|• FORM 10-Q • EX-31.1 • EX-31.2 • EX-32 • XBRL INSTANCE DOCUMENT • XBRL TAXONOMY EXTENSION SCHEMA • XBRL TAXONOMY EXTENSION CALCULATION LINKBASE • XBRL TAXONOMY EXTENSION LABEL LINKBASE • XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE|
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
For the quarterly period ended March 31, 2012
For the transition period from to
Commission File Number: 0-14549
United Security Bancshares, Inc.
(Exact Name of Registrant as Specified in Its Charter)
(Registrants Telephone Number, Including Area Code)
(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):
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 issuers classes of common stock, as of the latest practicable date.
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 Companys 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 Companys Securities and Exchange Commission (SEC) filings and other public announcements, including the risk factors described in Part I, Item 1A of the Companys 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.
UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES
(In Thousands of Dollars, Except Per Share Data)
The accompanying notes are an integral part of these Condensed Consolidated Statements.
UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES
(In Thousands of Dollars, Except Per Share Data)
The accompanying notes are an integral part of these Condensed Consolidated Statements.
UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES
(In Thousands of Dollars)
The accompanying notes are an integral part of these Condensed Consolidated Statements.
UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES
(In Thousands of Dollars)
The accompanying notes are an integral part of these Condensed Consolidated Statements.
UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES
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 Companys 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 Companys 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 transferors 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 Companys 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 FASBs 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 entitys shareholders equity and (3) disclosing quantitative information about the unobservable inputs used within the Level 3 hierarchy. This ASU became effective for the Companys interim and annual periods beginning after December 15, 2011 and did not have a material impact on the Companys consolidated financial position, results of operations or cash flows. See Note 5 for the newly-required disclosures.
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 entitys financial statements to evaluate the effect or potential effect of netting arrangements on an entitys 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.
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):
4. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) consists of net income (loss) and the change in the unrealized gains or losses on the Companys 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 Companys 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:
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 Companys 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.
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.
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 Companys 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 loans 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
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.
NON-RECURRING FAIR VALUE MEASUREMENTS USING SIGNIFICANT UNOBSERVABLE INPUTS
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 Companys financial instruments at March 31, 2012 and December 31, 2011 were as follows:
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:
The scheduled maturities of investment securities available-for-sale and held-to-maturity at March 31, 2012 are presented in the following table:
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 Companys 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.
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
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 Companys 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 Banks 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 Companys 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:
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.
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 14 family residential properties These loans include conventional mortgage loans on one-to-four family residential properties. These properties may serve as the borrowers 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 borrowers 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
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:
Impaired Loan Evaluations
The following table details loans individually evaluated for impairment at March 31, 2012 and December 31, 2011.
The following table details loans collectively evaluated for impairment at March 31, 2012 and December 31, 2011.
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:
The table below illustrates the carrying amount of loans by credit quality indicator at March 31, 2012 (in thousands of dollars).
The table below illustrates the carrying amount of loans by credit quality indicator at December 31, 2011 (in thousands of dollars).
The following table provides an aging analysis of past due loans and nonaccruing loans by class at March 31, 2012 (in thousands of dollars).
The following table provides an aging analysis of past due loans and nonaccruing loans by class at December 31, 2011 (in thousands of dollars).
At March 31, 2012, the carrying amount of impaired loans consisted of the following (in thousands of dollars):
At December 31, 2011, the carrying amount of impaired loans consisted of the following (in thousands of dollars):
The average net investment in impaired loans and interest income recognized and received on impaired loans are as follows (in thousands of dollars):
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 borrowers 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.
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:
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:
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 Companys and the Banks 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 Companys 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:
13. GUARANTEES, COMMITMENTS AND CONTINGENCIES
The Banks 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 Banks 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:
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 Banks 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
customers 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 managements 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.
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 courts 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 Automotives 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 Courts 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 Automotives 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 Automotives 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 ALCs 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 Banks 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. Russells 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. Russells complaint and Ms. Russells 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 USBIs consolidated financial statements or 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 Companys 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 Companys unaudited consolidated financial statements and related notes appearing elsewhere in this report and Managements Discussion and Analysis of Financial Condition and Results of Operations appearing in the Companys 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.
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, managements 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 managements estimation and judgment, the allowance for loan losses is inherently subject to adjustment at future dates. Unfavorable changes in the factors used by management to determine the adequacy of the allowance, including increased loan delinquencies and subsequent charge-offs, or the availability of new information, could require additional provisions, in excess of normal provisions, to the allowance for loan losses in future periods. There can be no assurance that loan losses in future periods will not exceed the allowance for loan losses or that additions to the allowances will not be required.
At March 31, 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):
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.
LIQUIDITY AND CAPITAL RESOURCES
The Banks 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.
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 Banks capital. Liquidity management involves the ability to meet day-to-day cash flow requirements of the Banks 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.
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 managements 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 Banks 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 Banks 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 Banks assets and liabilities, as well as long-term changes in core profitability.
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Companys Securities Exchange Act of 1934 (the Exchange Act) reports is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms and that such information is accumulated and communicated to the Companys 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 Companys 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 Companys management concluded, as of March 31, 2012, that the Companys disclosure controls and procedures are effective to ensure that the information required to be disclosed in the Companys periodic filings with the SEC is recorded, processed, summarized and reported within the time periods specified.
There were no changes in the Companys 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 Companys internal control over financial reporting.
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 Companys consolidated financial statements or results of operations.
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.
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 Companys common stock.
Issuer Purchases of Equity Securities
The exhibits listed in the Index to Exhibits below are filed herewith and are incorporated herein by reference.
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
Its Vice President, Treasurer and Assistant Secretary, Chief Financial Officer and Principal Accounting Officer
(Duly Authorized Officer and Principal Financial Officer)
INDEX TO EXHIBITS