared to the first quarter of 2011. The provision for loan losses at ALC increased to $712,000 for the three months ended March 31, 2012, compared to $486,000 for the same period in 2011. While non-performing loans at ALC declined, net charge-offs, primarily in the consumer portfolio, increased, requiring increased provision for loan losses, when compared to March 31, 2011. At the Company level, net charge-offs were $3.7 million and $2.2 million for March 31, 2012 and March 31, 2011, respectively. Net charge-offs at the Bank were $3.0 million and $700,000 at ALC.

Total non-interest income for USBI increased $85,000, or 7.1%, for the first quarter of 2012, compared to the same period in 2011. Service charges and fees on deposit accounts decreased $88,000 for the 2012 first quarter, compared to the same period in 2011. All other fees increased $176,000 for the three months ended March 31, 2012, compared to the same period of 2011.

Total non-interest expense increased $2.4 million, or 32.2%, for the 2012 first quarter compared to the same period in 2011. Salary and employee benefits increased $194,000, when comparing the first quarter of 2012 to the same period in 2011. For the first quarter of 2012, salary expense increased $136,000, health insurance expense increased $89,000, contributions to the United Security Bancshares, Inc. Employee Stock Ownership Plan (with 401(k) Provisions) decreased $31,000 and all other compensation and benefits costs remained unchanged when compared to the same period in 2011. For the 2012 first quarter, impairment on other real estate increased $2.4 million, and realized loss on the sale of other real estate decreased $145,000.

Income tax benefit for the first quarter of 2012 was $982,000, compared to income tax expense of $207,000 in the first quarter of 2011. Management estimates the effective tax rate for the Company to be approximately 30.0% of pre-tax income for the period ended March 31, 2012.

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

In comparing consolidated financial condition at March 31, 2012 to December 31, 2011, total assets decreased $4.4 million to $617.4 million, while liabilities decreased $3.1 million to $552.5 million. Shareholders’ equity decreased $1.2 million as a result of a net loss of $1.2 million.

Investment securities for USBI decreased $4.5 million, or 3.7%, during the first three months of 2012. Investments provide the Company with a stable form of liquidity while maximizing earnings yield. Loans, net of unearned income, decreased $16.7 million, from $403.4 million at December 31, 2011, to $386.6 million at March 31, 2012. Deposits increased $6.6 million, or 1.2%, during the first three months of 2012. Loans, net of unearned income at ALC decreased $2.6 million, from $81.7 million at December 31, 2011 to $79.1 million at March 31, 2012. Loans, net of unearned income at the Bank, after consolidation eliminations, decreased $14.1 million from $321.6 million at December 31, 2011 to $307.5 million at March 31, 2012.

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.

 

32


Table of Contents

At March 31, 2012, the allowance for loan losses was $20.7 million, or 5.0% 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 60.3% at March 31, 2012, compared to 62.5% at December 31, 2011. At March 31, 2012, loans on non-accrual increased $1.4 million, accruing loans past due 90 days or more decreased $464,000 and real estate acquired in settlement of loans decreased $2.1 million, each as compared to December 31, 2011.

Net charge-offs as of the quarter ended March 31, 2012 were $3.7 million, or 3.8% of average loans on an annualized basis, an increase of 66.3%, or $1.5 million, from the charge-offs of $2.2 million, or 2.2% of average loans on an annualized basis, reported a year earlier. The provision for loan losses for the first three months of 2012 was $2.2 million, compared to $1.3 million at March 31, 2012.

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

 

     Consolidated  
     March 31,     December 31,     March 31,  
     2012     2011     2011  

Loans Accounted for on a Non-Accrual Basis

   $ 17,945      $ 16,502      $ 21,580   

Accruing Loans Past Due 90 Days or More

     1,868        2,332        4,426   

Real Estate Acquired in Settlement of Loans

     14,633        16,774        25,821   
  

 

 

   

 

 

   

 

 

 

Total

   $ 34,446      $ 35,608      $ 51,827   

Non-Performing Assets as a Percentage of Net Loans and Other Real Estate

     8.58     8.48     12.05

 

     FUSB  
     March 31,     December 31,     March 31,  
     2012     2011     2011  

Loans Accounted for on a Non-Accrual Basis

   $ 16,433      $ 14,616      $ 20,178   

Accruing Loans Past Due 90 Days or More

     58        224        1,674   

Real Estate Acquired in Settlement of Loans

     11,309        12,606        19,430   
  

 

 

   

 

 

   

 

 

 

Total

   $ 27,800      $ 27,446      $ 41,282   

Non-Performing Assets as a Percentage of Net Loans and Other Real Estate

     8.72     8.21     12.06

 

     ALC  
     March 31,     December 31,     March 31,  
     2012     2011     2011  

Loans Accounted for on a Non-Accrual Basis

   $ 1,512      $ 1,886      $ 1,402   

Accruing Loans Past Due 90 Days or More

     1,810        2,108        2,752   

Real Estate Acquired in Settlement of Loans

     3,324        4,168        6,391   
  

 

 

   

 

 

   

 

 

 

Total

   $ 6,646      $ 8,162      $ 10,545   

Non-Performing Assets as a Percentage of Net Loans and Other Real Estate

     8.06     9.50     11.97

Non-performing assets as a percentage of net loans and other real estate was 8.6% at March 31, 2012 and 8.5% at December 31, 2011. Loans on non-accrual status increased $1.4 million, accruing loans past due 90 days or more decreased $464,000 and real estate acquired in settlement of loans decreased $2.1 million from December 31, 2011. The Company forecasts that adverse economic conditions and the severely depressed real estate market 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, 2012 consisted of 4 residential properties totaling $71,528 and 40 commercial properties totaling $11.2 million at the Bank and 97 residential properties totaling $2.9 million and 16 commercial properties totaling $330,066 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. Real estate values continue to decline, and the real estate market remains severely 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.

 

33


Table of Contents

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 $175.2 million in borrowing capacity from the FHLB and $7.8 million in established federal funds lines.

The Bank is required to maintain certain levels of regulatory capital. At March 31, 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 13 to Item 1, “Guarantees, Commitments and Contingencies,” for a discussion of such claims and legal actions.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The primary functions of asset and liability management are to (1) assure adequate liquidity, (2) maintain an appropriate balance between interest-sensitive assets and interest-sensitive liabilities, (3) maximize the profit of the Bank and (4) reduce risks to the Bank’s capital. Liquidity management involves the ability to meet day-to-day cash flow requirements of the Bank’s customers, whether they are depositors wishing to withdraw funds or borrowers requiring funds to meet their credit needs. Without proper liquidity management, the Bank would not be able to perform a primary function under its role as a financial intermediary and would not be able to meet the needs of the communities that it serves. Interest rate risk management focuses on the maturity structure and repricing characteristics of its assets and liabilities when changes occur in market interest rates. Effective interest rate sensitivity management ensures that both assets and liabilities respond to changes in interest rates within an acceptable time frame, thereby minimizing the effect of such interest rate movements on short- and long-term net interest margin and net interest income.

The asset portion of the balance sheet provides liquidity primarily from two sources. These are principal payments and maturities of loans and maturities and principal payments from the investment portfolio. Other short-term investments such as federal funds sold are additional sources of liquidity. Loans maturing or repricing in one year or less amounted to $172.3 million at December 31, 2011 and $145.1 million at March 31, 2012.

Investment securities forecasted to mature or reprice over the next twelve months ending March 31, 2013 are estimated to be $7.8 million, or about 6.8%, of the investment portfolio as of March 31, 2012. For comparison, principal payments on investment securities totaled $7.5 million, or 6.6%, of the investment portfolio at March 31, 2012.

Although the majority of the securities portfolio has legal final maturities longer than 10 years, a substantial percentage of the portfolio provides monthly principal and interest payments and consists of securities that are readily marketable and easily convertible into cash on short notice. As of March 31, 2012, the bond portfolio had an expected average maturity of 3.5 years, and approximately 72.8% of the $113.7 million in bonds was expected to be repaid within 5 years. However, management does not rely solely upon the investment portfolio to generate cash flows to fund loans, capital expenditures, dividends, debt repayment and other cash requirements. Instead, these activities are funded by cash flows from loan payments, as well as increases in deposits and short-term borrowings.

The liability portion of the balance sheet provides liquidity through interest bearing and non-interest bearing deposit accounts. Federal funds purchased, FHLB advances, securities sold under agreements to repurchase and short-term and long-term borrowings are additional sources of liquidity. Liquidity management involves the continual monitoring of the sources and uses of funds to maintain an acceptable cash position. Long-term liquidity management focuses on considerations related to the total balance sheet structure.

The Bank, at March 31, 2012, had long-term debt and short-term borrowings that, on average, represented 2.4% of total liabilities and equity, compared to 3.9% at year-end 2011.

 

34


Table of Contents

Interest rate sensitivity is a function of the repricing characteristics of the portfolio of assets and liabilities. These repricing characteristics are the time frames during which the interest-bearing assets and liabilities are subject to changes in interest rates, either at replacement or maturity, during the life of the instruments. Measuring interest rate sensitivity is a function of the differences in the volume of assets and the volume of liabilities that are subject to repricing in future time periods. These differences are known as interest sensitivity gaps and are usually calculated for segments of time and on a cumulative basis.

Measuring Interest Rate Sensitivity: Gap analysis is a technique used to measure interest rate sensitivity at a particular point in time. Assets and liabilities are placed in gap intervals based on their repricing dates. Assets and liabilities for which no specific repricing dates exist are placed in gap intervals based on management’s judgment concerning their most likely repricing behaviors.

A net gap for each time period is calculated by subtracting the liabilities repricing in that interval from the assets repricing. A positive gap – more assets repricing than liabilities – will benefit net interest income if rates are rising and will detract from net interest income in a falling rate environment. Conversely, a negative gap – more liabilities repricing than assets – will benefit net interest income in a declining interest rate environment and will detract from net interest income in a rising interest rate environment.

Gap analysis is the simplest representation of the Bank’s interest rate sensitivity. However, it cannot reveal the impact of factors such as administered rates, pricing strategies on consumer and business deposits, changes in balance sheet mix or the effect of various options embedded in balance sheet instruments, such as refinancing rates within the loan and bond portfolios.

Simple gap analysis is no longer considered to be as accurate a tool for measuring interest rate risk as pro forma income simulation because it does not make an allowance for how much an item reprices as interest rates change, only that it is possible that the item could reprice. Accordingly, the Bank does not rely on gap analysis but instead measures changes in net interest income and net interest margin through income simulation over +/- 1%, 2% and 3% interest rate shocks. Our estimates have consistently shown that the Bank has very limited, if any, net interest margin and net interest income risk to rising interest rates.

On a monthly basis, the Bank simulates how changes in short- and long-term interest rates will impact future profitability, as reflected by changes in the Bank’s net interest margin.

Also on a monthly basis, the Bank calculates how changes in interest rates would impact the market value of its assets and liabilities, as well as changes in long-term profitability. The process is similar to assessing short-term risk but emphasizes and is measured over a five-year time period, which allows for a more comprehensive assessment of longer-term repricing and cash flow imbalances that may not be captured by short-term net interest margin simulation. The results of these calculations are representative of long-term interest rate risk, both in terms of changes in the present value of the Bank’s assets and liabilities, as well as long-term changes in core profitability.

ITEM 4. CONTROLS AND PROCEDURES

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s Securities Exchange Act of 1934 (the “Exchange Act”) reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

The management of the Company carried out an evaluation, under the supervision and with the participation of the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Exchange Act) as of March 31, 2012, pursuant to the evaluation of these controls and procedures required by Rule 13a-15 of the Exchange Act. Based upon that evaluation, the Company’s management concluded, as of March 31, 2012, that the Company’s disclosure controls and procedures are effective to ensure that the information required to be disclosed in the Company’s periodic filings with the SEC is recorded, processed, summarized and reported within the time periods specified.

 

35


Table of Contents

There were no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the quarter ended March 31, 2012 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

See Note 13 to Item 1, “Guarantees, Commitments and Contingencies,” for information regarding certain litigation matters relating to the Company and its subsidiaries.

The Company and its subsidiaries also are parties to litigation other than as described in Note 13 to Item 1, and the Company intends to vigorously defend itself in all such litigation. In the opinion of the Company, based on review and consultation with legal counsel, the outcome of such litigation should not have a material adverse effect on the Company’s consolidated financial statements or results of operations.

ITEM 1A. RISK FACTORS

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, Item 1A, “Risk Factors,” in our Annual Report on Form 10-K for the year ended December 31, 2011 that could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing the Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table sets forth purchases made by or on behalf of the Company or any “affiliated purchaser,” as defined in Rule 10b-18(a)(3) of the Exchange Act, of shares of the Company’s common stock.

Issuer Purchases of Equity Securities

 

Period

   Total Number
of Shares
Purchased
    Average
Price Paid
per Share
     Total Number of
Shares Purchased as
Part of Publicly
Announced

Programs(1)
     Maximum Number (or
Approximate Dollar Value)
of Shares that May Yet Be
Purchased Under

the Programs (1)
 

January 1 – January 31

     7,500 (2)    $ 4.58         —           242,303   

February 1 – February 29

     3,500 (2)    $ 6.29         —           242,303   

March 1 – March 31

     —        $ 0.00         —           242,303   

Total

     11,000      $ 5.12         —           242,303   

 

(1) On December 17, 2011, the Board of Directors extended the share repurchase program previously approved by the Board on January 19, 2006. Under the repurchase program, the Company is authorized to repurchase up to 642,785 shares of common stock. The expiration date of the extended repurchase program is December 31, 2012. At March 31, 2012, there was 242,303 shares that may still be purchased under the program.
(2) Shares were purchased in open-market transactions by an independent trustee for the United Security Bancshares Inc. Employee Stock Ownership Plan (With 401(k) Provisions).

ITEM 6. EXHIBITS

The exhibits listed in the Index to Exhibits below are filed herewith and are incorporated herein by reference.

 

36


Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

UNITED SECURITY BANCSHARES, INC.

DATE: May 11, 2012

BY: /s/Robert Steen

Robert Steen

Its Vice President, Treasurer and Assistant Secretary, Chief Financial Officer and Principal Accounting Officer

(Duly Authorized Officer and Principal Financial Officer)

INDEX TO EXHIBITS

 

Exhibit No.

  

Description

3.1    Certificate of Incorporation of United Security Bancshares, Inc., incorporated herein by reference to the Exhibits to Form 10-Q for the quarter ended September 30, 1999.
3.2    Amended and Restated Bylaws of United Security Bancshares, Inc., incorporated by reference to Exhibit 3(ii) to the Current Report on Form 8-K filed August 29, 2007.
3.2A    First Amendment to the Bylaws of United Security Bancshares, Inc., incorporated by reference to Exhibit 3(ii) to the Current Report on Form 8-K filed on February 24, 2012.
31.1    Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.
31.2    Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.
32    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101    Interactive Data File.

 

37

XNAS:USBI United Security Bancshares Inc Quarterly Report 10-Q Filling

United Security Bancshares Inc XNAS:USBI Stock - Get Quarterly Report SEC Filing of United Security Bancshares Inc XNAS:USBI stocks, including company profile, shares outstanding, strategy, business segments, operations, officers, consolidated financial statements, financial notes and ownership information.

XNAS:USBI Quarterly Report 10-Q Filing - 3/31/2012
Name |  Ticker |  Star Rating |  Market Cap |  Stock Type |  Sector |  Industry Star Rating |  Investment Style |  Total Assets |  Category |  Top Holdings |  Top Sectors |  Symbol |  Title Star Rating |  Category |  Total Assets |  Top Holdings |  Top Sectors |  Symbol |  Name Title |  Date |  Author |  Collection |  Interest |  Popularity Topic |  Sector |  Key Indicators |  User Interest |  Market Cap |  Industry Name |  Ticker |  Star Rating |  Market Cap |  Stock Type |  Sector |  Industry Star Rating |  Investment Style |  Total Assets |  Category |  Top Holdings |  Top Sectors |  Symbol / Ticker |  Title Star Rating |  Category |  Total Assets |  Symbol / Ticker |  Name Title |  Date |  Author |  Collection |  Popularity |  Interest Title |  Date |  Company |  Symbol |  Interest |  Popularity Topic |  Sector |  Key Indicators |  User Interest |  Market Cap |  Industry Title |  Date |  Company |