FUSB

Business Context and Reporting Period

Company: United Security Bancshares, Inc. (a Delaware corporation and bank holding company).
Reporting Period: Fiscal year ended December 31, 1999.
Operations: The Company operates primarily through its subsidiary, First United Security Bank (the "Bank"), which serves Alabama and Mississippi. The Bank also owns Acceptance Loan Company, Inc. ("ALC"), a consumer finance subsidiary with 33 offices, and First Security Courier Corporation. The Company is in the process of organizing a reinsurance subsidiary in Arizona.

Key Financial Metrics

Material Changes vs. Prior Period

• Net Income Decline: Net income decreased by approximately $419,000 (4.9%) to $8.2 million, primarily due to a higher provision for loan losses ($4.3 million vs. $3.2 million) and increased non-interest expenses.
• Loan Portfolio Growth: Total loans increased by $41.7 million (17.4%), driven by a $33.7 million increase in real estate loans and a $4.3 million increase in consumer installment loans (largely from ALC).
• Asset Quality Improvement: Non-performing assets decreased significantly from $5.3 million in 1998 to $3.4 million in 1999. Non-accrual loans dropped from $3.5 million to $1.7 million.
• Expense Increase: Non-interest expenses rose to $18.5 million (up 9.0%), attributed to staffing new ALC offices and equipment upgrades for Year 2000 compliance.
• Securities Portfolio: The investment portfolio decreased by $6.1 million due to unrealized losses from interest rate changes, resulting in a net unrealized loss of $1.8 million (net of tax) compared to a gain of $2.8 million in 1998.

Outlook, Risks, and Management Commentary

• Interest Rate Sensitivity: Management maintains a liability-sensitive position (negative gap) over the next 12 months, meaning net interest income would benefit slightly from falling rates and be adversely impacted by rising rates.
• Industry Concentration: The Bank has a concentration in the timber industry ($31.2 million, or 11.1% of gross loans). Management believes diversification within the industry mitigates risk, though economic health of the sector remains a key factor.
• Regulatory Capital: The Company is "well capitalized," exceeding all regulatory requirements. Tier 1 Capital to Risk-Weighted Assets was 17.79% (minimum 4.00%) and Total Capital to Risk-Weighted Assets was 19.05% (minimum 8.00%).
• Derivatives: The Company uses interest rate swaps, caps, and floors to manage interest rate risk. Unrealized losses on "high risk" securities designated for hedging were $918,000.
• Year 2000 Issues: Management reports no material effects from Year 2000 issues, with approximately $250,000 in compliance costs incurred over the last three years.
• Dividends: The Company paid $0.84 per share in dividends in 1999, marking the 11th consecutive year of dividend increases.

Investor Verification Checklist

• Loan Loss Provision Adequacy: Verify if the 2.0% allowance for loan losses remains sufficient given the growth in the higher-risk consumer installment portfolio (ALC).
• Timber Industry Exposure: Monitor the economic health of the timber industry in Alabama and Mississippi, as 11% of the loan portfolio is concentrated in this sector.
• Interest Rate Environment: Assess the impact of rising interest rates on the Company's negative interest rate sensitivity gap and net interest margin.
• Securities Valuation: Review the $1.8 million net unrealized loss in the securities portfolio and the potential impact of SFAS No. 133 (Derivatives) adoption in 2001.
• Expense Management: Track non-interest expense ratios as the Company continues to expand ALC operations and integrate new technologies.