United States
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 March 31, 1999 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
(Registrant'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 April 26, 1999, there were 6,939,511 shares of such stock
outstanding.
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UNITED SECURITY BANCORPORATION
INDEX TO QUARTERLY REPORT ON FORM 10-Q
March 31, 1999
Table of Contents
Page
Part I Financial Information
Item 1. Financial Statements
Consolidated Statements of Condition - March 31, 1999
and December 31, 1998 . . . . . . . . . . . . . . .
3
Consolidated Statements of Income - Three Months
Ended March 31, 1999 and 1998 . . . . . . . . . . .
4
Consolidated Condensed Statements of Cash Flows -
Three Months Ended March 31, 1999 and 1998. . . . .
5
Notes to Consolidated Financial Statements . . . .
6-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . .
9-11
Item 3. Quantitative and Qualitative Disclosures About
Market Risk . . . . . . . . . . . . . . . . . . . .
12
Part II Other Information
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . .
12
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . .
12
2
3 UNITED SECURITY BANCORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
March 31,
December 31,
($ in thousands) 1999
1998
ASSETS
Cash and due from banks $ 16,790 $
24,437
Overnight interest bearing deposits with
other banks 7,004
12,166
Federal funds sold 2,875
485
--------- -------
- --
Cash and cash equivalents 26,669
37,088
Securities 68,599
87,350
Loans, net of allowance for loan losses of $3,781
in 1999 and $3,819 in 1998 370,239
359,532
Accrued interest receivable 4,759
4,565
Premises and equipment, net 12,209
12,145
Foreclosed real estate and other foreclosed
assets 1,266
1,245
Life insurance and salary continuation assets 3,470
3,438
Intangible assets 6,474
6,525
Other assets 1,589
1,249
--------- -------
- --
TOTAL ASSETS $ 495,274 $
513,137
=========
=========
LIABILITIES
Noninterest bearing - demand deposits $ 77,346 $
85,422
Interest bearing:
NOW and savings accounts 192,642
198,812
Time, $100,000 and over 52,728
53,195
Other time 110,475
115,499
--------- -------
- --
TOTAL DEPOSITS 433,191
452,928
Short-term borrowings 408
Capital lease obligations 707
712
Accrued interest payable 1,569
1,646
Other liabilities 3,011
3,640
--------- -------
- --
TOTAL LIABILITIES 438,886
458,926
STOCKHOLDERS' EQUITY
Common stock, no par, shares authorized
15,000,000; issued and outstanding 6,939,511
in 1999 and 6,928,522 in 1998 44,447
41,853
Retained earnings 11,827
12,162
Accumulated other comprehensive income, net of
tax 114
196
--------- -------
- --
TOTAL STOCKHOLDERS' EQUITY 56,388
54,211
--------- -------
- --
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 495,274 $
513,137
=========
=========
The accompanying notes are an integral part of these statements.
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UNITED SECURITY BANCORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
($ in thousands, except per share)
Three Months Ended
March 31,
1999 1998
INTEREST INCOME
Interest and fees on loans and leases $ 9,299 $ 8,581
Interest on securities 1,213 1,551
Other interest income 100 217
------- -------
TOTAL INTEREST INCOME 10,612 10,349
------- -------
INTEREST EXPENSE
Interest on deposits 3,675 3,950
Interest on borrowings 39 228
------- -------
TOTAL INTEREST EXPENSE 3,714 4,178
------- -------
NET INTEREST INCOME 6,898 6,171
Provision for loan losses 267 220
------- -------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 6,631 5,951
------- -------
NONINTEREST INCOME
Fees and service charges 626 567
Insurance commissions 263 284
Securities gains/(losses) 42 48
Other 334 667
------- -------
TOTAL NONINTEREST INCOME 1,265 1,566
------- -------
NONINTEREST EXPENSE
Salaries and employee benefits 2,853 2,775
Occupancy expense, net 385 340
Equipment expense 333 356
Intangible amortization 94 109
Other operating expense 1,153 966
------- -------
TOTAL NONINTEREST EXPENSE 4,818 4,546
------- -------
INCOME BEFORE TAXES 3,078 2,971
INCOME TAX EXPENSE 999 895
------- -------
NET INCOME $ 2,079 $ 2,076
======= =======
Basic earnings per common share $ .30 $ .30
Diluted earnings per common share $ .30 $ .30
Basic weighted average shares outstanding 6,931,130 6,896,934
Weighted average shares outstanding 7,032,045 7,029,932
The accompanying notes are an integral part of these statements.
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UNITED SECURITY BANCORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR-TO-DATE March 31, 1999 and 1998
($ in thousands)
1999 1998
Cash flows from operating activities:
Net income $ 2,079 $ 2,076
Provision for loan losses 267 220
Depreciation and amortization 229 260
(Increase)/decrease in assets and liabilities
Accrued interest receivable (194) (359)
Life insurance and salary continuation
assets (32) (286)
Other assets (289) 67
Accrued interest payable (77) 185
Other liabilities (629) 1,044
------- -------
Net cash provided by operating activities 1,354 3,207
------- -------
Cash flows from investing activities:
Securities:
Maturities 19,728 10,414
Sales 4,058 6,098
Purchases (5,116) (11,609)
Net increase in loans (10,974) (12,947)
Sales of premises and equipment 923
Purchases of premises and equipment (293) (543)
Foreclosed real estate activity (21) (95)
------- -------
Net cash change in investing activities 7,382 (7,759)
------- -------
Cash flows from financing activities:
Net change in deposits (19,737) (8,671)
Proceeds from borrowings 408 262
Principal payments on borrowings (1,782)
Principal payments on capital lease
obligations (5) (5)
Cash received from stock sales 196 201
Cash dividends and redemption of fractional
shares (17) (69)
------- -------
Net cash provided by financing activities (19,155) (10,064)
------- -------
Net change in cash and cash equivalents (10,419) (14,616)
Cash and cash equivalents, beginning of year 37,088 41,926
------- -------
Cash and cash equivalents, end of quarter $26,669 $27,310
======= =======
The accompanying notes are an integral part of these statements.
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UNITED SECURITY BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. Management Statement
The consolidated financial statements include the accounts of
United Security Bancorporation and its wholly-owned subsidiaries
(USBN), United Security Bank, Home Security Bank, Bank of Pullman,
Grant National Bank, Bank of the West, USB Insurance Agencies,
Inc., USB Mortgage Company, and USB Leasing, Inc. after eliminating
all significant intercompany balances and transactions. In the
opinion of USBN, the accompanying Consolidated Financial Statements
present fairly the financial position of USBN as of March 31, 1999
and December 31, 1998, and the related statements of income and
cash flows for the three month period ended March 31, 1999 and
1998.
Certain reclassifications of 1998 balances have been made to
conform with the March 31, 1999 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
dividends. Prior reported amounts have been restated to reflect
pooling of interests accounting for the Bank of the West (BOW) and
Grant National Bank (GNB) mergers. See Note 5 for further
information.
Effective January 1, 1999, USBN adopted Statement of Financial
Accounting Standards No. 134, "Accounting for Mortgage-Backed
Securities Retained After Securitization of Mortgage Loans Held for
Sale by a Mortgage Banking Enterprise". The Statement establishes
accounting and reporting standards for certain activities of
mortgage banking enterprises. Management believes that the
provisions of the statement will not have a material effect on its
financial condition or reported results of operations.
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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 March 31, 1999 and December 31,
1998 were as follows:
March 31, 1999 December
31, 1998
Amortized Fair Financial Amortized
Fair Financial
($ in thousands) Cost Value Statements Cost
Value Statements
Securities available-for-sale:
U.S. Treasury securities $ 3,806 $ 3,867 $ 3,867 $ 4,309
$4,401 $ 4,401 Obligations of federal government
agencies 16,420 16,350 16,350 26,314
26,443 26,443
Mortgage backed securities 21,252 21,299 21,299 27,949
27,993 27,993
Obligations of states, municipalities
and political subdivisions 9,591 9,856 9,856 2,061
2,103 2,103
Other securities 16,603 16,477 16,477 17,646
17,634 17,634
------- ------- ------- ------- --
- ---- ------
67,672 67,849 67,849 78,279
78,574 78,574
Securities held-to-maturity:
Obligations of states, municipalities
and political subdivisions 750 774 750 8,776
9,032 8,776
------- ------- ------- ------- ---
- ---- -------
Total $68,422 $68,623 $68,599 $87,055
$87,606 $87,350
======= ======= ======= =======
======= =======
NOTE 3. LOANS
Loan detail by category as of March 31, 1999 and December 31, 1998
were as follows:
($ in thousands) March 31,
December 31,
1999
1998
Commercial and industrial $213,196
$199,798
Agricultural 54,572
57,511
Real estate mortgage 65,035
63,127
Real estate construction 14,031
14,170
Installment 19,996
20,364
Lease financing 3,256
3,546
Bank cards and other 4,682
5,603
-------- ------
- --
Total loans 374,768
364,119
Allowance for loan losses (3,781)
(3,819)
Deferred loan fees, net of deferred costs (748)
(768)
-------- ------
- --
Net loans $370,239
$359,532
========
========
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8 UNITED SECURITY BANCORPORATION
NOTE 4. ALLOWANCE FOR LOAN LOSSES
The allowance for loan loss is maintained at levels considered
adequate by management to provide for possible loan losses. The
allowance is based on management's assessment of various factors
affecting the loan portfolio, including problem loans, business
conditions and loss experience, and an overall evaluation of the
quality of the underlying collateral. Changes in the allowance for
loan losses during the three months ended March 31, 1999 and 1998
were as follows:
Three Months Ended
March 31,
($ in thousands) 1999 1998
Balance, beginning of period $3,819 $3,869
Provision for loan losses 267 220
Loan charge-offs (332) (206)
Loan recoveries 27 45
------ ------
Balance, end of period $3,781 $3,928
====== ======
NOTE 5. Grant National Bank Acquisition
On February 1, 1999 USBN completed its merger with BOW. As of
February 1, 1999 BOW had approximately $103 million in total
assets, $90 million in deposits, $68 million in loans, and $12
million in total equity. 1,749,300 USBN common shares were issued
to BOW shareholders for the merger. On July 20, 1998, USBN
completed its merger with GNB. As of July 20, 1998 GNB had
approximately $32 million in total assets, $29 million in deposits,
$22 million in loans, and $3 million in total equity. 468,270 USBN
common shares were issued to GNB shareholders for the merger. The
pooling of interests accounting method is being used for both of
these transactions, which includes restating prior reported amounts
to reflect the mergers with BOW and GNB. The effects of the
restatement on revenue, net income and stockholders' equity are
shown below:
Three Months Ended
($ in thousands) March 31, 1998
Net interest income and noninterest income:
Original USBN amount reported $ 5,624
BOW 1,594
GNB 519
-------
As Restated $ 7,737
Net income: =======
Original USBN amounts reported $ 1,390
BOW 588
GNB 98
-------
As Restated $ 2,076
=======
Stockholders' equity: December 31, 1998
Original USBN amounts reported $42,201
BOW 12,010
-------
As Restated $54,211
=======
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UNITED SECURITY BANCORPORATION
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS
OF OPERATIONS
The following discussion contains a review of the results of
operations and financial condition for first quarter results in
1999 and 1998. This information should be read in conjunction with
the financial statements and related notes appearing in this
report. The reader is assumed to have access to USBN's Form 10-K
for the year ended December 31, 1998, which contains additional
information.
This discussion may contain certain forward looking statements,
which are made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. Such statements
are subject to certain risks and uncertainties that could cause
actual results to differ materially from those stated. Readers are
cautioned not to place undue reliance on those forward-looking
statements.
Overview
A performance summary and detailed discussion regarding the first
quarter results in 1999 and 1998 follow this table.
UNITED SECURITY BANCORPORATION AND SUBSIDIARIES
PERFORMANCE SUMMARY
Three Months Ended March 31,
%
($ in thousands) 1998 1997 Change
Interest income $10,612 $10,349 2.5%
Interest expense 3,714 4,178 -11.1%
------- ------- -----
Net interest income 6,898 6,171 11.8%
Provision for loan losses 267 220 21.4%
------- ------- -----
Net interest income after
provision for loan losses 6,631 5,951 11.4%
Noninterest income 1,265 1,566 -19.2%
Noninterest expense 4,818 4,546 6.0%
------- ------- -----
Income before income taxes 3,078 2,971 3.6%
Income taxes 999 895 11.6%
------- ------- -----
Net income $ 2,079 $ 2,076 .1%
======= ======= =====
Basic earnings per common share $ .30 $ .30
Diluted earnings per common share$ .30 $ .30
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UNITED SECURITY BANCORPORATION
Net Income
USBN reported an increase in net income to $2,079,000 for the first
three months of 1999 compared to $2,076,000 for the same period in
1998. Basic and diluted earnings per share were $.30 in 1999 and
1998. 1998 net income included $242,000 or $.03 per share net gain
from the sale of property.
Net Interest Income
For the first three months of 1999 net interest income grew 12% to
$6,898,000 compared to $6,171,000 in 1998. The increase is due to
a combination of growth in the net interest margin to average
earning assets from 5.74% to 6.17% and an increase in average
earning loans from $321,148,000 to $366,879,000. Average deposits
grew from $336 million in 1998 to $359 million in 1999. Deposits
declined since the end of the year primarily due to seasonal
fluctuation for each of the Banks. This reduction in deposits and
the funding of the loan growth was accomplished primarily by
reducing overnight cash investments and liquid security
investments.
Provision for Loan Losses
The allowance for loan losses is based on management's evaluation
of the loan portfolio. The allowance for loan losses is 1.01% of
total loans as of March 31, 1999.
Noninterest Income
Noninterest income declined 19% to $1,265,000 from $1,566,000 in
1998. The decline is due to USBN recognizing income of $366,000 in
1998 from the sale of a commercial real estate property. Fees and
service charges increased 10% to $626,000 in 1999 due to core
deposit activity. Insurance commissions declined slightly to
$263,000.
Noninterest Expense
Noninterest expense increased by 6% in 1999 to $4,818,000, which
was primarily due to normal growth, expansion and merger related
expenses.
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UNITED SECURITY BANCORPORATION
Year 2000 Issues
The Year 2000 Problem. The century date change creates a problem
because some computer programs and systems were designed to store
calendar years with only two numbers, rather than four numbers.
Computer programs and systems may recognize a date using "00" as
1900 rather than the Year 2000. The extent of the impact of this
Year 2000 problem is not yet known and could affect the global
economy and every organization. USBN is addressing these issues.
The Challenges faced by USBN. The Year 2000 problem is of concern
to USBN and other financial institutions because most financial
transactions including interest accruals and payments are date
sensitive. The Year 2000 problem could impact all automated
systems including automated teller machines, alarm systems, and
vaults. Some systems are more difficult to assess and repair.
USBN's State of Readiness. USBN is reviewing its automated systems
and business processes to identify and correct any date-related
problems that may arise with the change of the century at December
31, 1999. In September, 1998, USBN and the provider of USBN's
mainframe computer applications completed an installation and
upgrade of the mainframe operating systems to comply with changes
for the Year 2000. Testing of the new software will continue
through 1999. USBN also continues to review its PC hardware and
software and its major automated systems suppliers for Year 2000
compliance. A small number of PCs and PC systems required
upgrades, which has been completed.
Third Party Concerns. USBN has numerous customers, vendors, and
third party service providers whose failure to address the Year
2000 problem may create significant business disruption and costs
to USBN. It is impossible for any one party to eliminate the risks
related to the Year 2000 problem. It is possible that USBN's
service could be disrupted through the loss of electric power,
phone service, or other reasons outside of USBN's control. USBN is
in contact with its outside providers of services on an ongoing
basis to evaluate their progress in addressing the Year 2000
problem.
The Banks are incorporating Year 2000 issues into their standards
of creditworthiness for new and renewed loans and are reviewing
significant existing borrowers for Year 2000 risk. Review in this
area will continue through 1999.
Estimated Costs. The cost of complying with the Year 2000 issues
is estimated to be $175,000 including staff time expenses. About
$160,000 of this amount has already been incurred.
USBN's Contingency Plans. USBN is in the process of developing and
implementing contingency plans to handle the most reasonably likely
worst case scenarios. Since these worst case scenarios are
difficult or even impossible to predict at this time, these
contingency plans are particularly challenging. USBN intends to
develop contingency plans that are reasonably necessary to address
the Year 2000 problem and to revise them as necessary on an ongoing
basis until the problem is confronted and resolved.
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UNITED SECURITY BANCORPORATION
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market risks faced by Bank of the West are consistent with the
other USBN subsidiary Banks. There have been no material changes
in reported market risks faced by USBN since the end of the most
recent fiscal year end.
Part II
Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None in first quarter 1999.
(b) Reports on Form 8-K during first quarter 1999
Date Item # Subject
February 2, 1999 Item 2 United Security Bancorporation completes
merger
with Bank of the West
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 on April
26, 1999.
UNITED SECURITY BANCORPORATION
/s/ Richard C. Emery
-------------------------------
- ----
Richard C. Emery, President and
Chief Executive Officer
/s/ Chad Galloway
-------------------------------
- ---
Chad Galloway, Vice President
and
Chief Financial Officer
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