U.S. SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q (Mark One) ( X ) Quarterly report under Section 13 or 15 (d) of the Securities Exchange Act of 1934 For the quarterly period ended September 30, 1997 or ------------------ ( ) Transition report under Section 13 or 15 (d) of the Exchange Act For the transition period from to Commission file number 000 - 18561 UNITED SECURITY BANCORPORATION (Exact Name of Registrant as Specified in Its Charter) Washington 91-1259511 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 9506 North Newport Highway, Spokane, WA 99218-1200 (Address of Principal Executive Offices) (509) 467-6949 (Issuer's Telephone Number, Including Area Code) Check whether the issuer: (1) 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 The issuer has one class of capital stock, that being common stock. On October 31, 1997 there were 3,684,341 shares of such stock outstanding. 1 2 UNITED SECURITY BANCORPORATION INDEX TO QUARTERLY REPORT ON FORM 10-Q September 30, 1997 Table of Contents Page Part I Financial Information Item 1. Financial Statements Consolidated Statements of Condition - September 30, 1997 and December 31, 1996 . . . . . . . . . . . . . . . 3 Consolidated Statements of Income - Three Months and Nine Months Ended September 30, 1997 and 1996 . . . 4 Consolidated Condensed Statements of Cash Flows - Nine Months Ended September 30, 1997 and 1996 . . . 5 Notes to Consolidated Financial Statements . . . . 6-8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . 9-10 Part II Other Information Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . 11 Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 2 3 UNITED SECURITY BANCORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CONDITION Sept 30, December 31, ($ in thousands) 1997 1996 ASSETS (Audited) Cash and due from banks $ 14,871 $ 10,430 Overnight interest bearing deposits with other banks 7,722 6,223 Federal funds sold 6,510 10,770 --------- ------- - -- Cash and cash equivalents 29,103 27,423 Securities (Note 2) 43,871 15,613 Loans, net of allowance for loan losses of $1,888 in 1997 and $2,034 in 1996 (Notes 3 and 4) 192,108 176,386 Accrued interest receivable 2,601 2,108 Premises and equipment, net 8,100 6,117 Foreclosed real estate and other foreclosed assets 434 205 Life insurance and salary continuation assets 2,483 2,311 Intangible assets (Note 5) 2,307 119 Other assets 799 767 --------- ------- - -- TOTAL ASSETS $ 281,806 $ 231,049 ========= ========= LIABILITIES Noninterest bearing - demand deposits $ 42,828 $ 33,281 Interest bearing: NOW and savings accounts 108,965 80,735 Time, $100,000 and over 25,539 24,554 Other time 65,591 58,829 --------- ------- - -- TOTAL DEPOSITS 242,923 l97,399 Notes payable 3,635 2,491 Capital lease obligations 737 751 Accrued interest payable 705 630 Other liabilities 2,133 1,765 --------- ------- - -- TOTAL LIABILITIES 250,133 203,036 STOCKHOLDERS' EQUITY Common stock, no par, shares authorized 15,000,000; issued and outstanding 3,684,341 in 1997 and 3,682,341 in 1996 21,014 21,001 Retained earnings 10,955 7,276 Net unrealized loss on securities available- for-sale, net of tax of $87 in 1997 and $136 for 1996 (168) (264) Guaranteed bank loan to Employee Stock Ownership Plan (128) --------- ------- - -- TOTAL STOCKHOLDERS' EQUITY 31,673 28,013 --------- ------- - -- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 281,806 $ 231,049 ========= ========= The accompanying notes are an integral part of these statements. 3 4 UNITED SECURITY BANCORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME ($ in thousands, except per share) Three Months Ended Sept 30, Year-To-Date 1997 1996 1997 1996 INTEREST INCOME Interest and fees on loans and leases $ 5,391 $ 4,852 $15,144 $13,709 Interest on securities 505 279 1,096 971 Other interest income 328 206 799 459 ------- ------- --- - ---- ------- TOTAL INTEREST INCOME 6,224 5,337 17,039 15,139 ------- ------- --- - ---- ------- INTEREST EXPENSE Interest on deposits 2,337 2,031 6,477 5,789 Interest on borrowings 92 80 231 221 ------- ------- --- - ---- ------- TOTAL INTEREST EXPENSE 2,429 2,111 6,708 6,010 ------- ------- --- - ---- ------- NET INTEREST INCOME 3,795 3,226 10,331 9,129 Provision for loan losses (Note 4) 227 136 548 403 ------- ------- --- - ---- ------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 3,568 3,090 9,783 8,726 ------- ------- --- - ---- ------- NONINTEREST INCOME Fees and service charges 350 273 933 822 Insurance commissions 310 324 893 956 Securities gains/(losses) (25) 53 Insurance proceeds (Note 5) 796 796 Other 154 207 397 454 ------- ------- --- - ---- ------- TOTAL NONINTEREST INCOME 1,610 804 2,994 2,285 ------- ------- --- - ---- ------- NONINTEREST EXPENSE Salaries and employee benefits 1,564 1,505 4,450 4,405 Occupancy expense, net 176 161 480 458 Equipment expense 206 171 542 539 Other operating expense 716 446 1,802 1,360 ------- ------- --- - ---- ------- TOTAL NONINTEREST EXPENSE 2,662 2,283 7,274 6,762 ------- ------- --- - ---- ------- INCOME BEFORE TAXES 2,516 1,611 5,503 4,249 FEDERAL INCOME TAX EXPENSE 806 483 1,823 1,342 ------- ------- --- - ---- ------- NET INCOME $ 1,710 $ 1,128 $ 3,680 $ 2,907 ======= ======= ======= ======= Earnings per common share $ .46 $ .31 $ 1.00 $ .79 Weighted average shares outstanding 3,684,341 3,682,341 3,683,352 3,672,904 The accompanying notes are an integral part of these statements. 4 5 UNITED SECURITY BANCORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEAR-TO-DATE SEPTEMBER 30, 1997 AND 1996 ($ in thousands) 1997 1996 Increase in Cash and Cash Equivalents Net income $ 3,680 $ 2,907 Cash flows from operating activities: Provision for loan losses 548 403 Depreciation and amortization 349 389 (Increase)/decrease in assets and liabilities Accrued interest receivable (493) (423) Life insurance and salary continuation assets (172) (263) Intangible assets (2,173) 69 Other assets (48) 58 Accrued interest payable 75 102 Other liabilities 368 313 ------- ------- Net cash provided by operating activities 2,134 3,555 ------- ------- Cash flows from investing activities: Securities: Maturities 250 7,636 Sales 4,595 4,526 Purchases (33,007) (7,649) Net (increase)/decrease in loans and leases(16,270) (29,106) Purchases of premises and equipment (2,332) (213) Foreclosed real estate activity (229) (250) ------- ------- Net cash provided by investing activities (46,993) (25,056) ------- ------- Cash flows from financing activities: Net increase in deposits 45,524 37,379 Proceeds from notes payable 1,043 2,529 Principal payments on notes payable (27) (27) Principal payments on capital lease obligations (14) (12) Cash received from stock sales 20 200 Cash paid for redemption of fractional shares (7) (7) ------- ------- Net cash provided by financing activities 46,539 40,062 ------- ------- Net increase/(decrease) in cash and cash equivalents 1,680 18,561 Cash and cash equivalents, beginning of year 27,423 15,581 ------- ------- Cash and cash equivalents, end of quarter $29,103 $34,142 ======= ======= The accompanying notes are an integral part of these statements. 5 6 UNITED SECURITY BANCORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. Management Statement In the opinion of the Company, the accompanying audited and unaudited Consolidated Financial Statements present fairly the financial position of the Company as of September 30, 1997, December 31, 1996, and September 30, 1996, and the results of operations and the changes in financial position for the nine month period ended September 30, 1997 and 1996. Certain reclassifications of 1996 balances have been made to conform with the September 30, 1997 presentation; there was no impact on net income, earnings per share or stockholders' equity. Also per share amounts and weighted average shares outstanding have been retroactively adjusted to reflect previously disclosed stock split-ups. In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 128 (SFAS 128), Earnings Per Share, which establishes new standards for computing and presenting earnings per share. SFAS 128 is effective for financial statements issued for periods ending after December 15, 1997 and requires restatement of all prior-period earnings per share data. Early application of SFAS 128 is not permitted. The Company's adoption of the provision of SFAS 128 will result in the dual presentation of basic and diluted earnings per share. The Company has previously disclosed basic earnings per share. Diluted earnings per share as calculated under SFAS 128 is not expected to materially differ, if at all from previously disclosed earnings per share. 6 7 UNITED SECURITY BANCORPORATION NOTE 2. Securities Most of the securities are classified as available-for-sale and are stated at fair value, and unrealized holding gains and losses, net of related deferred taxes, are reported as a separate component of stockholders' equity. Gains or losses on available-for-sale securities sales are reported as part of noninterest income based on the net proceeds and the adjusted carrying amount of the securities sold, using the specific identification method. Carrying amount and fair values at September 30, 1997 and December 31, 1996 were as follows: Sept 30, 1997 December 31, 1996 Amortized Fair Financial Amortized Fair Financial ($ in thousands) Cost Value Statements Cost Value Statements Securities available-for-sale: U.S. Treasury securities $ 500 $ 501 $ 501 $ 500 $ 500 $ 500 Obligations of federal government agencies 22,088 22,062 22,062 1,800 1,799 1,799 Mortgage backed securities 11,218 11,244 11,244 6,395 6,348 6,348 Obligations of states, municipalities and political subdivisions 3,255 3,223 3,223 3,250 3,099 3,099 Other securities 5,791 5,567 5,567 3,463 3,262 3,262 ------- ------- ------- ------- -- - ---- ------ 42,852 42,597 42,597 15,408 15,008 15,008 Securities held-to-maturity: Obligations of states, municipalities and political subdivisions 1,274 1,286 1,274 605 611 605 ------- ------- ------- ------- --- - ---- ------- Total $44,126 $43,883 $43,871 $16,013 $15,619 $15,613 ======= ======= ======= ======= ======= ======= NOTE 3. LOANS Loan detail by category as of September 30, 1997 and December 31, 1996 were as follows: ($ in thousands) Sept 30, December 31, 1997 1996 (Audited) Commercial and industrial $107,906 $ 97,086 Agricultural 27,836 25,621 Real estate mortgage 31,945 29,318 Real estate construction 8,271 9,954 Installment 10,171 10,527 Lease financing 5,129 3,038 Bank cards and other 3,326 3,384 -------- ------ - -- Total loans 194,584 178,928 Allowance for loan losses (1,888) (2,034) Deferred loan fees, net of deferred costs (588) (508) -------- ------ - -- Net loans $192,108 $176,386 ======== ======== 7 8 UNITED SECURITY BANCORPORATION NOTE 4. ALLOWANCE FOR LOAN LOSSES The allowance for loan loss is maintained at levels considered adequate by management to provide for possible loan losses. The allowance is based on management's assessment of various factors affecting the loan portfolio, including problem loans, business conditions and loss experience, and an overall evaluation of the quality of the underlying collateral. Changes in the allowance for loan loss during the three and nine months ended September 30, 1997 and 1996 were as follows: Three Months Ended Sept 30, Year-To- Date ($ in thousands) 1997 1996 1997 1996 Balance, beginning of period $1,977 $1,570 $2,034 $1,391 Provision for loan losses 227 136 548 403 Loan charge-offs (318) (73) (747) (165) Loan recoveries 2 3 53 7 ------ ------ ------ -- - ---- Balance, end of period $1,888 $1,636 $1,888 $1,636 ====== ====== ====== ====== NOTE 5. SUBSEQUENT EVENTS In July 1997 the Company acquired five branches from Wells Fargo Bank. United Security Bank acquired two of the branches in Moses Lake and Davenport, Washington. Home Security Bank acquired three of the branches in Walla Walla, Mabton, and Naches, Washington. These branches are located in the identified market place for the two Banks. The acquisitions will increase deposits by approximately $35 million, premises and equipment by $1.8 million, and other assets by $2.3 million primarily for core deposit acquisition costs. The Company previously disclosed a loss due to an embezzlement by a former employee of its subsidiary, Home Security Bank. In third quarter 1997 the Company received from its insurance carrier $796,000. This is a full recovery of the embezzlement, except for the insurance policy deductible of $50,000. The income has improved third quarter 1997 results, net of federal income taxes. In fourth quarter 1997 the Company anticipates acquiring Community Ban Corporation and its wholly-owned subsidiary Bank of Pullman. This will add approximately $60 million in assets, $35 million in loans, and $51 million in deposits. The purchase method of accounting will be used for the acquisition. The purchase is approximately $12 million with an acquired intangible asset of approximately $5 million. 8 9 UNITED SECURITY BANCORPORATION Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Preliminary Note Regarding Forward-Looking Statements The information set forth in this item 2 includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act, and is subject to the safe harbor created by those sections. Overview A performance summary and detailed discussion regarding the third quarter and year-to-date results in 1997 and 1996 follow this table. UNITED SECURITY BANCORPORATION AND SUBSIDIARIES PERFORMANCE SUMMARY Three Months Ended Sept 30, Year-To- Date % % ($ in thousands) 1997 1996 Change 1997 1996 Change Interest income $ 6,224 $ 5,337 16.6% $17,039 $15,139 12.6% Interest expense 2,429 2,111 15.1% 6,708 6,010 11.6% ------- ------- ----- ------- - ------- ----- Net interest income 3,795 3,226 17.6% 10,331 9,129 13.2% Provision for loan losses 227 136 66.9% 548 403 36.0% ------- ------- ----- ------- - ------- ----- Net interest income after provision for loan losses 3,568 3,090 15.5% 9,783 8,726 12.1% Noninterest income 1,610 804 100.2% 2,994 2,285 31.0% Noninterest expense 2,662 2,283 16.6% 7,274 6,762 7.6% ------- ------- ----- ------- - ------- ----- Income before income taxes 2,516 1,611 56.2% 5,503 4,249 29.5% Income taxes 806 483 66.9% 1,823 1,342 35.8% ------- ------- ----- ------- - ------- ----- Net income $ 1,710 $ 1,128 51.6% $ 3,680 $ 2,907 26.6% ======= ======= ===== ======= ======= ===== Earnings per share $ .46 $ .31 51.5% $ 1.00 $ .79 26.2% Average shares outstanding 3,684,341 3,682,341 .1% 3,683,352 3,672,904 .3% Results of Operations The results of operations include the consolidated results of operations for United Security Bancorporation and its wholly-owned subsidiaries (Company), United Security Bank, Home Security Bank, USB Insurance Agencies, Inc., USB Mortgage Company and USB Leasing, Inc. This information should be read in conjunction with the financial statements and related notes appearing in this report. United Security Bancorporation and its subsidiaries reported an 27% increase in net income to $3,680,000 for the first nine months of 1997 compared to $2,907,000 for the same period in 1996. Earnings per share increased by 26% to $1.00 compared to $.79 for 1996. For third quarter 1997, earnings increased 52% to $1,710,000 compared to $1,128,000 for the same period in 1996. Earnings per share in third quarter was $.46 in 1997 and $.31 in 1996, an increase of 52%. 9 10 UNITED SECURITY BANCORPORATION Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Net income was improved for the year and quarter due to the receipt of $796,000 in insurance proceeds recovering an embezzlement loss reported in 1996. Net of taxes the proceeds improved net income for the year and quarter by $525,000 or $.14 per share. Net Interest Income Net interest income grew 13% to $10,331,000 in 1997 compared to $9,129,000 in 1996. The increase is primarily the result of loan growth. Total loans grew 13% to $193,996,000 as of September 30, 1997 compared to $172,358,000 as of September 30, 1996. The net interest margin to average earning assets was 6.16% and 6.31% as of September 30, 1997 and 1996, respectively. Provision for Loan Losses The allowance for loan losses grew 15%, comparing September 30, 1997 to 1996, which represents .97% and .95% of loans, respectively. Noninterest Income Noninterest income increased by 31% to $2,994,000 during the first nine months of 1997 compared to $2,285,000 for the same period in 1996. The primary factor for the increase was the insurance proceeds of $796,000 described above. Fees and service charges increased 14% to $933,000 in 1997 from $822,000 in 1996 due to deposit growth patterns. This was offset by a 7% decline in insurance commissions, a loss on sales of available-for-sale securities. The loss on the sales of securities allowed the Company to reposition and improve the yield on its securities portfolio. Noninterest Expense Noninterest expense increased by 8% in 1997 compared to 1996 as the Company continued its expansion and its planned acquisition activity. The Company efficiency ratio improved to 54.49%, and 57.94% without the insurance proceeds for 1997, compared to 59.52% for 1996. Liquidity and Capital Resources The Company completed its acquisition of five Wells Fargo branches in July, 1997 increasing deposits by approximately $35 million, premises and equipment by $1.8 million and other assets by $2.3 million primarily for core deposit acquisition costs. In fourth quarter 1997 the Company anticipates acquiring Community Ban Corporation and its wholly-owned subsidiary Bank of Pullman. This will add approximately $60 million in assets, $35 million in loans, and $51 million in deposits. The purchase method of accounting will be used for the acquisition. The purchase price is approximately $12 million with an acquired intangible asset of approximately $5 million. 10 11 UNITED SECURITY BANCORPORATION Part II Other Information Item 6. Exhibits and Reports on Form 8-K (a) Exhibits None in third quarter 1997. (b) Reports on Form 8-K during second quarter 1997 Date Item # Subject July 24, 1997 Item 5. United Security Collects Insurance Settlement July 24, 1997 Item 5. United Security Completes Purchase of Five Wells Fargo Branches August 27, 1997 Item 5. United Security Bancorporation to Acquire Bank of Pullman 11 12 UNITED SECURITY BANCORPORATION 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 BANCORPORATION /s/ William C. Dashiell ------------------------------- - --- William C. Dashiell, President and Chief Executive Officer Date: November 10, 1997 /s/ Chad Galloway ----------------- ------------------------------- - --- Chad Galloway, Vice President and Chief Financial Officer 12