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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to ____________
Commission file number 0-18561
UNITED SECURITY BANCORPORATION
(Exact name of registrant as specified in its charter)
Washington 91-1259511
(State or other jurisdiction (IRS Employer
of incorporation) Identification No.)
9506 North Newport Highway
Spokane, Washington 99218-1200
(Address of principal executive offices)
Registrant's telephone number, including area code (509) 467-6949
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act:
Common Stock, no par value NASDAQ National Market System
Title of each class Name of each exchange on which registered
Check whether the registrant (1) filed all reports required to be filed by
Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for such
shorter period as 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 [ ]
Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendments to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, computed by reference to the stock closing prices on stock at
February 14, 1998, was $70,414,000. The number of shares of common stock
outstanding at such date was 4,052,775.
Documents incorporated by reference. Portions of the United Security
Bancorporation Definitive Proxy Statement are incorporated by reference into
Part III of the Form 10-K.
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UNITED SECURITY BANCORPORATION
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR
ENDED DECEMBER 31, 1997
TABLE OF CONTENTS
PART I Page
Item 1. Business ................................................................ 3
Item 2. Properties .............................................................. 17
Item 3. Legal Proceedings ....................................................... 19
Item 4. Submission of Matters to a Vote of Security Holders ..................... 19
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters ............................................................... 19
Item 6. Selected Financial Data ................................................. 21
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations ................................................. 22
Item 7A. Quantitative and Qualitative Disclosures About Market Risk .............. 28
Item 8. Financial Statements and Supplementary Data ............................. 29
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure .............................................. 29
PART III
Item 10. Directors and Executive Officers of the Registrant ...................... 29
Item 11. Executive Compensation .................................................. 29
Item 12. Security Ownership of Certain Beneficial Owners and
Management ............................................................ 29
Item 13. Certain Relationships and Related Transactions .......................... 29
PART IV
Item 14. Exhibits, Financial Statements, and Reports on Form 8-K ................. 29
SIGNATURES ................................................................................. 31
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UNITED SECURITY BANCORPORATION
PART I
Item 1. BUSINESS.
UNITED SECURITY BANCORPORATION
United Security Bancorporation (Company) is a multi-bank holding company
headquartered in Spokane, Washington. The Company owns three banks, United
Security Bank (Washington) (USB), Home Security Bank (Washington) (HSB), and
Bank of Pullman (Idaho) (BOP) (collectively, Banks), and also owns USB Insurance
(Washington) (an insurance agency), USB Leasing (Washington) (a leasing
company), and USB Mortgage (Washington) (a mortgage company). The Company
conducts its banking business through twenty-four branches located in
communities throughout eastern Washington, including Spokane and a branch in
Moscow, Idaho. The Company focuses its banking and other services on
individuals, professionals, and small to medium sized businesses in diversified
industries throughout its service area. At December 31, 1997, the Company had
total consolidated assets of $350.4 million, net loans of $226.7 million and
deposits of $307.6 million. The Company was founded in 1983 and has been
profitable in every year since its inception. In 1995, the Company completed a
public offering selling $8.5 million in stock and is listed on NASDAQ under the
symbol "USBN".
THE BANKS
USB was formed in 1974 and serves customers in Spokane and northeastern
Washington from eleven branches. HSB was formed in 1989 and serves customers in
southeastern Washington from six branches. BOP was acquired in 1997 and serves
customers in eastern Washington with six branches and one branch in Moscow,
Idaho. The Banks offer a full range of financial services to commercial and
individual customers, including short-term and medium-term loans, revolving
credit facilities, inventory and accounts receivable financing, equipment
financing, residential and small commercial construction lending, agricultural
lending, various saving programs, checking accounts, installment and personal
loans, and bank credit cards. The Banks also provide a broad range of depository
and lending services to commercial, industrial and agricultural enterprises,
governmental entities and individuals. The Banks' deposit-taking and lending
activities are primarily directed to the communities in which their branches are
located. The Banks' primary marketing focus is on small to medium-sized
businesses and professionals in these communities.
The loan portfolios of the Banks consist primarily of commercial, agricultural,
real estate (both mortgage and construction loans) and installment loans. At
December 31, 1997, virtually all of the loans originated by the Banks were
within the Banks' principal service areas.
The Company is committed to the needs of the local communities it serves, and
strives to provide a high level of personal and professional service to its
customers. Management believes the Company's community involvement, its
understanding of its service area and its local decision-making abilities give
it a distinct advantage over larger banking institutions. The Company is well
positioned to provide loans to small and medium sized businesses because of the
Company's direct knowledge of its customers' businesses and the communities it
serves. USB, HSB, and BOP provide personalized, quality financial service to its
customers, which has enabled them to maintain a stable and relatively low-cost
retail deposit base.
USB INSURANCE
USB Insurance began operating in April 1987 and is engaged in selling a full
line of insurance and financial products such as annuities and mutual funds on
an agency basis to individuals, commercial, industrial and agricultural
enterprises from locations in Colville, Chewelah and Kettle Falls, Washington.
Its business was significantly enhanced in 1990 through the acquisition
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UNITED SECURITY BANCORPORATION
of two additional agencies in northeastern Washington. Total revenues of USB
Insurance for the year ended December 31, 1997 were $1,170,000 as compared to
revenues of $1,202,000 for 1996. The insurance operation has been profitable
since 1995.
USB LEASING
USB Leasing began operation in 1986 and is engaged in equipment leasing to small
and medium-sized companies in the markets it serves. The Company has used a
portion of the proceeds from its May, 1995 stock sale to expand its leasing
operations. Leasing assets grew to $5.3 million as of December 31, 1997. The
leasing operation has been profitable since 1996. Management of the Company
expects to continue expanding its leasing business over the next several years.
USB MORTGAGE
The Company provided USB Mortgage with a portion of the proceeds received in the
public offering of the Company's common stock in 1995. Management expects to
continue expanding its mortgage business over the next several years. As of
December 31, 1997 assets were $2.9 million. The mortgage operation has been
profitable since 1996.
BUSINESS STRATEGY
The Company's business strategy is to continue to build a growing, profitable
community banking and financial services network by emphasizing high quality
customer service and by focusing on the financial needs of consumers and small
to medium-sized businesses. The Company intends to pursue an aggressive growth
strategy, the key components of which include:
* Increasing market share in existing markets
* Expanding the markets served through new branch openings and
acquisitions
* Expanding nonbanking financial services
* Providing superior customer service
Increase Market Share in Existing Markets. Since its formation in 1983, the
Company has focused on commercial banking to small and medium-sized businesses,
professionals and other individuals. Management believes that the Company can
continue to gain market share by targeting products and services to these
businesses.
The Company emphasizes the development of long-term relationships with its
customers, which enables the Banks to develop and offer new products that meet
its customers' needs. The Company is oriented toward the communities it serves
and is actively involved in their communities. The Company believes this
community orientation gives the Company a competitive advantage in attracting
and retaining targeted customers.
The consolidation of the banking industry in recent years has resulted in
centralized loan approval and servicing functions in the larger financial
institutions with whom the Company competes. This has resulted in inconvenience
and reduced service to small business and individual customers of these
institutions, and has created opportunities for smaller, locally-focused
institutions, such as banks, which can approve credit and offer other customized
banking services within each branch. The Company maintains loan officers in each
branch, and branch managers have the authority to approve loans in amounts up to
$100,000.
Expand Markets Served through New Branch Openings and Acquisitions. The Company
intends to expand its presence in eastern and central Washington by opening new
branches and acquiring other financial institutions in markets not currently
served by USB, HSB, and BOP. USB recently opened branches in Liberty Lake and
Qualchan both near the city of Spokane.
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UNITED SECURITY BANCORPORATION
Management considers a variety of criteria in evaluating potential branch
expansion, including the demographics and short and long-term growth prospects
for the location, the management and other resources needed to integrate the
branch into its existing operations, the degree to which the branch would
enhance the geographic diversity of the Company or would enhance the Company's
presence in an existing market, and the estimated cost of opening and operating
the branch as compared to the cost of acquiring an existing office and deposit
base.
In addition to internal growth, there may be attractive opportunities to grow
the Company through carefully selected acquisitions of other financial
institutions or their branches in central and eastern Washington, eastern Oregon
and northern Idaho.
Acquisition. On July 18, 1997 the Company purchased five branches from Wells
Fargo Bank. HSB purchased three branches located in Mabton, Naches, and Walla
Walla, Washington. USB purchased two branches located in Davenport and Moses
Lake, Washington. These branches are located in the identified market place for
the Banks. The acquisition increased deposits by approximately $35 million,
premises and equipment by $1.9 million, and intangible assets by $2.1 million
primarily for the core deposit acquisition cost. The purchase price was $3.2
million.
Bank of Pullman. On October 20, 1997 the Company acquired Bank of Pullman for
$11,955,000. BOP is located in the commercial center for the Palouse, the winter
wheat growing region in Eastern Washington, and home of Washington State
University. It has seven branches, six in Washington and one in Idaho. The
Company initially purchased Community Ban Corporation, and its wholly-owned
subsidiary BOP. Shortly following the acquisition Community Ban Corporation was
dissolved, and BOP became a wholly-owned subsidiary of United Security
Bancorporation. The acquisition was accounted for as a purchase transaction.
Accordingly, the results of operations of BOP are included with the Company for
periods subsequent to the date of acquisition. The acquisition increased assets
by $64 million, intangible assets by $4.8 million, and deposits by $55 million
as of December 31, 1997.
Expand Nonbanking Financial Services. The Company intends to aggressively expand
the nonbanking products and services offered through USB Insurance, USB Leasing,
and USB Mortgage, and expects to develop other products and services, including
real estate-related financial services not currently offered through the Banks.
USB Insurance will seek to expand its emphasis on marketing a full line of
insurance and financial products such as annuities and mutual funds to
individuals and commercial enterprises, and USB Leasing will continue to focus
on providing commercial leases to small and medium-sized businesses that utilize
computers, heavy, non-specialized, industrial equipment, and agricultural
equipment. Management believes the expansion of the Company's customer base
through internal growth and possible acquisitions should create significant new
opportunities for each of the nonbank subsidiaries to cross-market their
products and services.
Under current federal regulations, the Company is precluded from maintaining
offices for USB Insurance in any Bank branch serving a community of more than
5,000 inhabitants. As a consequence, the products and services offered by these
subsidiaries are necessarily limited to the smaller communities in the Company's
service areas in which the Banks maintain branches.
Provide Superior Customer Service. The Company attributes it success to its
efforts to offer superior, personal service through professional bankers at all
of its branches. The Company distinguishes itself in its markets by emphasizing
a culture in which customers are the highest priority in all aspects of the
Company's operations. Ongoing employee training is focused on customer needs,
responsiveness and courtesy to customers. The Company's marketing efforts and
operating practices emphasize the Company's ties to the local communities it
serves, and its commitment to providing the highest level of personalized
service.
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UNITED SECURITY BANCORPORATION
LENDING ACTIVITIES
The Company's loan portfolio consists primarily of commercial loans,
agricultural loans, real estate mortgage loans, residential real estate and
other construction loans, consumer installment loans and bank card loans. At
December 31, 1997, the Company had total loans and leases outstanding of
approximately $229 million, which equals 74.6% of the Company's total deposits
and 65.4% of its total assets. $130 million of these loans were originated by
USB, $60 million were originated by HSB, and $34 million by BOP. Virtually all
of the loans held by the Company were to borrowers within the Banks' principal
market areas.
See loan category amounts for five years in Item 6, selected financial data.
Commercial Loans. Commercial loans primarily consist of loans to businesses for
various purposes, including revolving lines of credit, equipment financing loans
and letters of credit. These loans generally mature within one year, have
adjustable rates and are secured by inventory, accounts receivable, equipment or
real estate. The Company also classifies commercial construction loans, which
may have maturities in excess of one year, as commercial loans.
Agricultural Loans. Agricultural loans primarily consist of farm loans to
finance operating expenses. These loans generally mature within one year, have
adjustable rates and are secured by farm real estate, equipment, crops or
livestock. Since agricultural loans present certain risks not associated with
other types of lending , the policy of the Banks has been to make such loans
generally only to agricultural producers with diverse crops, thereby mitigating
the risk of loss attributable to a crop failure or the deterioration of
commodity prices. The Company has also reduced its loan exposure to
timber-related borrowers in northeastern Washington in recent years, due to
consolidation of the timber industry in the area generally and the gradual
elimination of some timber-related businesses attributable to increased
environmental concerns.
Mortgage Loans. Mortgage loans include various types of loans for which the
Company holds real property as collateral. At December 31, 1997, loans included
approximately $19.8 million of adjustable and fixed rate first mortgage loans
secured by one to four family residential properties, approximately $5.3 of
second mortgage loans secured by one to four family residential properties,
approximately $6.1 million in loans secured by multifamily (five or more)
residential properties. Mortgage loans typically mature in one to five years and
require payments on amortization schedules ranging from one year to twenty
years.
Construction Loans. Construction loans are made to individuals and contractors
to construct primarily single-family principal residences. These loans have
maturities of three months to six months. Interest rates are typically
adjustable, although some fixed-rate loans are made. The Company's policy is to
require that a permanent financing commitment be in place before a construction
loan is made to an individual borrower.
Consumer and Other Loans. Consumer loans are primarily automobile and home
equity loans. Consumer loans generally have maturities of five years or less,
and fixed interest rates. Other loans consist of personal lines of credit and
bank card advances. Personal lines of credit generally have maturities of one
year or less, and fixed interest rates. Bank card advances are generally due
within 30 days and bear interest at rates that vary from time-to-time.
INTEREST RATES. The interest rates charged on loans vary with the degree of risk
and amount of the loan, and are further subject to competitive pressures, money
market rates, the availability of funds and government regulations.
Approximately 47% of the loans in the Company's portfolio have interest rates
that float with the lending Bank's reference rate, which is in turn based on
various indices such as the rates of interest charged by money center banks.
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UNITED SECURITY BANCORPORATION
LENDING AND CREDIT MANAGEMENT. USB, HSB and BOP each follow loan policies, which
have been approved by each Bank's board of directors and are overseen by the
Company. The policies establish levels of loan commitment by loan type, and
credit review and grading criteria, and other matters such as loan
administration, loans to affiliates, costs, problem loans and loan loss
reserves, and related items. Loans are typically reviewed and graded on a
monthly basis.
All loan applications are processed at the Banks' branch lending offices. All
loan applications are approved by designated officers in accordance with the
respective guidelines and underwriting policies of the Banks. Credit limits
generally vary according to the type of loan and the individual loan officer's
experience. The maximum current loan limits available to any one individual vary
from $25,000 per loan to $300,000 per loan. In addition, five individuals
currently can combine their credit authority, to a maximum of $750,000 for USB,
$500,000 for HSB and $500,000 for BOP with respect to certain loans. Loans in
excess of the above amounts require the approval of the board of directors of
the lending Bank.
Under applicable federal and state law, permissible loans to one borrower by
either of the Banks are also limited. As of December 31, 1997, the Banks, as a
matter of policy, do not extend credit to any single borrower in excess of
$2,500,000, $1,000,000, and $1,400,000 for USB, HSB, and BOP, respectively.
To accommodate borrowers whose financing needs exceed their lending limits, the
Banks can sell loan participations to one another or to outside participants. At
December 31, 1997, 1996 and 1995, the outstanding balance of loan participations
sold outside the Company were $24,091,000, $25,205,000, and $22,365,000,
respectively.
SECONDARY MORTGAGE SALES. USB Mortgage also sells mortgage loans in the
secondary market to various mortgage underwriters and other financial
institutions. The Mortgage Company sells fixed-rate, single-family residential
loans in order to decrease the amount outstanding of such loans and also sells
adjustable rate residential loans in order to increase the weighted average
yields of the portfolios. In 1997, the Mortgage Company sold $2.1 million
mortgage loans, consisting of $1.4 million of fixed-rate residential loans and
$.7 million of adjustable rate residential loans. Fees received on such sales
are included in interest and fees earned on loans, and accounted for
approximately 2.0%, 3.0%, and .8% of such interest and fees in each of the three
years ended December 31, 1997, 1996, and 1995, respectively. Such loans are sold
on a servicing released basis, meaning the Company does not retain mortgage
servicing responsibilities.
NONPERFORMING ASSETS.
The following table provides information for the Company's nonperforming assets
as of December 31, 1997, 1996, and 1995.
YEAR ENDED DECEMBER 31,
($ in thousands) 1997 1996 1995 1994 1993
Nonperforming loans:
Nonaccrual loans $2,181 $ 457 $ 777 $ 775 $ 811
Accrual loans 90 days or more past due 764 441 612 228 3
------ ------ ------ ------ ------
Total nonperforming loans 2,945 898 1,389 1,003 814
Other real estate owned and other repossed assets 967 205 370 231 337
------ ------ ------ ------ ------
Total nonperforming assets $3,912 $1,103 $1,759 $1,234 $1,151
====== ====== ====== ====== ======
Allowance for loan losses $2,613 $2,034 $1,391 $1,246 $ 802
Ratio of total nonperforming assets to total assets 1.12% 0.48% 0.92% 0.75% 0.92%
Ratio of total nonperforming loans to total loans 1.28% 0.50% 0.97% 0.82% 0.91%
Ratio of allowance for loan losses to total nonperforming loans 88.7% 226.5% 100.1% 124.2% 98.5%
The Company's nonperforming loans consist of nonaccruing loans, which are loans
that are past due over 90 days, other than loans that are adequately
collateralized and in the process of
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UNITED SECURITY BANCORPORATION
collection. No interest is taken into account unless received in cash or until
such time as the borrower demonstrates an ability to resume payments of
principal and interest. Interest previously accrued, but not collected is
reversed and charged against income at the time the loan is placed in nonaccrual
status. In 1995 the Company adopted Statement of Financial Accounting Standards
(FASB) No. 114, Accounting by Creditors for Impairment of a Loan, as amended by
FASB No. 118, Accounting by Creditors for Impairment of a Loan - Income
Recognition and Disclosures. These Standards require that impaired loans be
measured to reflect the fair value of collateral. Nonaccrual loan and accruing
loans more than 90 days delinquent are considered impaired loans. Additional
other loans are also consider impaired as identified by management. Loans
classified impaired are evaluated as part of management's allowance for loan
loss adequacy review. The fair value of the collateral is evaluated to determine
if a specific allowance for loan loss is needed for impaired loans. See note 6
to the Consolidated Financial Statements.
Real estate properties acquired through, or in lieu of, loan foreclosure are to
be sold and are initially recorded at fair value at the date of foreclosure
establishing a new cost basis. After foreclosure, valuations are periodically
performed by management and the real estate is carried at the lower of carrying
amount or fair value less cost to sell. Real estate properties and other
repossessed assets of the Company had a book value of $967,000 as of December
31, 1997, consisting primarily of commercial and chattel property.
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses represents management's recognition of the risks
of extending credit and its evaluation of the quality of the loan portfolios of
the Banks. The allowance is maintained at levels considered adequate by
management to provide for anticipated loan losses, and is based on management's
assessment of various factors affecting the loan portfolios, including problem
loans, business conditions and loss experience, an overall evaluation of the
quality of the underlying collateral, and collateral selling costs. The
allowance is increased by provisions charged to operations and is reduced by
loans charged off, net of any recoveries.
The decline in real estate market values in many parts of the country and the
significant losses experienced by many financial institutions in the late
1980's, have resulted in increased regulatory scrutiny of the loan portfolios of
financial institutions such as the Company and the Banks, particularly with
respect to commercial real estate and multi-family residential real estate
loans. Management of the Company periodically reviews the status of loans that
are contractually past due and the net realizable value of the collateral
securing such loans, and establishes reserves through the provision of loan
losses where ultimate collection of such loans is questionable. The provision
for loan losses also reflects a general allocation of unanticipated losses based
in part on the size of the Company's loan portfolio and management's assessment
of economic conditions within the Company's service area. Management believes
that the allowance for loan losses is adequate.
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UNITED SECURITY BANCORPORATION
The following table sets forth information regarding changes in the Company's
allowance for loan losses as follows:
YEARS ENDED DECEMBER 31,
($ in thousands) 1997 1996 1995 1994 1993
Balance of allowance for loan losses at beginning of period $ 2,034 $ 1,391 $ 1,246 $ 802 $ 692
Charge-offs
Commercial 453 253 114 117 54
Agricultural 112 1 19
Real estate (mortgage and construction) 272
Consumer 131 58 24 2 3
Other 22 61 52 28 14
-------- -------- -------- -------- --------
Total charge-offs 990 372 190 148 90
Recoveries
Commercial, financial and agricultural 77 7 13 6 1
Consumer 3 1 5 4
Real estate (mortgage and construction) 37 4
Other 1 1
-------- -------- -------- -------- --------
Total recoveries 117 9 18 7 9
Net charge-offs 873 363 172 141 81
Provision for loan losses 752 1,006 317 585 191
Allowance acquired through acquisition 700
-------- -------- -------- -------- --------
Balance of allowance for loan losses at end of period $ 2,613 $ 2,034 $ 1,391 $ 1,246 $ 802
======== ======== ======== ======== ========
Ratio of net charge-offs to average loans 0.45% 0.22% 0.13% 0.13% 0.10%
Average loans and leases outstanding during the period $193,045 $164,109 $131,818 $106,032 $ 78,580
The following table sets forth the allowance for loan losses by loan category,
based on management's assessment of the risk associated with such categories as
of the dates indicated, and summarizes the percentage of gross loans in each
category to total gross loans.
DECEMBER 31,
1997 1996 1995 1994 1993
AMOUNT OF AMOUNT OF AMOUNT OF AMOUNT OF AMOUNT OF
($ in thousands) ALLOWANCE % ALLOWANCE % ALLOWANCE % ALLOWANCE % ALLOWANCE %
Commercial $1,391 53% $1,098 54% $ 726 52% $ 623 50% $ 417 52%
Agricultural 384 15% 285 14% 191 14% 175 14% 137 17%
Real estate-mortgage 487 19% 325 16% 242 18% 249 20% 104 13%
Real estate-construction 96 4% 122 6% 98 7% 87 7% 48 6%
Consumer 144 5% 122 6% 89 6% 75 6% 72 9%
Other 111 4% 82 4% 45 3% 37 3% 24 3%
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total $2,613 100% $2,034 100% $1,391 100% $1,246 100% $ 802 100%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
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UNITED SECURITY BANCORPORATION
INVESTMENTS
Management of the investment portfolio is consolidated into a single investment
committee of the Company, which comprises the Company's chief executive officer,
president and chief operations officer and its vice president and chief
financial officer, and the presidents of USB, HSB, and BOP. The investment
committee of the Company is responsible for reviewing and approving the
investment strategies and recommendations of each of the Banks, consistent with
the Company's asset/liability and investment policy.
The following table sets forth the carrying value, by type, of the securities in
the Company's portfolio at December 31, 1997, 1996 and 1995.
DECEMBER 31,
($ in thousands) 1997 1996 1995
U.S. Treasury and other U.S. Government agencies $55,443 $ 8,630 $17,596
States of the U.S. and political subdivisions 6,722 3,704 365
Other securities 4,605 3,279 4,440
------- ------- -------
Total securities $66,770 $15,613 $22,401
======= ======= =======
As of December 31, 1997, 1996 and 1995, the amortized cost of the Company's
investment portfolio exceeded its market value by $77,000, $394,000 and
$124,000, respectively. No portion of the Company's investment portfolio is
invested in derivative securities (being securities whose value derives from the
value of an underlying security or securities, or market index of underlying
securities' values), and to the Company's knowledge, no portion of any mutual
fund held in the Company's investment portfolio was invested in derivative
securities.
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UNITED SECURITY BANCORPORATION
The following table sets forth the book values, maturities and approximate
average aggregate yields of securities in the Company's investment portfolio by
type at December 31, 1997.
Type and Maturity
($ in thousands) Yield Amount
U.S. Treasury and other U.S. government
agencies and corporations:
1 year or less $21,418
Over 1 through 5 years 34,025
Over 5 through 10 years
Over 10 years
-------
Total 6.75% 55,443
-------
States and political subdivisions
1 year or less 777
Over 1 through 5 years 4,756
Over 5 through 10 years 921
Over 10 Years 268
-------
Total 6.38% 6,722
-------
Other securities:
1 year or less 3,574
Over 1 through 5 years 1,031
Over 5 through 10 years
Over 10 years
-------
Total 7.24% 4,605
-------
Total investment securities:
1 year or less 25,769
Over 1 through 5 years 39,812
Over 5 through 10 years 921
Over 10 years 268
-------
Total 6.73% $66,770
=======
The yields for tax-exempt securities have been computed on a full tax equivalent
basis using an assumed tax rate of 34%. Maturities of mortgage-backed
securities, which are primarily included with U.S. government agencies, are
estimated and are based on the average lives of the underlying mortgage loans,
adjusted to incorporate prepayment assumptions.
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UNITED SECURITY BANCORPORATION
DEPOSITS
The Company's primary source of funds has historically been customer deposits.
The Banks strive to maintain a high percentage of noninterest-bearing deposits,
which are low cost funds and result in higher interest margins. At December 31,
1997, 1996, and 1995, the Company's ratios of noninterest-bearing deposits to
total deposits were 21.0%, 16.9%, and 15.7%, respectively.
The Company offers a variety of accounts designed to attract both short-term and
long-term deposits from its customers. These accounts include negotiable order
of withdrawal ("NOW") accounts, money market investment accounts, savings
accounts, and certificates of deposit and other time deposits. Interest-bearing
accounts earn interest at rates established by management of the Banks, based on
competitive market factors and management's desire to increase or decrease
certain types or maturities of deposits consistent with the Banks policies. The
Company traditionally has not sought brokered deposits and does not intend to do
so in the future.
The following table sets forth the average balances for each major category of
deposit and the weighted-average interest rate paid for deposits in 1997, 1996
and 1995.
YEAR ENDED DECEMBER 31,
1997 1996 1995
AVERAGE INTEREST AVERAGE INTEREST AVERAGE INTEREST
($ in thousands) BALANCE RATE BALANCE RATE BALANCE RATE
Interest-bearing demand deposits $ 81,020 4.65% $ 56,483 4.44% $ 43,558 4.28%
Savings deposits 19,846 3.72% 14,822 3.02% 15,411 3.18%
Time deposits 91,169 5.44% 82,840 5.91% 75,340 6.03%
Noninterest-bearing demand deposits 39,325 29,060 21,598
-------- -------- --------
Total $231,360 $183,205 $155,907
======== ======== ========
The following table shows the amounts and maturities of certificates of deposit
that had balances of more than $100,000 at December 31, 1997, 1996 and 1995.
DECEMBER 31,
($ in thousands) 1997 1996 1995
Certificates of Deposit over $100,000 with remaining maturity:
Less than three months $11,678 $12,103 $ 8,541
Three to six months 5,452 3,635 5,106
Over six months to one year 10,809 8,312 5,994
Over one year 2,222 504 2,052
------- ------- -------
Total $30,161 $24,554 $21,693
======= ======= =======
COMPETITION
While the Company encounters a great deal of competition in its lending
activities, management believes there is less competition in the Company's
specialty middle market and neighborhood bank niche than there was a few years
ago. The Company believes that its competitive position has been strengthened by
the consolidation in the banking industry, which has resulted in a focus on the
larger accounts with less contact between the bank officers and their customers.
The Company's strategy by contrast, is to remain a middle market lender, which
maintains close long-term relationships with its customers.
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UNITED SECURITY BANCORPORATION
USB competes for deposits and banking business in northeastern Washington from
eleven locations in Chewelah, Colville, Davenport, Kettle Falls, Ione, Moses
Lake, and Spokane. The Bank's market area encompasses Stevens, Ferry, Grant,
Lincoln and Pend Oreille Counties, and the northern and eastern portions of
Spokane County. USB competes against two commercial banks and one mutual savings
bank in Stevens County, one commercial bank and one credit union in Ferry
County, four commercial banks, one federal savings bank and several credit
unions in Grant County, and five commercial banks and two credit unions in
Lincoln County and two commercial banks and one credit union in Pend Oreille
County. In Spokane County, USB competes against approximately seven commercial
banks, one mutual savings bank, several credit unions and savings and loans.
HSB serves customers in southeastern and southcentral Washington from locations
in Mabton, Naches, Sunnyside, Prosser, Yakima and Walla Walla. The bank's market
area encompasses Yakima and Walla Walla Counties and the western portion of
Benton County. HSB competes against commercial banks, savings and loans, and
credit unions in its market area.
BOP serves customers in the southeastern corner of the State of Washington and
Latah County, Idaho. BOP is located in Whitman County with branches in Pullman,
Colton, and Uniontown. Competition within Pullman includes two commercial banks,
one mutual savings bank, and a credit union. In Palouse, Washington BOP competes
with one local bank. Bank of Pullman transferred its charter to the State of
Idaho in order to open a branch in Moscow, Idaho in 1997. Competition in Moscow,
Idaho comes from four commercial banks, one savings bank and two credit unions.
EMPLOYEES
As of December 31, 1997, the Company had 214 employees, of which 84 were
employed by USB, 48 were employed by HSB, 44 were employed by BOP, 15 were
employed by USB Insurance, 2 were employed by USB Leasing, 13 were employed by
USB Mortgage, and 8 were employed by the Parent Company, United Security
Bancorporation. None of the Company's employees are covered by a collective
bargaining agreement. Management believes relations with the Company's employees
are good. United Security Bancorporation is located at 9506 N. Newport Hwy.,
Spokane, WA 99218 and the telephone number is 509-467-6949.
EFFECT OF GOVERNMENTAL POLICY
One of the most significant factors affecting the Bank's earnings is the
difference between the interest rates paid by the Bank on its deposits and its
other borrowings and the interest rates earned by the Bank on loans to its
customers and securities owned by the Bank. The yields of its assets and the
rates paid on its liabilities are sensitive to changes in prevailing interest
rates. Thus, the earnings and growth of the Bank will be influenced by general
economic conditions, the monetary and fiscal policies of the federal government,
and the policies of regulatory agencies, particularly the Federal Reserve Board,
which implements national monetary policy. An important function of the Federal
Reserve System is to regulate the money supply and credit conditions in order to
mitigate recessionary and inflationary pressures. Among the techniques used to
implement these objectives are open market operations in United Sates government
securities, changes in reserve requirements of banks, and in the cost of
short-term borrowings. These techniques influence overall growth and
distribution of credit, bank loans, investments and deposits, and may also
affect interest rates charged on loans or paid on deposits. The nature and
impact of future changes in monetary policies cannot be predicted.
From time to time, legislation has been enacted which has the effect of
increasing the cost of doing business, limiting or expanding permissible
activities, or affecting the competitive balance between bank and other
financial institutions. Legislative proposals which could affect the Company and
the banking business in general have been proposed and may be introduced
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UNITED SECURITY BANCORPORATION
before the United States Congress and other governmental bodies. These proposals
may alter the Company's structure, regulation, disclosure and reporting
requirements. In addition, various banking regulatory agencies frequently
propose rules and regulations to implement and enforce existing legislation. It
cannot be predicted whether or in what form any such legislation or regulations
will be enacted or the extent to which the business of the Company would be
affected thereby.
SUPERVISION AND REGULATION
General. As a bank holding company, the Company is subject to regulation under
Bank Holding Company Act of 1956, as amended (the "BHCA"), and its examination
and reporting requirements. Under the BHCA, a bank holding company may not
directly or indirectly acquire the ownership or control of more than 5% of the
voting shares or substantially all of the assets of any company, including a
bank or savings and loan association, without the prior approval of the Federal
Reserve Board. In addition, bank holding companies are generally prohibited
under the BHCA from engaging in nonbanking activities, subject to certain
exceptions. The Economic Growth and Regulatory Paperwork Reduction Act of 1996
("Economic Growth Act") amended the BHCA to eliminate the requirement that bank
holding companies seek approval of the Board of Governors of the Federal Reserve
("FRB") before engaging de novo in permissible nonbanking activities if the
holding company is well-capitalized and meets certain other specified criteria.
A bank holding company meeting those specifications need only notify the FRB
within 10 business days after beginning the activity. The Economic Growth Act
also established an expedited procedure for well-capitalized bank holding
companies meeting certain criteria to obtain FRB approval to acquire smaller
companies that engage in permissible non-banking activities pre-approved by FRB
order.
The Company and its subsidiaries are subject to supervision and examination by
applicable federal and state banking agencies. The earnings of the Company's
subsidiaries, and therefore the earnings of the Company, are affected by general
economic conditions, management policies and the legislative and governmental
actions of various regulatory authorities, including the Federal Reserve Board,
the FDIC, the Division of Finance and various other state financial institution
regulatory agencies. In addition, there are numerous governmental requirements
and regulations that affect the activities of the Company and its subsidiaries.
Certain Transactions with Affiliates. There are various legal restrictions on
the extent to which a bank holding company and certain of its nonbank
subsidiaries can borrow or otherwise obtain credit from its bank subsidiaries.
In general, these restrictions require that any such extensions of credit must
be on nonpreferential terms and secured by designated amounts of specified
collateral and be limited, as to any one of the holding company or such nonbank
subsidiaries, to 10% of the lending bank's capital stock and surplus, and as to
the holding company and all such nonbank subsidiaries in the aggregate, to 20%
of such capital stock and surplus.
Tie-In Arrangements. The Company and its subsidiaries cannot engage in certain
tie-in arrangements relating to any extension of credit, sale or lease of
property or furnishing of services. For example, with certain exceptions,
neither the Company nor its subsidiaries may condition an extension of credit to
a customer on either (1) a requirement that the customer obtain additional
services provided by it or (2) an agreement by the customer to refrain from
obtaining other services from a competitor. In April of 1997, the FRB adopted
significant amendments to its anti-tying rules that: (1) removed FRB-imposed
anti-tying restrictions on bank holding companies and their non-bank
subsidiaries; (2) allowed banks greater flexibility to package products with
their affiliates; and (3) established a safe harbor from the tying restrictions
for certain foreign transactions. These amendments are designed to enhance
competition in banking and nonbanking products and allow banks and their
affiliates to provide more efficient, lower cost service to their customers.
However, the impact of the amendments on the Company and its subsidiaries is
unclear at this time.
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UNITED SECURITY BANCORPORATION
Payment of Dividends. The Company is a legal entity separate and distinct from
the Banks, the Mortgage Company, the Leasing Company and Insurance Company. The
principal source of the Company's revenues is dividends from the Banks. Various
federal and state statutory provisions limit the amount of dividends the Banks
can pay to the Company without regulatory approval. The approval of appropriate
federal or state bank regulatory agencies is required for any dividend if the
total of all dividends declared by the Banks in any calendar year would exceed
the total of the institution's net profits, as defined by regulatory agencies,
for such year combined with its retained net profits for the preceding two
years. The payment of dividends by the Banks may also be affected by other
factors, such as the maintenance of adequate capital.
Capital Adequacy. The Federal Reserve Board has issued standards for measuring
capital adequacy for bank holding companies. These standards are designed to
provide risk-responsive capital guidelines and to incorporate a consistent
framework for use by financial institutions operating in major international
financial markets. The banking regulators have issued standards of banks that
are similar to, but not identical with, the standards of bank holding companies.
In general, the risk-related standards require financial institutions and
financial institution holding companies to maintain capital levels based on
"risk adjusted" assets, so that categories of assets with potentially higher
credit risk will require more capital backing than categories with lower credit
risk. In addition, financial institutions and financial institution holding
companies are required to maintain capital to support off-balance sheet
activities such as loan commitments.
FDIC Insurance Assessments. The subsidiary depository institutions of the
Company are subject to FDIC deposit insurance assessments. The FDIC has adopted
a risk-based premium schedule. Each financial institution is assigned to one of
three capital groups--well capitalized, adequately capitalized or
undercapitalized--and further assigned to one of three subgroups within a
capital group, on the basis of supervisory evaluations by the institution's
primary federal and, if applicable, state supervisors, and on the basis of other
information relevant to the institution's financial condition and the risk posed
to the applicable insurance fund. The actual assessment rate applicable to a
particular institution will, therefore, depend in part upon the risk assessment
classification so assigned to the institution by the FDIC. See "--FIRREA and
FDICIA."
The Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA"), adopted in August 1989 to provide for the resolution of insolvent
savings associations, required the FDIC to establish separate deposit insurance
funds--the Bank Insurance Fund ("BIF") for bank and the Savings Association
Insurance Fund ("SAIF") for savings associations. FIRREA also required the FDIC
to set deposit insurance assessments at such levels as would cause BIF and SAIF
to reach their "designated reserve ratios" of 1.25 percent of the deposits
insured by them within a reasonable period of time. Due to low costs of
resolving bank insolvencies in the last few years, BIF reached its designated
reserve ratio in May 1995. As a result, effective January 1, 1996, the FDIC
eliminated deposit insurance assessments (except for the minimum $2,000 payment
required by law) for banks that are well capitalized and well managed and
reduced the deposit insurance assessments for all other banks. With the
enactment of the Deposit Insurance Funds Act of 1996 ("Funds Act"), for the
three-year period beginning in 1997, BIF-insured deposits such as those of the
Bank are subject to a Financing Corporation ("FICO") premium assessment on
domestic deposits at one-fifth the premium rate (roughly 1.3 basis points)
imposed on SAIF-insured deposits (roughly 6.5 basis points). Beginning in the
year 2000, BIF-insured institutions like the Bank will be required to pay the
FICO obligations on a pro-rata basis with all thrift institutions; annual
assessments are expected to equal approximately 2.4 basis points until 2017, to
be phased out completely by 2019. The Funds Act provides for the merger of the
BIF and SAIF on January 1, 1999, only if no thrift institutions exist on that
date.
Support of Subsidiary Banks. Under Federal Reserve Board policy, the Company is
expected to act as a source of financial strength to the Banks and to commit
resources to support the Banks in circumstances where it may not choose to do so
absent such a policy. This support may be required at times when the Company may
not find itself able to provide it. In addition, any capital loans by the
Company to the Banks would also be subordinate in right of payment to
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UNITED SECURITY BANCORPORATION
deposits and certain other indebtedness of such subsidiary. Consistent with this
policy regarding bank holding companies serving as a source of financial
strength for their subsidiary banks, the Federal Reserve Board has stated that,
as a matter of prudent banking, a bank holding company generally should not
maintain a rate of cash dividends unless its net income available to common
shareholders has been sufficient to fully fund the dividends and the prospective
rate of earnings retention appears consistent with the bank holding company's
capital needs, asset quality and overall financial condition.
FIRREA and FDICIA. FIRREA contains a cross-guarantee provision which could
result in insured depository institutions owned by the Company being assessed
for losses incurred by the FDIC in connection with assistance provided to, or
the failure of, any other insured depository institution owned by the Company.
Under FIRREA, failure to meet the capital guidelines could subject a banking
institution to a variety of enforcement remedies available to federal regulatory
authorities, including the termination of deposit insurance by the FDIC.
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
made extensive changes to the federal banking laws. FDICIA instituted certain
changes to the supervisory process, including provisions that mandate certain
regulatory agency actions against undercapitalized institutions within specified
time limits. FDICIA contain various other provisions that may affect the
operations of banks and savings institutions.
The prompt corrective action provision of FDICIA requires the federal banking
regulators to assign each insured institution to one of five capital categories
("well capitalized," "adequately capitalized" or one of three "undercapitalized"
categories) and to take progressively more restrictive actions based on the
capital categorization, as specified below. Under FDICIA, capital requirements
would include a leverage limit, a risk-based capital requirement and any other
measure of capital deemed appropriate by the federal banking regulators for
measuring the capital adequacy of an insured depository institution. All
institutions, regardless of their capital levels, are restricted from making any
capital distribution or paying any management fees that would cause the
institution to fail to satisfy the minimum levels for any relevant capital
measure.
The FDIC and the Federal Reserve Board adopted capital-related regulations under
FDICIA. Under those regulations, a bank will be well capitalized if it: (i) had
a risk-based capital ratio of 10% or greater; (ii) had a ratio of Tier 1 capital
to risk-weighted assets of 6% or greater; (iii) had a Tier 1 capital to average
assets of 5% or greater and (iv) was not subject to an order, written agreement,
capital directive or prompt correction action directive to meet and maintain a
specific capital level for any capital measure. A bank will be adequately
capitalized if it was not "well capitalized" and: (i) had a risk-based capital
ratio of 8% or greater; (ii) had a ratio of Tier 1 capital to risk-weighted
assets of 4% or greater; and (iii) had a ratio of Tier 1 capital to average
assets of 4% or greater (except that certain associations rated "Composite 1"
under the federal banking agencies' CAMEL rating system may be adequately
capitalized if their ratios of core capital to adjusted total assets were 3% or
greater). FDICIA also makes extensive changes in existing rules regarding
audits, examinations and accounting. It generally requires annual on-site, full
scope examinations by each bank's primary federal regulatory. It also imposes
new responsibilities on management, the independent audit committee and outside
accountants to develop or approve reports regarding the effectiveness of
internal controls, legal compliance and off-balance sheet liabilities and
assets.
Depositor Preference Statute. Legislation enacted in August 1993 provides a
preference for deposits and certain claims for administrative expenses and
employee compensation against an insured depository institution, in the
liquidation or other resolution of such an institution by any receiver. Such
obligations would be afforded priority over other general unsecured claims
against such an institution, including federal funds and letters of credit, as
well as any obligation to shareholders of such an institution in their capacity
as such.
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UNITED SECURITY BANCORPORATION
The Interstate Banking and Community Development Legislation. In September 1994,
legislation was enacted that is expected to have a significant effect in
restructuring the banking industry in the United States. The Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994 ("Riegle-Neal")
facilitates the interstate expansion and consolidation of banking organizations
by permitting (i) bank holding companies that are adequately capitalized and
managed, one year after enactment of the legislation, to acquire banks located
in states outside their home states regardless of whether such acquisitions are
authorized under the law of the host state, (ii) the interstate merger of banks
after June 1, 1997, subject to the right of individual states to "opt in" or to
"opt out" of this authority before that date, (iii) banks to establish new
branches on an interstate basis provided that such action is specifically
authorized by the law of the host state, (iv) foreign banks to establish, with
approval of the regulators in the United States, branches outside their home
states to the same extent that national or state banks located in the home state
would be authorized to do so, and (v) banks to receive deposits, renew time
deposits, close loans, service loans and receive payments on loans and other
obligations as agent for any bank or thrift affiliate, whether the affiliate is
located in the same state or a different state. One effect of Riegle-Neal is to
permit the Company to acquire banks located in any state and to permit bank
holding companies located in any state to acquire banks and bank holding
companies in Washington. Under recent banking agency regulations, banks are
prohibited from using their interstate branches primarily for deposit
production. The FDIC and other banking agencies have accordingly implemented a
loan-to-deposit ratio screen to ensure compliance with this prohibition.
Overall, Riegle-Neal is likely to have the effects of increasing competition and
promoting geographic diversification in the banking industry.
Securities Registration and Reporting. The common stock of the Company is
registered as a class with the SEC under the 1934 Act and thus is subject to the
periodic reporting and proxy solicitation requirements and the insider-trading
restrictions of that Act. The periodic reports, proxy statements, and other
information filed by the Company under that Act can be inspected and copied at
or obtained from the office of the SEC in Washington, D.C. In addition, the
securities issued by the Company are subject to the registration requirements of
the 1933 Act and applicable state securities laws unless exemptions are
available.
ITEM 2. PROPERTIES.
At December 31, 1997, the Company owned or leased facilities in twenty-three
locations in eastern Washington and one location in Moscow, Idaho. A description
of the property is as follows:
USB's Chewelah branch is a leased facility located at S. 106 2nd E. The building
has approximately 9,600 square feet and was last renovated in 1983.
Approximately 720 square feet is subleased to USB Insurance. The lease is
treated as a Capital Lease. The lease agreement expires in 2010. See footnote 12
in the consolidated financial statements for further information.
USB's Ione branch is a leased facility located at 222 Main. The building has
approximately 3,000 square feet and was renovated in 1983. The lease is treated
as a Capital Lease. The lease agreement expires in 2010. See footnote 12 in the
consolidated financial statements for further information.
USB leased its downtown Spokane facility in 1995 located at 222 N. Wall. The
square footage is approximately 8,700 square feet. The lease agreement expires
in 2005. The facility is leased from a Company partially owned by a Director of
the Company. USB Mortgage and USB Leasing lease approximately 1,850 square feet
of shared office space at this facility. Their lease expires in 2000.
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UNITED SECURITY BANCORPORATION
The Company owns the USB Colville branch located at 621 South Main and leases it
to USB and USB Insurance. The building has approximately 7,700 square feet
including 3,100 square feet leased to USB Insurance. The building was renovated
in 1991.
The Company owns the USB Kettle Falls branch located at Juniper and Highway 395
and leases this facility to USB for a branch and USB Insurance, square footage
of approximately 4,200 and 475, respectively. The building was purchased in
1982.
The Company owns the USB Northpointe branch located at North 9506 Newport
Highway and leases it to USB for a branch and USB Mortgage, square footage of
approximately 9,000 and 878, respectively. The remainder of the space or about
1,400 square feet is used by the Company as its headquarters. The building was
renovated in 1993. This is also the headquarters location for USB. The mainframe
computer location is at this site for the Company.
The Company owns the USB Spokane Valley branch located at 14306 E. Sprague and
leases it to USB for a branch, a doctor, a securities brokerage firm, and a
pharmaceutical. Square footage is about 7,000 square feet with about 4,000
square feet used for banking services.
In 1997 USB purchased its branch located in Davenport at 639 Morgan St. The
building has approximately 1,350 square feet.
In 1997 USB purchased its branch located in Moses Lake at 101 E. 4th Ave. The
building has approximately 3,100 square feet.
In 1997 the Company constructed the USB branch located in Liberty Lake at 1221
N. Liberty Lake Road. The building has approximately 1,900 square feet. The land
is leased.
In 1997 the Company constructed the USB branch located in Qualchan at 4233 S.
Cheney Spokane Road. The building has approximately 1,900 square feet. The land
is leased.
The Company owns the HSB branch located in Sunnyside at 322 S. 6th Street. The
building was purchased in 1992 and has approximately 5,120 square feet. This is
the headquarters location for HSB.
The Company owns the HSB branch located in Prosser at 1115 Meade Avenue. The
building was purchased in 1989 and has approximately 3,700 square feet.
The Company owns the HSB branch located in Yakima located at 315 N. 2nd Street.
The building has approximately 10,000 square feet. HSB subleases approximately
2,300 square feet of space to a law firm.
In 1997 HSB purchased its branch located in Mabton at 408 B Street. The building
has approximately 2,400 square feet.
In 1997 HSB purchased its branch located in Naches at 619 2nd St. The building
has approximately 3,400 square feet.
In 1997 HSB purchased its branch located in Walla Walla at 33 E. Main St. The
building has approximately 6,000 square feet.
BOP was acquired by the Company in 1997. Its main office located at 300 E. Main
Street in Pullman is a leased facility with approximately 6,100 square feet. The
building was built in 1900 and renovated in 1980. This is a leased facility.
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UNITED SECURITY BANCORPORATION
BOP has a second Pullman location at 1020 N. Grand. It has approximately 4,000
square feet of building space. The building was built in 1961. This is a leased
facility.
BOP has a third Pullman branch located on the Washington State University campus
and was built in 1953 and renovated in 1968. This is a leased facility. The
branch has 700 square feet of banking space. This branch will be relocated to
South Grand in 1998.
BOP has a leased branch in Moscow, Idaho at 505 S. Jackson, which is a new
branch opened in 1997. The building area is approximately 1,440 square feet.
BOP owns a branch in Colton located at 702 Broadway. It has approximately 3,100
square feet. The building was completed in 1900.
BOP owns a branch building in Uniontown at 118 S. Montgomery St. It was built in
1900 and has approximately 1,000 square feet.
BOP owns a branch located at Bridge & Main St. in Palouse. It was built in 1900
and has approximately 3,000 square feet. BOP leases an office of this building
to an insurance company.
ITEM 3. LEGAL PROCEEDINGS.
Periodically and in the ordinary course of business, various claims and lawsuits
are brought against the Company or the Banks, such as claims to enforce lines,
condemnation proceedings on properties in which the Banks hold security
interests, claims involving the making and servicing of real property loans and
other issues incident to the business of the Company and the Banks. In the
opinion of management, the ultimate liability, if any, resulting from such
claims or lawsuits will not have a material adverse effect on the financial
position or results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the Company's shareholders during the
fourth quarter of 1997.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
MARKET INFORMATION. Effective in May, 1995 the Common Stock was approved for
quotation on the Nasdaq National Market System (NASDAQ) under the symbol "USBN".
Prior to NASDAQ quotation, the Common Stock was traded on a limited basis in the
over-the-counter market. The following table sets out the high and low bid
prices per share for the Common Stock for 1997 and 1996 as reported by NASDAQ.
1997 1996
HIGH LOW HIGH LOW
First Quarter $13.86 $11.57 $11.15 $9.82
Second Quarter $13.18 $11.59 $11.15 $9.71
Third Quarter $16.94 $12.62 $12.40 $9.71
Fourth Quarter $19.09 $16.14 $12.60 $10.54
Per share amounts have been adjusted giving retroactive effect to stock
split-ups and stock dividends.
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UNITED SECURITY BANCORPORATION
HOLDERS. The number of holders of common stock of record on February 14, 1998
was approximately 1,200.
DIVIDENDS. The Company has declared and paid the following dividends subsequent
to January 1, 1995: On February 14, 1995, the Company paid a 10% stock dividend;
on August 23, 1995, the Company paid a 10% stock dividend; and on February 5,
1996 and February 25, 1997 the Company issued 10% stock split-ups. On February
10, 1998, the Company paid a 10% stock dividend.
The Company has adopted a dividend policy which is periodically reviewed and
revised by the Board of Directors. Historically, the goal of such policy was to
pay dividends at levels established during past years, provided funds were
available and the payment of such dividends did not violate the capital
requirements of the Company or the Banks. The primary source of funding dividend
payments has been the Banks, which currently pay the Company, in the form of
dividends, approximately 15% of their net annual profits after establishment of
loan loss allowances and payment of taxes. Funding of dividends from the
Company's other subsidiaries, USB Insurance, USB Leasing, and USB Mortgage, has
been minimal. The Company expects that future dividends, if declared, will be
paid in the form of stock dividends.
Payment of dividends, including stock dividends, is subject to regulatory
limitations. Under federal banking law, the payment of dividends by the Company
and the Banks is subject to capital adequacy requirements established by the
Federal Reserve Board and the FDIC. Under Washington general corporate law as it
applies to the Company, no cash dividend may be declared or paid, if, after
giving effect to the dividend, the Company is insolvent or the liabilities of
the Company exceed the Company's assets. Payment of dividends, including stock
dividends, on the Common Stock is also affected by statutory limitations, which
restrict the ability of the Banks to pay upstream dividends to the Company.
Under Washington banking law as it applies to the Banks, no dividend may be
declared or paid in an amount greater than net profits then available, and after
a portion of such net profits have been added to the surplus funds of the Bank.
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UNITED SECURITY BANCORPORATION
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth certain selected consolidated financial data of
the Company at and for the years ended December 31:
($ in thousands, except per share amounts) 1997 1996 1995 1994 1993
Net interest income $ 14,780 $ 12,572 $ 10,042 $ 7,768 $ 6,021
Provision for loan losses 752 1,006 317 585 191
Noninterest income 3,717 2,981 3,765 2,258 2,149
Noninterest expense 10,628 9,872 8,414 6,446 5,918
Income before income tax expense 7,117 4,675 5,076 2,995 2,060
Income tax expense 2,253 1,513 1,325 1,017 695
Net income 4,864 3,162 3,751 1,978 1,365
Basic earnings per common share $ 1.20 $ 0.78 $ 1.09 $ 0.92 $ 0.72
Diluted earnings per common share $ 1.19 $ 0.78 $ 1.09 $ 0.92 $ 0.72
Return on average assets 1.81% 1.47% 2.10% 1.36% 1.17%
Return on average equity 16.07% 11.90% 19.39% 18.91% 17.20%
Assets $ 350,479 $ 231,049 $ 191,578 $ 163,911 $ 125,737
Securities 66,770 15,613 22,401 23,135 20,888
Loans:
Commercial and industrial 122,482 97,086 75,011 61,968 46,593
Agricultural 33,787 25,621 19,787 16,721 15,136
Real estate mortgage 42,884 29,318 25,048 24,883 12,079
Real estate construction 8,440 9,954 10,169 8,126 6,303
Installment 12,666 10,527 9,234 7,781 6,185
Lease financing 5,209 3,038 1,336 54
Bank cards and other loans 4,541 3,384 3,172 3,286 2,874
Total loans 230,009 178,928 143,757 122,765 89,224
Allowance for loan loss to loans percentage 1.14% 1.14% 0.97% 1.02% 0.90%
Deposits 307,586 197,399 163,791 146,629 114,139
Borrowings 6,989 3,242 767 4,035 1,658
Stockholders' equity 33,089 28,013 24,863 12,186 8,643
Equity to assets ratio 9.44% 12.12% 12.98% 7.43% 6.87%
Book value per common share $ 8.16 $ 6.92 $ 6.17 $ 5.19 $ 4.53
Number of common shares outstanding 4,052,775 4,050,575 4,031,554 2,347,839 1,908,795
Weighted average shares outstanding 4,051,961 4,042,811 3,441,502 2,149,050 1,908,795
See Results of Operations for a description of the nonrecurring items impacting
the above years for comparative purposes.
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UNITED SECURITY BANCORPORATION
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
The Company's net income is derived primarily from net interest income of the
Banks, which is the difference between interest earned on their loan and
investment portfolios and their cost of funds, primarily interest paid on
deposits and borrowings. For the years ended December 31, 1997, 1996, and 1995,
the Company's average net interest margins were 6.1%, 6.4%, and 6.1%,
respectively. See Asset/Liability Management.
Net income is also affected by levels of provisions for loan losses, noninterest
income (primarily service charges on deposits, insurance commissions, and other
operating income) and noninterest expenses (primarily salaries and benefits,
occupancy expense, data processing cost, legal and professional services
expense, business and occupation tax, and other operating expenses). For the
three years ended December 31, 1997, 1996, and 1995, the provision for loan
losses was $752,000, $1,006,000, and $317,000, respectively. Net charge-offs
during the year ended December 31, 1997 were $873,000 as compared to $363,000
and $172,000 during 1996 and 1995, respectively. For the three years ended
December 31, 1997, 1996, and 1995 noninterest income as a percentage of
personnel expenses was 57%, 50%, and 76%, respectively.
NET INTEREST INCOME
The following table sets forth information with regard to average balances of
assets and liabilities, and interest income from interest-earning assets and
interest expense on interest-bearing liabilities, resultant yields or costs, net
interest income, net interest spread (the difference between the average yield
on interest-earning assets and the average cost of interest-bearing
liabilities), and the net interest margin.
YEAR ENDED DECEMBER 31,
1997 1996
($ in thousands) AVERAGE AVERAGE
ASSETS BALANCE INTEREST % BALANCE INTEREST %
Loans $193,045 $ 21,501 11.14% $164,109 $ 18,765 11.43%
Taxable securities 26,274 1,790 6.81% 15,404 1,038 6.74%
Nontaxable securities 5,785 369 6.38% 3,732 285 7.64%
Federal funds sold 11,323 623 5.50% 7,460 402 5.39%
Time deposits with other banks 8,884 486 5.47% 5,935 306 5.16%
-------- -------- ----- -------- -------- -----
Total interest earning assets 245,311 $ 24,769 10.10% 196,640 $ 20,796 10.58%
======== ===== ======== =====
Noninterest earning assets 23,765 19,066
-------- --------
Total assets $269,076 $215,706
======== ========
LIABILITIES
Interest-bearing demand deposits $ 81,020 $ 3,768 4.65% $ 56,483 $ 2,506 4.44%
Savings deposits 19,846 739 3.72% 14,822 447 3.02%
Time deposits 91,169 4,956 5.44% 82,840 4,897 5.91%
-------- -------- ----- -------- -------- -----
Total interest-bearing deposits 192,035 9,463 4.93% 154,145 7,850 5.09%
Short-term debt 105 5 4.76%
Long-term debt 4,796 432 9.01% 3,077 292 9.49%
-------- -------- ----- -------- -------- -----
Total interest-bearing liabilities 196,831 $ 9,895 5.03% 157,327 $ 8,147 5.18%
======== ===== ======== =====
Noninterest bearing demand deposits 39,325 29,060
Other noninterest bearing liabilities 2,656 2,695
-------- --------
Total liabilities 238,812 189,082
STOCKHOLDERS' EQUITY 30,264 26,624
-------- --------
Total liabilities and stockholders' equity $269,076 $215,706
======== ========
Net interest income $ 14,874 5.07% $ 12,649 5.40%
======== ==== ======== =====
Net interest margin to average
earning assets 6.06% 6.43%
==== ====
YEAR ENDED DECEMBER 31,
1995
($ in thousands) AVERAGE
ASSETS BALANCE INTEREST %
Loans $131,818 $ 14,976 11.36%
Taxable securities 24,030 1,634 6.80%
Nontaxable securities 228 17 7.46%
Federal funds sold 3,788 205 5.41%
Time deposits with other banks 3,746 228 6.09%
-------- -------- -----
Total interest earning assets 163,610 $ 17,060 10.43%
======== =====
Noninterest earning assets 14,804
--------
Total assets $178,414
========
LIABILITIES
Interest-bearing demand deposits $ 43,558 $ 1,865 4.28%
Savings deposits 15,411 490 3.18%
Time deposits 75,340 4,546 6.03%
-------- -------- -----
Total interest-bearing deposits 134,309 6,901 5.14%
Short-term debt 1,084 35 3.23%
Long-term debt 779 78 10.01%
-------- -------- -----
Total interest-bearing liabilities 136,172 $ 7,014 5.15%
======== =====
Noninterest bearing demand deposits 21,598
Other noninterest bearing liabilities 1,303
--------
Total liabilities 159,073
STOCKHOLDERS' EQUITY 19,341
========
Total liabilities and stockholders' equity $178,414
========
Net interest income $ 10,046 5.28%
======== =====
Net interest margin to average
earning assets 6.14%
=====
Nonaccrual loans are included with loan balances. In the above table tax exempt
securities income has been adjusted to a tax equivalent basis using an assumed
tax rate of 34%.
22
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UNITED SECURITY BANCORPORATION
The following table illustrates the changes in the Company's net interest income
due to changes in volumes and interest rates.
1997 VS 1996 1996 VS 1995
INCREASE (DECREASE) IN NET INTEREST INCOME DUE TO CHANGES IN
($ in thousands) VOLUME RATE TOTAL VOLUME RATE TOTAL
INTEREST EARNING ASSETS
Loans $ 3,309 $ (573) $ 2,736 $ 3,669 $ 120 $ 3,789
Securities 841 (22) 819 (348) (53) (401)
Federal funds sold 208 13 221 199 (2) 197
Interest-bearing deposits in other banks 152 28 180 133 (55) 78
-------- -------- -------- -------- -------- --------
Total interest earning assets 4,510 (554) 3,956 3,653 10 3,663
-------- -------- -------- -------- -------- --------
INTEREST BEARING LIABILITIES
Interest-bearing demand deposits 1,089 173 1,262 553 88 641
Savings deposits 152 140 292 (19) (24) (43)
Time deposits 492 (433) 59 453 (102) 351
-------- -------- -------- -------- -------- --------
Total interest bearing deposits 1,733 (120) 1,613 987 (38) 949
Short-term debt (5) (5) (32) 2 (30)
Long-term debt 163 (23) 140 230 (16) 214
-------- -------- -------- -------- -------- --------
Total interest bearing liabilities 1,891 (143) 1,748 1,185 (52) 1,133
======== ======== ======== ======== ======== ========
Total increase (decrease) in net interest income $ 2,619 $ (411) $ 2,208 $ 2,468 $ 62 $ 2,530
======== ======== ======== ======== ======== ========
The change in interest income and interest expense due to changes in both volume
and rate, which cannot be segregated, has been allocated proportionately to the
change due to volume and the change due to rate.
ASSET/LIABILITY MANAGEMENT
The Company's results of operations depend substantially on its net interest
income. Interest income and cost of funds are affected by general economic
conditions, regulatory policy and competition in the marketplace. See "Liquidity
and Capital Resources."
The Banks' operating strategies focus on asset/liability management. The purpose
of asset/liability management ("ALM") is to provide stable net interest income
growth by protecting the Banks' and the Company's earnings from undue interest
rate risk. Each of the Banks follows an ALM policy for controlling exposure to
interest rate risk. The ALM policy is established by a committee in each Bank
and is reviewed, approved and administered by the asset/liability committee of
the Company. In order to control risk in a rising interest rate environment,
management's philosophy has been to shorten the average maturity of the
investment portfolio in order to achieve a more asset sensitive position,
therefore allowing quicker asset repricing. Conversely, in a declining interest
rate environment, the philosophy is to lengthen the average maturity of the
investment portfolio, thereby becoming more liability sensitive.
The ALM policy is also designed to maintain an appropriate balance between
rate-sensitive assets and liabilities in order to maximize interest rate
spreads. The Banks monitor the sensitivity of their assets and liabilities with
respect to changes in interest rates and maturities, and direct the allocation
of their funds accordingly. The strategy of each Bank has been to maintain, to
the extent possible, a balanced position between assets and liabilities, and to
place emphasis on the sensitivity of its assets. Generally, the Banks attempt to
maintain liquid assets, in order to meet funding requirements in the current
period, and a ratio of interest income to average earning assets of 4% to 6%. At
December 31, 1997, the net interest margins of USB, HSB, and BOP were 5.46%,
5.10%, and 5.42%, respectively. Should interest rates trend upward in the near
future, the Company could become more asset sensitive through the sale of
investment securities, although the amount realized on the sale would be
adversely affected by the increased rates. Management believes there will be
less movement in rates on short-term liabilities such as savings, negotiable
order of withdrawal ("NOW") accounts and money market
23
24
UNITED SECURITY BANCORPORATION
accounts in an increasing interest rate environment than in rates on the
Company's interest-earning assets.
The following table sets forth the Company's contractual payment, maturity or
repricing information for interest-earning assets and interest-bearing
liabilities, and the resulting cumulative interest rate gap as of December 31,
1997. The amounts in the table are derived from internal data from the Company
and could be significantly affected by factors such as changes in prepayment
experience, early withdrawals of deposits and competition. Mortgage-backed
securities, which are included with securities are estimated and based on the
average lives of the underlying mortgage loans, adjusted to incorporate
prepayment assumptions.
ESTIMATED MATURITY OR REPRICING
THREE MONTHS
LESS THAN TO LESS THAN ONE TO OVER FIVE
($ in thousands) THREE MONTHS ONE YEAR FIVE YEARS YEARS TOTAL
INTEREST-EARNING ASSETS:
Fixed-rate loans $ 10,521 $ 15,646 $53,886 $40,441 $120,494
Floating-rate loans 108,854 108,854
Securities 9,900 15,869 39,812 1,189 66,770
Other interest-earning assets 14,866 14,866
--------- --------- ------- ------- --------
Total interest-earning assets $ 144,141 $ 31,515 $93,698 $41,630 $310,984
========= ========= ======= ======= ========
INTEREST-BEARING LIABILITIES:
Savings and NOW accounts $ 129,811 $129,811
Certificates of deposit over $100,000 11,678 16,261 2,222 30,161
Other time deposits 22,618 49,710 10,645 55 83,028
Long-term debt 5,530 15 124 588 6,257
--------- --------- ------- ------- --------
Total interest-bearing liabilities $ 169,637 $ 65,986 $12,991 $ 643 $249,257
========= ========= ======= ======= ========
Interest sensitivity gap $ (25,496) $ (34,471) $80,707 $40,987
Cumulative interest sensitive gap (25,496) (59,967) 20,740 61,727
As a percentage of total assets -7.27% -17.11% 5.92% 17.61%
Certain assumptions are inherent in the method of analysis presented in the
foregoing table. For example, although certain assets and liabilities may have
similar maturities and periods to repricing, they may react differently to
changes in market interest rates. Also, interest rates on assets and liabilities
may fluctuate in advance of changes in market interest rates, while interest
rates on other assets and liabilities may follow changes in market interest
rates. Additionally, certain assets have features that restrict changes in the
interest rates of such assets, both on a short-term basis and over the lives of
such assets. A change in market interest rates, prepayments and early
withdrawals could cause significant deviation from the stated payments,
maturities and repricings.
24
25
UNITED SECURITY BANCORPORATION
The following table presents the aggregate maturities of loans in each major
category of the Banks' loan portfolios at December 31, 1997. Actual maturities
may differ from the contractual maturities shown below as a result of renewals
and prepayments.
AGGREGATE MATURITIES AT DECEMBER 31, 1997
LESS THAN ONE TO OVER FIVE
($ in thousands) ONE YEAR FIVE YEARS YEARS TOTAL
Commercial, financial and agricultural $68,732 $41,615 $45,922 $156,269
Real estate-mortgage 9,549 17,595 15,740 42,884
Real estate-construction 7,413 752 275 8,440
Consumer 5,392 5,933 1,341 12,666
Other 4,643 5,058 49 9,750
------- ------- ------- --------
Total $95,729 $70,953 $63,327 $230,009
======= ======= ======= ========
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
GENERAL. The Company's net income was $4,864,000 in 1997, $3,162,000 in 1996,
and $3,751,000 in 1995. Basic earnings per share were $1.20, $.78, and $1.09 for
1997, 1996, and 1995, respectively. The results were impacted by the following
nonrecurring items:
1. In 1997, the Company recovered from its insurance provider $796,000 for
a theft by a former employee of its bank subsidiary, Home Security Bank.
After income taxes the recovery improved 1997 net income by $525,000 or
$.14 per share. In 1996, the Company detected and recorded an estimated
operational loss of $860,000 for the theft. This reduced after tax net
income by $568,000 or $.14 per share. Without the impact of the theft
recovery and loss net income would have been $4,339,000 and $3,730,000
for 1997 and 1996, respectively. Earnings per share would have been
$1.06 for 1997 and $.92 for 1996.
2. 1995 earnings were improved by $651,000 for the net of life insurance
proceeds received of $1,030,000 less death benefit expense of $379,000
from the death of a key employee. Net income was improved by $780,000 or
$.23 per share. Net income would have been $2,971,000 or $.86 per share
without the net amount of the life insurance proceeds.
The Company completed an acquisition of the Bank of Pullman in October, 1997 for
$11,955,000. The acquisition was accounted for as a purchase transaction.
Accordingly, the results of operations of Bank of Pullman increased net income
of the Company subsequent to the date of acquisition by $225,000. The
acquisition increased assets by $64 million, intangible assets by $4.8 million,
and deposits by $55 million as of December 31, 1997.
In July, 1997 the Company purchased five branches from Wells Fargo Bank. USB
purchased two branches located in Davenport and Moses Lake, Washington. HSB
purchased three branches located in Mabton, Naches, and Walla Walla, Washington.
The acquisitions increased deposits by approximately $35 million, premises and
equipment by $1.9 million, and intangible assets by $2.1 million.
Return on average assets was 1.81%, 1.47%, and 2.10% for 1997, 1996, and 1995,
respectively. Return on average equity was 16.07%, 11.90%, and 19.39% for 1997,
1996, and 1995, respectively. Without the nonrecurring items described above,
return on assets would have been 1.61%, 1.73%, and 1.67% for 1997, 1996, and
1995, respectively. Return on equity would have been 14.34%, 14.01%, and 15.36%
for 1997, 1996, and 1995, respectively.
25
26
UNITED SECURITY BANCORPORATION
NET INTEREST INCOME. Net interest income increased 18% to $14,780,000 in 1997
compared to 1996. The increase in 1996 was 25% to $12,572,000 over 1995 results.
The net interest income improvements were primarily the result of loan volume
increases in 1997 and 1996. The Company's net interest margin to average earning
assets was 6.06%, 6.43%, and 6.14% in 1997, 1996, and 1995, respectively.
Consistent with the decline in market interest rates the yield on earning assets
dropped by .44% in 1997 while the decline on interest-bearing liabilities was
.15%. The yield on loans declined from 11.43% in 1996 to 11.14% in 1997. The
Company's cost of funds declined from 5.18% in 1996 to 5.03% in 1997.
NONINTEREST INCOME. Noninterest income, which consists of fees and service
charges, insurance commissions, insurance proceeds, and other income, increased
by 25% in 1997 to $3,717,000 and decreased 21% to $2,981,000 in 1996. Unusual
insurance proceeds of $796,000 in 1997 for recovery of the theft loss and
$1,030,000 in 1995 for life insurance are included in the income reported.
Without the unusual income noninterest income would have been $2,921,000,
$2,981,000, and $2,735,000 for 1997, 1996 and 1995, respectively. Fees and
service charges for banking services increased by 19% in 1997 as the Company
expanded its core deposit base with normal growth and the acquisitions of Bank
of Pullman and Wells Fargo. The customer deposit base growth income was offset
by declines in insurance commissions and leasing income in 1997.
NONINTEREST EXPENSE. Noninterest expense increased by 8% in 1997 to $10,628,000
and 17% in 1996 to $9,872,000. The Company expanded its branch locations from 10
at the end of 1996 to 24 near the end of 1997. The acquisitions of Bank of
Pullman and the Wells Fargo branches increased the number of full time
equivalent employees to 214 as of December 31, 1997 from 150 as of December 31,
1996. Occupancy, equipment and other expense increased with the acquisitions and
planned acquisition activity. The operational loss of $860,000 described above
was reported in 1996. A death benefit expense of $379,000 was recorded in 1995
as described above.
YEAR 2000
The Corporation 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. The provider of the Company's mainframe
computer applications will provide a Year 2000 software compliance update. The
Company intends to install and test the release by September 30, 1998. The
installation will also upgrade the mainframe operating systems. The Company is
also reviewing its PC hardware and software and its major automated systems
suppliers for Year 2000 compliance. A small number of PCs and PC systems will
require upgrades. USB, HSB, and BOP 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. The cost of complying with the Year 2000 issues is
presently estimated to be $150,000 including staff time costs.
LIQUIDITY AND CAPITAL RESOURCES
Management believes that the Company's cash flow will be sufficient to support
its existing operations for the foreseeable future. If the Company needs
additional liquidity, it would be required to borrow or issue additional capital
stock. The Company's ability to incur indebtedness is limited by government
regulations and its ability to service borrowings is dependent upon the
availability of dividends from the Banks and nonbank subsidiaries. The payment
of dividends by the Banks is subject to limitations imposed by law and
governmental regulations.
The Banks may borrow on a short-term basis to compensate for reductions in other
sources of funds. Bank borrowings may also be used on a longer-term basis to
support expanded lending activities and to match the maturity of repricing
intervals of assets.
26
27
UNITED SECURITY BANCORPORATION
The Company's total stockholders' equity increased to $33,089,000 at December
31, 1997, from $28,013,000 at December 31, 1996 and $24,863,000 at December 31,
1995. At December 31, 1997, stockholders' equity was 9.44% of total assets,
compared to 12.12% at December 31, 1996. The reduction was the results of the
acquisitions of BOP and five Wells Fargo branches during 1997. At December 31,
1997, the Company held cash and cash-equivalent assets of $33.9 million. At such
date, virtually all of the Company's investment securities ($65 million in
aggregate amount) were available-for-sale.
The capital levels of the Company and each of the Banks currently exceeded
applicable regulatory capital guidelines at December 31, 1997. During 1995, the
Company issued and sold 1,150,000 million shares of common stock in an
underwritten public offering, which yielded net proceeds to the Company after
deduction of commissions, selling expenses and related offering costs of $8.5
million. Proceeds from the sale were allocated among the Company's subsidiaries.
EFFECTS OF INFLATION AND CHANGING PRICES. The primary impact of inflation on the
Company's operations is increased asset yields, deposit costs and operating
overhead. Unlike most industrial companies, virtually all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates generally have a more significant impact on a financial
institution's performance than the effects of general levels of inflation.
Although interest rates do not necessarily move in the same direction or to the
same extent as the prices of goods and services, increases in inflation
generally have resulted in increased interest rates. The effects of inflation
can magnify the growth of assets, and if significant, would require that equity
capital increase at a faster rate than would otherwise be necessary.
NEW ACCOUNTING PRONOUNCEMENTS. In June 1997, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards (SFAS) No. 130
"Reporting Comprehensive Income." This Statement establishes standards for
reporting and display of comprehensive income and its components in a full set
of general-purpose financial statements. SFAS No. 130 requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. The Financial Accounting
Standards Board also issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" in June 1997. SFAS No. 131 established
standards for the way that public business enterprises report information about
operating segments in annual financial statements. Both of these statements
become effective for the Company on January 1, 1998 and provide additional
disclosures about the Company's operations. They are not anticipated to have
material effect on the financial position or results of operations of the
Company.
27
28
UNITED SECURITY BANCORPORATION
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
MARKET RISK
Management considers interest rate risk to be a market rate risk that could have
a significant effect on the financial condition and results of operations. The
Company does not use derivatives including forward and futures contracts,
options, and swaps to manage its market and interest rate risks. All of the
Company's transactions are denominated in U.S. dollars. Approximately 47% of the
Company's loan portfolio have interest rates, which float with the lending
Bank's reference rate. Fixed rate loans are generally made with a term of five
years or less.
In the Management Discussion and Analysis is a table presenting estimated
maturity or pricing information indicating the Company's exposure to interest
rate changes. The assumptions used in presenting the information are discussed
before and after the table. In the Asset/Liability section of the Management
Discussion and Analysis is a description of the process used to manage its
interest rate risk. The following table discloses the balances of the financial
instruments including the fair value as of December 31, 1997. The expected
maturities take into consideration historical and estimated principal
prepayments for loans and securities. Principal prepayments are the amounts of
principal reduction in addition to contractual amortization. Fixed-rate and
variable-rate loans are expected to have prepayment rates of 20%.
Mortgage-backed securities are assumed to have a prepayment based on a broker
analysis of the actual security held in the portfolio. The expected maturities
for financial liabilities with no stated maturity reflect historical and
estimated future roll-off rates. The roll-off rates for noninterest bearing
deposits, interest-bearing demand deposits and savings deposits is 15%, 25%, and
20%, respectively. The interest rates disclosed are based on rates from 1997
results. Fair values are based on the calculations used in accordance with
generally accepted accounting principles as disclosed in the financial
statements.
Year ended December 31, 1997 EXPECTED MATURITY FAIR
($ in thousands) 1998 1999 2000 2001 2002 THEREAFTER TOTAL VALUE
FINANCIAL ASSETS
Cash and due from banks $ 19,058 $ 19,058 $ 19,058
Overnight interest-bearing deposits
with other banks 9,656 9,656 9,656
Weighted average interest rate 5.47%
Federal funds sold 5,210 5,210 5,210
Weighted average interest rate 5.50%
Securities 25,769 13,070 7,887 8,038 10,817 1,189 66,770 66,790
Weighted average interest rate 6.73%
Fixed rate loans 24,099 24,099 24,099 24,099 24,098 120,494 125,213
Weighted average interest rate 10.90%
Variable rate loans 21,771 21,771 21,771 21,771 21,770 108,854 108,854
Weighted average interest rate 11.41%
FINANCIAL LIABILITIES
Noninterest bearing deposits 9,688 9,688 9,688 9,688 9,688 16,146 64,586 64,586
Interest-bearing demand deposits 24,422 24,422 24,422 24,421 97,687 97,687
Weighted average interest rate 4.65%
Savings deposits 6,425 6,425 6,425 6,425 6,424 32,124 32,124
Weighted average interest rate 3.72%
Time deposits 100,266 11,394 727 524 223 55 113,189 113,284
Weighted average interest rate 5.44%
Notes payable 212 139 536 2,427 2,943 6,257 6,257
Weighted average interest rate 9.01%
The above table presents information about the Company's interest sensitivity,
it does not predict future earnings. The Company uses budgeting and earnings
projections to forecast earnings under different interest rate projections. It
requires significant assumptions about the projection of loan prepayments, loan
originations and liability funding sources, which may be inaccurate. Weighted
average interest rates by expected maturity is not available.
28
29
UNITED SECURITY BANCORPORATION
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The consolidated financial statements and supplementary data of the Company and
its subsidiaries for the years ended December 31, 1997, 1996, and 1995, which
have been audited except as indicated by Moss Adams LLP or McFarland & Alton,
P.S., are included elsewhere in this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
In 1997 the Company selected Moss Adams LLP as its new independent auditors.
During the years ended December 31, 1997, 1996, and 1995, there were no
disagreements with Moss Adams LLP or McFarland & Alton, P.S. on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure which, if not resolved to the satisfaction of such firm,
would have caused them to make reference to the subject matter of such
disagreement in their reports on such financial statements.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS.
The information requested by this item is contained in the registrant's
1998 proxy statement, and is incorporated by reference herein.
ITEM 11. EXECUTIVE COMPENSATION.
The information requested by this item is contained in the registrant's
1998 proxy statement, and is incorporated by reference herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information requested by this item is contained in the registrant's
1998 proxy statement, and is incorporated by reference herein.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information requested by this item is contained in the registrant's
1998 proxy statement, and is incorporated by reference herein.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) (1) Financial Statements
United Security Bancorporation and Subsidiaries:
Independent Auditor's Reports on Consolidated Financial
Statements
Consolidated Statements of Condition
Consolidated Statements of Income
Consolidated Statements of Changes in Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
(a) (2) There are no financial statement schedules filed herewith.
29
30
UNITED SECURITY BANCORPORATION
(a) (3) Exhibits
3.1 Articles of Incorporation of Registrant, as amended.
Filed as Exhibit 3a to the Registrant's Registration Statement
on Form S-14 (File No. 2-86318) and redesignated and
incorporated by reference herein as Exhibit 3.1.
3.2 By-Laws of Registrant, as amended. Filed as Exhibit 3b to the
Registrant's Registration Statement on Form S-14 (File No.
2-86318) and redesignated and incorporated by reference herein
as Exhibit 3.2.
10.1 1995 Incentive Stock Option Plan. Form of Incentive Stock
Option Plan Agreement. Filed herewith.
10.2 Form of Salary Continuation Agreement. Exhibit A of the
agreement for William C. Dashiell, Daniel P. Murray , and
Duane L. Brandenburg. Filed herewith.
21 Subsidiaries of Registrant. Reference is made to "Item 1.
Business. United Security Bancorporation, The Banks, USB
Insurance, USB Leasing, and USB Mortgage" for the required
information.
27 Financial Data Schedule.
(b) Reports on Form 8-K filed in fourth quarter 1997.
Date Item # Subject
October 7, 1997 Item 5. United Security and The Wheatland Bank Terminate Merger
October 24, 1997 Item 5. United Security completes acquisition of Bank of Pullman
October 31, 1997 Item 2. Acquisition of Community Ban Corporation and Bank of Pullman
November 6, 1997 Item 7. Community Ban Corporation and Bank of Pullman acquisition
financial statements
(c) All schedules are omitted as the required information is not
applicable or the information is presented in the Consolidated
Financial Statements or related notes.
30
31
UNITED SECURITY BANCORPORATION
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
UNITED SECURITY BANCORPORATION
By: /s/ William C. Dashiell By: /s/ Richard Emery
------------------------------- ------------------------------------
William C. Dashiell, Chairman Richard Emery, President and
and Chief Executive Officer and Chief Operating Officer and Director
Director Date: March 24, 1998
Date: March 24, 1998
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By: /s/ David C. Blankenship By: /s/ Chad Galloway
------------------------------- ------------------------------------
David C. Blankenship, Director Chad Galloway, Vice President and
Date: March 24, 1998 Chief Financial Officer
Date: March 24, 1998
By: /s/ Rand Elliott By: /s/ Dann Simpson
------------------------------- ------------------------------------
Rand Elliott, Director Dann Simpson, Director
Date: March 24, 1998 Date: March 24, 1998
By: /s/ Robert J. Gardner By: /s/ Norman J. Traaen
------------------------------- ------------------------------------
Robert J. Gardner Norman J. Traaen
Date: March 24, 1998 Date: March 24, 1998
By: /s/ Robert L. Golob By: /s/ Ron Wachter
------------------------------- ------------------------------------
Robert L. Golob, Director Ron Wachter, Director
Date: March 24, 1998 Date: March 24, 1998
By: /s/ Keith P. Sattler
-------------------------------
Keith P. Sattler, Director
Date: March 24, 1998
31
32
UNITED SECURITY BANCORPORATION
Independent Auditor's Report
Board of Directors and Shareholders
United Security Bancorporation
Spokane, Washington
We have audited the accompanying consolidated statement of financial condition
of United Security Bancorporation and subsidiaries as of December 31, 1997, and
the related consolidated statements of income, changes in stockholders' equity,
and cash flows for the year then ended. These consolidated financial statements
are the responsibility of the Corporation's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 1997 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of United
Security Bancorporation and subsidiaries as of December 31, 1997, and the
results of their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles.
January 29, 1998 /s/ Moss Adams LLP
Everett, Washington
32
33
UNITED SECURITY BANCORPORATION
Independent Auditor's Report
Board of Directors and Shareholders
United Security Bancorporation
Spokane, Washington
We have audited the accompanying consolidated statement of financial condition
of United Security Bancorporation and subsidiaries as of December 31, 1996, and
the related consolidated statements of income, changes in stockholders' equity,
and cash flows for the years ended December 31, 1996 and 1995. These
consolidated financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of United Security
Bancorporation and subsidiaries as of December 31, 1996, and the results of its
operations, changes in stockholders' equity, and its cash flows for the years
ended December 31, 1996 and 1995, in conformity with generally accepted
accounting principles.
February 26, 1997 /s/ McFarland & Alton, P.S.
Spokane, Washington
33
34
UNITED SECURITY BANCORPORATION
CONSOLIDATED STATEMENTS OF CONDITION
DECEMBER 31, 1997 AND 1996
($ In thousands)
1997 1996
ASSETS
Cash and due from banks $ 19,058 $ 10,430
Overnight interest bearing deposits with other banks 9,656 6,223
Federal funds sold 5,210 10,770
---------- ----------
Cash and cash equivalents (Note 4) 33,924 27,423
Securities (Note 5) 66,770 15,613
Loans, net of allowance for loan losses of $2,613 in 1997 and
$2,034 in 1996 (Notes 6, 14, and 18) 226,735 176,386
Accrued interest receivable 2,867 2,108
Premises and equipment, net (Notes 7 and 12) 9,199 6,117
Foreclosed real estate and other foreclosed assets 967 205
Life insurance and salary continuation assets (Note 8) 2,512 2,311
Intangible assets (Note 2) 6,910 119
Other assets (Note 9) 595 767
---------- ----------
TOTAL ASSETS $ 350,479 $ 231,049
========== ==========
LIABILITIES
Noninterest bearing - demand deposits $ 64,586 $ 33,281
Interest bearing deposits:
NOW and savings accounts 129,811 80,735
Time, $100,000 and over (Note 10) 30,161 24,554
Other time (Note 10) 83,028 58,829
---------- ----------
TOTAL DEPOSITS (Note 18) 307,586 197,399
Notes payable (Note 11) 6,257 2,491
Capital lease obligations (Note 12) 732 751
Accrued interest payable 813 630
Other liabilities (Notes 8 and 9) 2,002 1,765
---------- ----------
TOTAL LIABILITIES 317,390 203,036
Commitments and contingencies (Note 12)
STOCKHOLDERS' EQUITY
Common stock, no par, shares authorized 15 million;
issued and outstanding 4,052,775 in 1997 and
4,050,575 in 1996 (Note 13) 28,383 21,001
Retained earnings (Note 14) 4,771 7,276
Net unrealized loss on securities available-for-sale,
net of tax of $33 in 1997 and $136 in 1996 (Note 5) (65) (264)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 33,089 28,013
---------- ----------
TOTAL LIABILITIES and STOCKHOLDERS' EQUITY $ 350,479 $ 231,049
========== ==========
The accompanying notes are an integral part of these statements.
34
35
UNITED SECURITY BANCORPORATION
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
($ In thousands, except per share amounts)
1997 1996 1995
INTEREST INCOME
Interest and fees on loans $ 21,501 $ 18,765 $ 14,976
Interest on securities 2,065 1,246 1,647
Other Interest Income 1,109 708 433
------------ ------------ ------------
TOTAL INTEREST INCOME 24,675 20,719 17,056
------------ ------------ ------------
INTEREST EXPENSE
Interest on deposits 9,463 7,850 6,901
Interest on borrowings 432 297 113
------------ ------------ ------------
TOTAL INTEREST EXPENSE 9,895 8,147 7,014
------------ ------------ ------------
NET INTEREST INCOME 14,780 12,572 10,042
Provision for loan losses (Note 6) 752 1,006 317
------------ ------------ ------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 14,028 11,566 9,725
------------ ------------ ------------
NONINTEREST INCOME
Fees and service charges 1,322 1,109 887
Insurance commissions 1,125 1,200 1,255
Securities gains, net (21) 53 53
Life insurance proceeds (Note 8) 1,030
Insurance proceeds (Note 22) 796
Other 495 619 540
------------ ------------ ------------
TOTAL NONINTEREST INCOME 3,717 2,981 3,765
------------ ------------ ------------
NONINTEREST EXPENSE
Salaries and employee benefits 6,481 5,960 4,980
Occupancy expense, net 732 618 488
Equipment expense 832 701 579
Operational loss (Note 22) 860
Death benefit expense (Note 8) 379
Legal and professional services expense 594 220 133
FDIC assessments 26 4 209
State business and occupation tax 328 279 251
Other operating expense 1,635 1,230 1,395
------------ ------------ ------------
TOTAL NONINTEREST EXPENSE 10,628 9,872 8,414
------------ ------------ ------------
INCOME BEFORE INCOME TAX EXPENSE 7,117 4,675 5,076
FEDERAL INCOME TAX EXPENSE (Note 9) 2,253 1,513 1,325
------------ ------------ ------------
NET INCOME $ 4,864 $ 3,162 $ 3,751
============ ============ ============
Basic earnings per common share (Notes 1, 3 and 21) $ 1.20 $ 0.78 $ 1.09
Diluted earnings per common share (Notes 1, 3 and 21) $ 1.19 $ 0.78 $ 1.09
Weighted average shares outstanding (Note 13) 4,051,961 4,042,811 3,441,502
The accompanying notes are an integral part of these statements.
35
36
UNITED SECURITY BANCORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
($ in thousands)
NET
UNREALIZED
COMMON STOCK RETAINED GAINS ESOP
SHARES AMOUNT EARNINGS (LOSSES) GUARANTEE TOTAL
--------- --------- --------- --------- --------- ---------
Balances, January 1, 1995 1,604,880 $ 10,202 $ 2,552 $ (548) $ (20) $ 12,186
Initial public offering of common stock
on May 5 and June 4, 1995 1,150,000 8,455 8,455
10% stock dividend on August 23, 1995 274,974 2,189 (2,189) 0
Redemption of fractional shares (9) (9)
ESOP guarantee activity 20 20
Net change in unrealized loss on available-for-sale
securities, net of taxes 460 460
Net income for 1995 3,751 3,751
10% stock split-up on February 5, 1996 (Note 13) 302,456
--------- --------- --------- --------- --------- ---------
Balances, December 31, 1995 3,332,310 20,837 4,114 (88) 0 24,863
Common stock issued for options
exercised (Note 16) 15,720 171 171
Redemption of fractional shares (7) (7)
Net change in unrealized loss on available-for-sale
securities, net of taxes (176) (176)
Net income for 1996 3,162 3,162
10% stock split-up on February 25, 1997 (Note 13) 334,311
--------- --------- --------- --------- --------- ---------
Balances, December 31, 1996 3,682,341 21,001 7,276 (264) 0 28,013
Common stock issued for options
exercised (Note 16) 2,000 20 20
Redemption of fractional shares (7) (7)
Net change in unrealized loss on available-for-sale
securities, net of taxes 199 199
Net income for 1997 4,864 4,864
10% stock dividend on February 10, 1998 (Note 13) 368,434 7,369 (7,369) 0
--------- --------- --------- --------- --------- ---------
Balances, December 31, 1997 4,052,775 $ 28,383 $ 4,771 ($ 65) $ 0 $ 33,089
========= ========= ========= ========= ========= =========
The accompanying notes are an integral part of these statements.
36
37
UNITED SECURITY BANCORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
($ in thousands)
1997 1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 4,864 $ 3,162 $ 3,751
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 752 1,006 317
Depreciation and amortization 516 507 462
Deferred income taxes 372 144 34
Gain on sale of other real estate (35)
(Increase) decrease in assets:
Accrued interest receivable (30) (473) (156)
Life insurance and salary continuation assets (201) 4 (402)
Other assets 406 92 (24)
Increase/(decrease) in liabilities:
Accrued interest payable 102 50 226
Other liabilities (598) 188 1,105
-------- -------- --------
NET CASH FROM OPERATING ACTIVITIES 6,183 4,680 5,278
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available-for-sale:
Maturities 7,686 8,446 3,586
Sales 12,050 7,215 11,745
Purchases (49,326) (8,898) (13,570)
Securities held-to-maturity:
Maturities 1,181 25 10
Purchases (1,665) (266) (340)
Net increase in loans and leases (20,607) (35,731) (21,391)
Purchase of Bank of Pullman (5,297)
Cash received from Wells Fargo branch acquisition 30,356
Purchases of premises and equipment (950) (241) (1,777)
Proceeds from sale of premises and equipment 28
Proceeds from foreclosed real estate sales 688 365 191
-------- -------- --------
NET CASH FROM INVESTING ACTIVITIES (25,884) (29,085) (21,518)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 22,442 33,608 17,162
Federal funds purchased (2,725)
Proceeds from notes payable 8,704 2,529
Principal payments on notes payable (4,938) (38) (485)
Principal payments on capital lease obligations (19) (16) (38)
Proceeds from issuance of capital stock 20 171 8,455
Cash paid for redemption of fractional shares (7) (7) (9)
-------- -------- --------
NET CASH FROM FINANCING ACTIVITIES 26,202 36,247 22,360
-------- -------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 6,501 11,842 6,120
Cash and cash equivalents at January 1 27,423 15,581 9,461
-------- -------- --------
Cash and cash equivalents at December 31 $ 33,924 $ 27,423 $ 15,581
======== ======== ========
Interest paid $ 9,712 $ 8,242 $ 6,788
Income taxes paid $ 1,922 $ 1,633 $ 1,168
Supplemental Schedule of Noncash Investing and Financing Activities
Foreclosed real estate acquired in settlement of loans $ 1,372 $ 210 $ 326
Transfers from securities at cost to securities at fair value $ 111
Purchase of Bank of Pullman
Fair value of assets acquired $ 65,813
Cash paid for the capital stock $(11,955)
--------
Liabilities assumed $ 53,858
========
The accompanying notes are an integral part of these statements.
37
38
UNITED SECURITY BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION:
The consolidated financial statements include the accounts of United Security
Bancorporation (the Corporation) and its wholly-owned subsidiaries, United
Security Bank, USB Leasing, Inc., USB Insurance Agencies, Inc., USB Mortgage
Company, Home Security Bank, and Bank of Pullman after eliminating all
significant intercompany balances and transactions.
NATURE OF BUSINESS:
United Security Bank and Home Security Bank are state chartered commercial banks
under the laws of the State of Washington, and provide banking services
primarily throughout eastern and central Washington. Bank of Pullman is a
banking corporation originally organized under the laws of the state of
Washington. In 1997, Bank of Pullman relocated its charter to the State of
Idaho. The Corporation and its subsidiaries are subject to competition from
other financial institutions, as well as non-financial intermediaries. The
Corporation and its subsidiaries are also subject to the regulations of certain
federal and state agencies and undergo periodic examinations by those regulatory
agencies.
BASIS OF FINANCIAL STATEMENT PRESENTATION:
The financial statements have been prepared in accordance with generally
accepted accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of certain assets and liabilities as of the date of the
statement of financial condition and certain revenues and expenses for the
period and the accompanying notes. Actual results could differ, either
positively or negatively, from those estimates.
Material estimates that are particularly susceptible to significant change in
the near-term relate to the determination of the allowance for loan losses and
the valuation of real estate acquired in connection with foreclosures or in the
satisfaction of loans. In connection with the determination of the allowance for
loan losses and other real estate owned, management obtains independent
appraisals for significant properties.
Management believes that the allowances for loan losses and other real estate
owned are adequate. While management uses currently available information to
recognize losses on loans and other real estate owned, future additions to the
allowances may be necessary based on changes in economic conditions. In
addition, various regulatory agencies, as an integral part of their examination
process, periodically review the Corporation's allowance for loan losses and
other real estate owned. Such agencies may require the Corporation to recognize
additions to the allowances based on their judgments of information available to
them at the time of their examination.
SECURITIES:
Most of the securities are classified available-for-sale. Securities
available-for-sale consist of debt and marketable equity securities. Debt
securities consist primarily of obligations of the U.S. government, state
governments and domestic corporations.
38
39
UNITED SECURITY BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Marketable equity securities consist primarily of mutual funds whose portfolios
consist primarily of U.S. Government backed debt securities. Unrealized holding
gains and losses, net of tax, on available-for-sale securities are excluded from
earnings and reported as a net amount in a separate component of stockholders'
equity until realized. Gains and losses on the sale of available-for-sale
securities are determined using the specific-identification method. Premiums and
discounts are recognized in interest income using the effective interest method
over the period to maturity.
Securities held-to-maturity for which the Bank has the positive intent and
ability to hold to maturity are reported at cost, adjusted for amortization of
premiums and discounts that are recognized in interest income using the
effective interest method over the period to maturity.
LOANS AND ALLOWANCES FOR LOAN LOSSES:
Loans receivable that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are reported at their outstanding
unpaid principal balances reduced by any charge-offs or specific valuation
accounts and net of any deferred fees or costs on originated loans, or
unamortized premiums or discounts on purchased loans. Net deferred fees or costs
are amortized using the interest method over the life of the loan.
The accrual of interest on impaired loans is discontinued when, in management's
opinion, the borrower may be unable to meet payments as they become due. When
interest accrual is discontinued, all unpaid interest is reversed. Interest
income is subsequently recognized only to the extent cash payments are received.
An allowance for probable losses on loans is maintained at a level deemed by
management to be adequate to provide for potential loan losses through charges
to operating expense. The allowance is based upon a continuing review of loans,
which includes consideration of actual net loan loss experience, changes in the
size and character of the loan portfolio, identification of individual problem
situations which may affect the borrower's ability to repay, the estimated value
of any underlying collateral, and evaluation of current economic conditions.
Loan losses are recognized through charges to the allowance.
FORECLOSED REAL ESTATE:
Real estate properties acquired through, or in lieu of, loan foreclosure are to
be sold and are initially recorded at fair value at the date of foreclosure
establishing a new cost basis. After foreclosure, valuations are periodically
performed by management and the real estate is carried at the lower of carrying
amount or fair value less cost to sell. Revenue and expenses from operations and
changes in the valuation allowance were insignificant at December 31, 1997, 1996
and 1995.
39
40
UNITED SECURITY BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PREMISES AND EQUIPMENT:
Land is carried at cost. Premises and equipment are stated at cost less
accumulated depreciation over estimated useful lives, which range from 3 to 31
years. Depreciation expense is computed using primarily the straight-line method
for financial statement purposes. Accelerated depreciation methods are used for
federal income tax purposes. Normal costs of maintenance and repairs are charged
to expense as incurred.
INTANGIBLES:
Intangible assets acquired in the form of goodwill, customer lists and covenants
to not compete, and core deposits purchased are being amortized using the
straight-line method over five to twenty five years.
INCOME TAXES:
The Corporation and its subsidiaries file a consolidated federal income tax
return. The income tax related to the individual entities is generally computed
as if each one had filed a separate tax return and is based on amounts reported
in the statements of income (after exclusion of non-taxable permanent
differences such as interest on state and municipal securities) and include
deferred taxes on temporary differences in the recognition of income and expense
for tax and financial statement purposes. Deferred taxes are computed using the
asset and liability approach as prescribed in Statement No. 109, Accounting for
Income Taxes.
PER SHARE AMOUNTS:
All per share amounts have been calculated on the basis of weighted average
number of shares outstanding during each year. All share and per share amounts
have been adjusted giving retroactive effect to stock split-ups and stock
dividends. The Corporation is following Statement of Financial Accounting (SFAS)
No. 128, Earnings Per Share, requiring the disclosure of basic and diluted
earnings per share.
CASH EQUIVALENTS:
For the purposes of presentation in the consolidated financial statements of
cash flows, cash and cash equivalents include cash on hand, amounts due from
banks, certificates of deposit and bankers acceptances with original maturities
of 90 days or less, federal funds sold and overnight deposits with other banks.
Generally, federal funds are purchased and sold for one-day periods.
STOCK OPTIONS:
Employee stock options are accounted for under Accounting Principle Board
Opinion (APB) No. 25, Accounting for Stock Issued to Employees. Stock options
are granted at exercise prices not less than the fair market value of common
stock on the date of grant. Under APB No. 25, no compensation expense is
recognized pursuant to the Corporation's stock option plans. The Corporation has
disclosed the proforma amounts of net income and earnings per share that would
have been reported had it elected to follow the fair value recognition
provisions of SFAS No. 123 (Note 16).
40
41
UNITED SECURITY BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
OTHER OFF-STATEMENT OF CONDITION INSTRUMENTS:
In the ordinary course of business the Corporation has entered into
off-statement of condition financial instruments consisting of commitments to
extend credit, commitments under credit-card arrangements, commercial letters of
credit, and standby letters of credit. Such financial instruments are recorded
in the financial statements when they are funded or related fees are incurred or
received.
RECLASSIFICATIONS:
Certain reclassifications of December 31, 1996 and 1995 balances have been made
to conform with the December 31, 1997 presentation; there was no impact on net
income, earnings per share or stockholders' equity as previously reported.
NOTE 2. ACQUISITIONS:
FIVE BRANCHES:
On July 18, 1997 the Corporation purchased five branches from a commercial bank.
Home Security Bank purchased three branches located in Mabton, Naches, and Walla
Walla, Washington. United Security Bank purchased two branches located in
Davenport and Moses Lake, Washington. These branches are located in the
identified market place for the Banks. The acquisitions increased deposits by
approximately $35 million, premises and equipment by $1.9 million, and
intangible assets by $2.1 million primarily for the core deposit acquisition
cost.
BANK OF PULLMAN:
Effective October 1, 1997 the Corporation acquired Bank of Pullman for
$11,955,000. Pullman is located in the commercial center for the Palouse, the
winter wheat growing region in Eastern Washington, and home of Washington State
University. It has seven branches, six in Washington and one in Idaho. The
Corporation initially purchased Community Ban Corporation, and its wholly-owned
subsidiary Bank of Pullman. Shortly following the acquisition Community Ban
Corporation was dissolved, and Bank of Pullman became a wholly-owned subsidiary
of United Security Bancorporation. The acquisition was accounted for as a
purchase transaction. Accordingly, the results of operations of Bank of Pullman
are included with the Corporation for periods subsequent to the date of
acquisition. Intangible assets increased by $4.8 million. Goodwill is amortized
using the straight-line method over 25 years. The following unaudited pro forma
combined summary of income gives effect to the combination as if the acquisition
was effective January 1, 1996.
Unaudited Pro Forma Combined Financial Data
($ in thousands, except per share data)
YEAR ENDED DECEMBER 31,
1997 1996
SUMMARY OF INCOME
Net interest income $17,084 $15,549
Provision for loan losses 759 1,006
Noninterest income 3,963 3,360
Noninterest expense 12,364 12,054
------- -------
Net income $ 5,485 $ 4,016
======= =======
Basic earnings per common share $ 1.35 $ 0.99
Diluted earnings per common share $ 1.34 $ 0.99
41
42
UNITED SECURITY BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. ACCOUNTING CHANGES
In 1996, the Corporation formally adopted SFAS No. 121, Accounting for
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of. This
statement addresses situations where information indicates that a company might
be unable to recover, through future operations or sales, the carrying amount of
long-lived assets and certain identifiable intangible assets and goodwill. Under
this statement impairment is measured based on the present value of expected
cash flows from the assets and its eventual disposition.
In 1997, the Corporation formally adopted SFAS No. 125, Accounting for Transfers
and Servicing of Financial Assets and Extinguishment of Liabilities. This
statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities. Those
standards are based on consistent application of a financial-components approach
that focuses on control. Under that approach, after a transfer of financial
assets, an entity recognizes the financial and servicing assets it controls and
the liabilities it has incurred. This statement provides consistent standards
for distinguishing transfers of financial assets that are sales from transfers
that are secured borrowings.
In 1997, the Corporation formally adopted SFAS No. 128, Earnings Per Share,
which established new standards for computing and presenting earnings per share.
This statement requires the dual presentation of basic and diluted earnings per
share. The Corporation has previously disclosed basic earnings per share.
Diluted earnings per share as calculated under SFAS No. 128 is not materially
different from basic earnings per share.
NOTE 4. CASH AND CASH EQUIVALENTS
The Banks are required to maintain cash reserves with the Federal Reserve Bank.
Cash reserve requirements are computed by applying prescribed percentages to
various types of deposits. When the Bank's cash reserves are in excess of that
required, it may lend the excess to other banks on a daily basis. Conversely,
when cash reserves are less than required, the Banks borrow funds on a daily
basis. Such reserve requirements at December 31, 1997 and 1996 were
approximately $1,731,000 and $245,000, respectively. The average amounts of
federal funds sold and overnight interest bearing deposits with other banks for
the years ended December 31, 1997 and 1996, were $17,713,000 and $13,395,000,
respectively. Similarly, averages of federal funds purchased were $11,000 and
$105,000, for 1997 and 1996, respectively. The balance of federal funds
purchased at December 31, 1997 and 1996 was $0.
42
43
UNITED SECURITY BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. SECURITIES
Debt and equity securities have been classified according to management's
intent. The amortized cost of securities and their fair values at December 31
were as follows:
DECEMBER 31, 1997 Gross Gross
($ in thousands) Amortized Unrealized Unrealized Fair Financial
Cost Gains Losses Value Statements
SECURITIES AVAILABLE-FOR-SALE:
U.S. Treasury securities $ 3,775 $ 10 $ 3,785 $ 3,785
Obligations of federal government
agencies 30,269 65 (24) 30,310 30,310
Obligations of states, municipalities
and political subdivisions 5,358 58 (6) 5,410 5,410
Mortgage backed securities 21,379 35 (52) 21,362 21,362
Other securities 4,774 3 (186) 4,591 4,591
-------- -------- -------- -------- --------
65,555 171 (268) 65,458 65,458
SECURITIES HELD-TO-MATURITY:
Obligations of states, municipalities
and political subdivisions 1,312 20 1,332 1,312
-------- -------- -------- -------- --------
Total $ 66,867 $ 191 $ (268) $ 66,790 $ 66,770
======== ======== ======== ======== ========
DECEMBER 31, 1996 Gross Gross
($ in thousands) Amortized Unrealized Unrealized Fair Financial
Cost Gains Losses Value Statements
SECURITIES AVAILABLE-FOR-SALE:
U.S. Treasury securities $ 500 $ 0 $ 0 $ 500 $ 500
Obligations of federal government
agencies 1,800 (1) 1,799 1,799
Obligations of states, municipalities
and political subdivisions 3,250 (151) 3,099 3,099
Mortgage backed securities 6,395 23 (70) 6,348 6,348
Other securities 3,463 (201) 3,262 3,262
-------- -------- -------- -------- --------
15,408 23 (423) 15,008 15,008
SECURITIES HELD-TO-MATURITY:
Obligations of states, municipalities
and political subdivisions 605 10 (4) 611 605
-------- -------- -------- -------- --------
Total $ 16,013 $ 33 ($ 427) $ 15,619 $ 15,613
======== ======== ======== ======== ========
43
44
UNITED SECURITY BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. SECURITIES (CONTINUED)
Securities taxable interest income was $1,696,000, $951,000, and $1,567,000 for
1997, 1996 and 1995, respectively. Securities nontaxable interest income was
$275,000, $208,000 and $13,000 for 1997, 1996, and 1995, respectively. Dividend
income was $94,000, $87,000, and $67,000 for 1997, 1996, and 1995, respectively.
Securities with an amortized cost of $4,122,000 and $3,645,000 at December 31,
1997 and 1996, respectively, were pledged to secure public deposits for purposes
required or permitted by law. Market value of these securities was $4,120,000
and $3,596,000 at December 31, 1997 and 1996, respectively. Included in other
securities are marketable equity securities with amortized costs totaling
$2,450,000 and $2,292,000, and market values of $2,266,000 and $2,091,000 at
December 31, 1997 and 1996, respectively. Also included in other securities is
$1,290,000 in 1997 and $1,167,000 in 1996 of Federal Home Loan Bank (FHLB)
Stock, which can be sold back to the Federal Home Loan Bank at cost, but is
restricted as to purchase and sale based on the level of business activity the
Corporation has with the FHLB.
Gross realized gains on sales of securities available for sale were $24,000,
$54,000, and $93,000 for 1997, 1996, and 1995, respectively. Gross realized
losses were $45,000, $1,000, and $40,000 for 1997, 1996, and 1995, respectively.
The contractual scheduled maturity of securities held-to-maturity and securities
available-for-sale at December 31, 1997 were as follows:
Available-for-Sale Held-to-Maturity
Amortized Fair Amortized Fair
($ in thousands) Cost Value Cost Value
Due in one year or less $ 5,168 $ 4,981 $ 560 $ 561
Due from one year to five years 18,132 18,176 134 138
Due from five to ten years 17,915 17,956 350 360
Due after ten years 2,961 2,983 268 273
Mortgage backed securities 21,379 21,362
------- ------- ------ ------
$65,555 $65,458 $1,312 $1,332
======= ======= ====== ======
Expected maturities will differ from contractual maturities because the issues
of certain debt securities have the right to call or prepay their obligations
without any penalties.
44
45
UNITED SECURITY BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. LOANS AND ALLOWANCE FOR LOAN LOSSES
Loan categories as of December 31, 1997 and 1996 were as follows:
($ in thousands) 1997 1996
Commercial and industrial $ 122,482 $ 97,086
Agricultural 33,787 25,621
Real estate mortgage 42,884 29,318
Real estate construction 8,440 9,954
Installment 12,666 10,527
Lease financing 5,209 3,038
Bank cards and other 4,541 3,384
--------- ---------
Total loans 230,009 178,928
Allowance for loan losses (2,613) (2,034)
Deferred loan fees, net of deferred costs (661) (508)
--------- ---------
Net loans $ 226,735 $ 176,386
========= =========
Variable rate loans were $108,854,000 and $78,683,000 as of December 31, 1997
and 1996, respectively. Remaining loans were fixed rate loans.
Changes in the allowance for loan losses are as follows:
($ in thousands) 1997 1996 1995
Balance, beginning of year $ 2,034 $ 1,391 $ 1,246
Allowance acquired through acquisition 700
Provision charged to operations 752 1,006 317
Loans charged-off (990) (372) (190)
Recoveries 117 9 18
------- ------- -------
Balance, end of year $ 2,613 $ 2,034 $ 1,391
======= ======= =======
45
46
UNITED SECURITY BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. LOANS AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)
A summary of loans by contractual maturity as of December 31, 1997 and 1996 is
as follows:
($ in thousands) 1997 1996
Maturity within one year $ 95,729 $ 66,703
One to five years 70,953 69,390
Over five years 63,327 42,835
-------- --------
$230,009 $178,928
======== ========
Impaired loan information as of December 31, 1997, 1996 and 1995 is as follows:
($ in thousands) 1997 1996 1995
Impaired loans with specific allowance for loan losses $ 287 $ 987 $ 176
Impaired loans without a specific allowance for loan losses 2,614 1,513 1,178
-------- -------- --------
Total impaired loans $ 2,901 $ 2,500 $ 1,354
======== ======== ========
Impaired loans allowance for loan losses $ 118 $ 234 $ 104
Average impaired loans 2,574 1,409 956
Interest income recognized for impaired loans 138 182 31
NOTE 7. PREMISES AND EQUIPMENT
Major classifications of premises and equipment are summarized as of December
31, 1997 and 1996 as follows:
($ in thousands) 1997 1996
Premises, including premises under capital lease,
1997 and 1996 $802 (Note 12) $ 7,066 $ 4,466
Furniture, fixtures, and equipment 4,179 2,583
Leasehold improvements 441 46
-------- --------
11,686 7,095
Less accumulated depreciation, including accumulated
amortization on assets under capital lease,
1997 $457; 1996 $241 (4,738) (3,005)
-------- --------
6,948 4,090
Land 2,251 2,027
-------- --------
Premises and equipment, net $ 9,199 $ 6,117
======== ========
46
47
UNITED SECURITY BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. LIFE INSURANCE AND SALARY CONTINUATION PLAN
United Security Bank and Home Security Bank maintain salary continuation plans
for the benefit of certain of their directors, executive officers and other key
employees. The plan provides for monthly payments to such persons, or their
designated beneficiaries, for a period of ten years following retirement at age
65, or death prior to retirement. Amounts payable to eligible participants are
determined by reference to such person's salary or directors' fee as of the date
of each such person's agreement under the plan.
The plan is generally available to most directors, executive officers and other
key employees of the Banks, and vests according to years of service. Persons
employed by the Banks for at least six continuous years following the effective
date of the plan are deemed vested with respect to 20% of the salary
continuation benefits available to them, and become vested in an additional 20%
of such benefits for each succeeding year of employment thereafter until the
employee becomes fully vested. Eligible persons employed by the Banks for at
least ten continuous years prior to the effective date of the plans are deemed
fully vested. The Banks' obligations under the salary continuation plan are
funded by prepaid policies of universal life insurance covering the lives of the
plan participants. The Banks are the beneficiaries of the life insurance
policies.
Cash surrender values, salary continuance benefit obligations at age 65, and the
recorded liability were as follows as of December 31, 1997 and 1996:
($ in thousands) 1997 1996
Cash surrender value $2,512 $2,311
Present value at age 65 of all participants after full vesting is obtained 1,640 1,653
Present value at age 65 of the current fully vested participants 597 597
Recorded liability for future benefit obligation 302 216
Vested participants are eligible to receive benefits at age 65.
Included in 1995 noninterest income is $1,030,000 of life insurance proceeds
received as part of the salary continuation program following the untimely death
of an executive officer. Also in 1995, noninterest expense includes $379,000 of
death benefit expense, which is payable over a ten year period to the former
officer's beneficiary as part of the salary continuation program. The unpaid
portion of the death benefit expense was $218,000 and $248,000 as of December
31, 1997 and 1996, respectively. These amounts and the recorded liability for
the future benefit obligation disclosed above have been accrued and are included
with other liabilities on the statements of condition.
47
48
UNITED SECURITY BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. FEDERAL INCOME TAXES
The components of federal income tax expense for the years presented are as
follows:
($ in thousands) 1997 1996 1995
Current expense $ 1,881 $ 1,369 $ 1,291
Deferred tax expense 372 144 34
-------- -------- --------
Federal income tax expense $ 2,253 $ 1,513 $ 1,325
======== ======== ========
The effective tax rate differs from the statutory federal tax rate as follows:
($ in thousands) 1997 1996 1995
Federal Income tax at statutory rates $ 2,420 $ 1,590 $ 1,726
Effect of tax-exempt life insurance proceeds (357)
Effect of tax-exempt interest income (99) (76) (13)
Effect of nondeductible expenses and other (68) (1) (31)
-------- -------- --------
Federal income tax expense $ 2,253 $ 1,513 $ 1,325
======== ======== ========
The following are the significant components of deferred tax assets and
liabilities. The net amount is classified with other liabilities in 1997 and
other assets in 1996 in the consolidated financial statements:
($ in thousands) 1997 1996
Deferred tax assets:
Allowance for loan losses $ 612 $ 441
Unrealized losses on available-for-sale securities 33 136
Deferred compensation expense 74 84
Other 88
------ ------
Total deferred tax assets 807 661
------ ------
Deferred tax liabilities:
Deferred loan fees 408 306
Lease financing 242 166
FHLB stock dividend income 137 105
Other 167 79
------ ------
Total deferred tax liabilities 954 656
------ ------
Net deferred tax assets/(liabilities) ($ 147) $ 5
====== ======
The applicable tax (benefit)/expense, net for securities gains and losses was
($7,000), $18,000, and $18,000 for 1997, 1996, and 1995, respectively.
48
49
UNITED SECURITY BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10. TIME DEPOSIT MATURITIES
At December 31, 1997, the scheduled maturities of time deposits were as follows:
($ in thousands)
1998 $100,266
1999 11,394
2000 727
2001 524
2002 223
Later years 55
--------
Total $113,189
========
NOTE 11. NOTES PAYABLE
Notes payable consisted of the following at year-end:
($ in thousands) 1997 1996
Parent Company, prime plus .25%, note due 2001 $2,445 $2,491
Parent Company, at prime, revolving note due 2002 2,943
USB Leasing, prime plus 1.00% notes due 2000 and 2001 766
Bank of Pullman treasury tax note 103
------ ------
$6,257 $2,491
====== ======
At December 31, 1997, the scheduled maturities of notes payable were as follows:
($ in thousands)
1998 $1,038
1999 948
2000 1,366
2001 2,905
------
Total $6,257
======
The Parent Company notes payable consist of borrowings to finance the purchase
of real estate from its Bank subsidiaries and to acquire the Bank of Pullman.
The debt reprices annually. The USB Leasing notes are to fund its commercial
equipment leasing program.
NOTE 12. COMMITMENTS AND CONTINGENT LIABILITIES
In the ordinary course of business, the Corporation has various outstanding
commitments and contingent liabilities that are not reflected in the
accompanying consolidated financial statements. In addition, the Corporation is
a defendant in certain claims and legal actions arising in the ordinary course
of business. In the opinion of management, after consultation with legal
counsel, the ultimate disposition of these matters is not expected to have a
material adverse effect on the consolidated financial condition of the
Corporation.
Lease Commitments:
During 1990, United Security Bank sold the land and buildings occupied by two of
its branches. The Bank has leased the real estate back for a term of 20 years
and
49
50
UNITED SECURITY BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12. COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
continues to operate the branches at these same sites. The leases have been
treated as capital leases (Note 7). The associated gain created by this
transaction, amounting to $358,000, has been deferred and is being amortized
using the straight-line method over the term of the lease. This deferred gain is
included in other liabilities. At December 31, 1997 and 1996, the deferred gain
net of amortization was $242,000 and $261,000, respectively. Amortization of
capital leases is included in depreciation expense.
The minimum annual rental commitments on capital and operating leases at
December 31, 1997, exclusive of taxes and other charges, are summarized as
follows:
($ in thousands)
1998 $ 385
1999 369
2000 308
2001 303
2002 309
Later years 2,866
------
Total minimum payments due 4,540
Less: Amount representing interest (615)
------
Present value of net minimum lease payments $3,925
======
One of the Banks leases a branch facility under a ten year operating lease with
an additional ten year option from a Partnership partially owned by a certain
Director. Total rental expense on operating leases amounted to $80,000, $80,000,
and $32,000 for 1997, 1996, and 1995, respectively (Note 18).
Other commitments and contingent liabilities:
The Corporation is a party to financial instruments with off-statement of
condition risk in the normal course of business to meet the financing needs of
its customers. These financial instruments include commitments to extend credit,
standby letters of credit and financial guarantees. Those instruments involve,
to varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the statement of condition. The contract or notional
amounts of those instruments reflect the extent of involvement the Corporation
has in particular classes of financial instruments.
The Corporation's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit and financial guarantees written is represented by the
contractual notional amount of those instruments. The Corporation uses the same
credit policies in making commitments and conditional obligations as it does for
statement of condition instruments. Unless noted otherwise, the Corporation does
not require collateral or other security to support financial instruments with
credit risk.
50
51
UNITED SECURITY BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12. COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
Contract or
Notional Amount
($ in thousands) 1997 1996
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit $ 41,419 $ 28,239
Standby letters of credit and financial guarantees written 2,246 1,989
Unused commitments on bankcards 7,219 4,648
-------- --------
TOTAL $ 50,884 $ 34,876
======== ========
The Corporation does not anticipate any material losses as a result of the
commitments or guarantees.
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 amount does not necessarily
represent future cash requirements. The Corporation evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained if
deemed necessary by the Corporation upon extension of credit is based on
management's credit evaluation of the counterparty. Collateral held varies but
may include accounts receivable, inventory, property, plant and equipment and
income producing commercial properties.
Standby letters of credit and financial guarantees written are conditional
commitments issued by the Corporation to guarantee the performance of a customer
of a third party. Those guarantees are primarily issued to support public and
private borrowing arrangements, including commercial paper, bond financing and
similar transactions. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to customers.
All the Banks' loans, commitments, and commercial and standby letters of credit
have been granted to customers in the Banks' market area. As such, significant
changes in economic conditions in the State of Washington or within its primary
industries could adversely effect the Banks ability to collect loans.
Substantially all such customers are depositors of the Banks. The concentrations
of credit by type of loan are set forth in Note 6. The Corporation's related
party loans and deposits are disclosed in Note 18. The Banks, as a matter of
policy, do not extend credit to any single borrower in excess of $2,500,000,
$1,000,000 and $1,400,000 for United Security Bank, Home Security Bank and Bank
of Pullman, respectively.
As of December 31, 1997 and 1996, the Banks had unused lines of credit of
$47,040,000 and $34,618,000, respectively. The lines were available for
short-term and long-term borrowings.
51
52
UNITED SECURITY BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13. CAPITAL STOCK
STOCK SPLIT-UPS, AND STOCK DIVIDENDS:
In January, 1998 the Board of Directors
declared a 10% common stock dividend. The Corporation recorded a transfer from
retained earnings to common stock for the market value of the additional shares
issued. In January, 1996 and 1997 the Board of Directors declared 10% common
stock dividends in the form of split-ups. The intent of the stock split-ups was
to obtain a reduction in the unit market price of shares and to obtain wider
distribution and improved marketability of the stock. No transfers from retained
earnings to capital stock were recorded. Per share amounts and weighted average
shares outstanding have been retroactively adjusted to reflect the stock
dividend and split-ups.
NOTE 14. RESTRICTIONS ON DIVIDENDS AND LOANS
The Banks are subject to state banking regulations relating to the payment of
dividends and the amount of loans that it may extend. Dividends may be paid out
of retained earnings provided that it will not bring the total capital below the
original capital contribution and that the amount in surplus is equal to or
greater than twenty-five percent of the common stock of the Bank. At December
31, 1997, the amount of retained earnings of United Security Bank, Home Security
Bank and Bank of Pullman available for dividends, amounted to $4,362,000,
$1,751,000, and $225,000 respectively. At December 31, 1996, the amount of
retained earnings of United Security Bank and Home Security Bank available for
dividends, amounted to $5,762,000 and $426,000, respectively. United Security
Bancorporation has the full amount of retained earnings available for dividends.
Certain loans to any person, including liabilities of a firm or association,
cannot exceed twenty percent of the capital and surplus of the Bank. Loans that
are secured or covered by guarantees, or by commitments or agreements to take
over or to purchase the same, made by any federal reserve bank or by the United
States, including any corporation wholly owned directly or indirectly by the
United States, are not subject to these restrictions. No loans can be made
unless the Bank has more than the minimum available funds required by law.
NOTE 15. EMPLOYEE STOCK OWNERSHIP PLAN (ESOP) AND PROFIT SHARING 401(k) PLAN
United Security Bancorporation sponsors an ESOP. An ESOP plan is a form of
retirement plan whereby the Corporation receives a deduction for contributions
to the Plan and the Plan invests all or a portion of the employer Trust
contributions and Trust earnings in stock of the Corporation. The Plan is
qualified under Section 401(a) of the Internal Revenue Code as a stock bonus
plan. Employees 21 years or older become eligible for participation after 1,000
hours or more of service in a plan year, and benefits fully vest after five
years of service. Contributions to the ESOP plan totaled $206,000, $185,000 and
$146,000 for 1997, 1996 and 1995, respectively and are based on a percentage of
Corporation earnings. Contributions are allocated pro rata based on eligible
annual compensation on December 31. The Corporation has a Profit Sharing 401(k)
Plan. There were no employer contributions in 1997, 1996 and 1995 to the plan.
52
53
UNITED SECURITY BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16. STOCK OPTION PLAN
The Corporation's Board of Directors adopted a stock option plan, known as the
Incentive Stock Option Plan. The plan provides for the issuance of incentive
stock options to key individuals of the Corporation and its subsidiaries,
including directors and executive officers. The Plan was amended to increase the
number of shares that may be issued pursuant to the exercise of options granted
to the lesser of 8% of the common stock then outstanding or 300,000 shares. A
Board of Directors Compensation Committee and an Executive Remuneration
Committee were formed to direct the granting of the options.
In 1995, 83,840 common stock options were granted to identified directors and
executive officers. The options were granted for a five year term from the date
of option and may be exercised anytime prior to that date, subject to conditions
prescribed in the Proxy Statement of the May 24, 1995 Annual Meeting of United
Security Bancorporation. In 1997, 53,035 common stock options were granted for a
five year term with a vesting schedule increasing 20% per year until the options
are fully vested at the end of five years. Options were granted at the average
price between the high and low on the NASDAQ Exchange on the last day of the
preceding month, before the date of option. The granted option price is adjusted
giving retroactive effect for stock dividends and split-ups.
The status of the Plan as of December 31, 1997, 1996 and 1995 is as follows:
1997 1996 1995
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
NUMBER PRICE NUMBER PRICE NUMBER PRICE
Outstanding at beginning of year 57,344 9.82 83,840 10.91
Granted 53,035 13.10 83,840 12.12
Exercised (2,000) 9.82 (15,720) 10.91
Forfeited (10,776) 10.91
-------- -------- --------
Outstanding at year-end 108,379 11.01 57,344 9.82 83,840 10.91
======== ======== ========
Exercisable at year-end 72,072 11.01 57,344 9.82 83,840 10.91
Weighted average fair value of options granted
during the year 8.93 5.02
The following table summarizes information about stock options outstanding at
December 31, 1997:
OPTIONS OUTSTANDING
WEIGHTED OPTIONS EXERCISABLE
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
$8.84 55,344 2.8 years $ 8.84 55,344 $ 8.84
$11.29 - $10.33 30,605 3.6 years $10.83 12,242 $10.83
$16.70 -$16.48 22,430 4.8 years $16.61 4,486 $16.61
53
54
UNITED SECURITY BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16. STOCK OPTION PLAN (CONTINUED)
If the fair value based method of accounting per SFAS No. 123 had been used for
1997, 1996 and 1995 the results and related assumptions would have been as
follows:
($ in thousands, except per share) 1997 1996 1995
Results using fair value based method of accounting:
Net income $4,551 $3,198 $3,473
Basic earnings per common share $ 1.12 $ 0.79 $ 1.01
Diluted earnings per common share $ 1.12 $ 0.79 $ 1.01
Assumptions used to make the fair value calculation:
Risk free interest rate 5.40% 5.60% 5.60%
Expected volatility 28.28% 29.97% 29.97%
Expected cash dividends 0% 0% 0%
Expected stock option life 4.2 years 4.8 years 4.8 years
NOTE 17. PARENT COMPANY ONLY STATEMENTS
The following are the condensed statements of condition, income, and cash flows
for the parent company only, United Security Bancorporation. These statements
are presented using the equity method of accounting; therefore, accounts of the
subsidiaries have not been included. Intercompany transactions and balances have
not been eliminated. The following information should be read in conjunction
with the other notes to the consolidated financial statements.
Condensed Statements of Condition
($ in thousands)
DECEMBER 31,
1997 1996
Cash $ 64 $ 2,470
Investment in and advances to:
Bank subsidiaries 29,766 20,323
Nonbank subsidiaries 3,444 3,322
Premises and equipment 5,185 4,596
Other assets 187 67
-------- --------
TOTAL ASSETS $ 38,646 $ 30,778
======== ========
Notes payable (Note 11) $ 5,388 $ 2,491
Accrued expenses and other liabilities 169 274
Stockholders' equity 33,089 28,013
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 38,646 $ 30,778
======== ========
54
55
UNITED SECURITY BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17. PARENT COMPANY ONLY STATEMENTS (CONTINUED)
Condensed Statements of Income
($ in thousands, except per share)
YEARS ENDED DECEMBER 31,
1997 1996 1995
Income:
Dividends:
Bank subsidiaries $ 702 $ 647 $ 667
Rent income 483 470 8
Other income 150 200 191
-------- -------- --------
1,335 1,317 866
-------- -------- --------
Expenses:
Salaries and benefits 790 701 513
Interest expense 331 216
Depreciation 183 169 12
Other operating expenses 501 277 151
-------- -------- --------
1,805 1,363 676
-------- -------- --------
Income/(loss) before tax benefit and equity in
undistributed net income of subsidiaries (470) (46) 190
Income tax benefit 425 241 155
-------- -------- --------
Income/(loss) before equity in undistributed
net income of subsidiaries (45) 195 345
Equity in undistributed net income (loss) of:
Bank subsidiaries 4,638 2,751 3,446
Nonbank subsidiaries 271 216 (40)
-------- -------- --------
Net income $ 4,864 $ 3,162 $ 3,751
======== ======== ========
55
56
UNITED SECURITY BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17. PARENT COMPANY ONLY STATEMENTS (CONTINUED)
Condensed Statements of Cash Flows
($ in thousands)
YEARS ENDED DECEMBER 31,
1997 1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 4,864 $ 3,162 $ 3,751
Adjustments to reconcile net income to cash provided
by operating activities:
Equity in undistributed net income of subsidiaries (4,909) (2,967) (3,406)
Depreciation 183 169 12
(Increase) decrease in other assets (54) 46 42
Increase (decrease) in other liabilities (173) 196 (150)
-------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES (89) 606 249
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in and advances to subsidiaries (750) (1,109) (3,941)
Return of investment in subsidiaries 8,250
Bank of Pullman acquisition (11,955)
Purchase of investment securities (1,204)
Sale of investment securities 803 401
Purchase of premises and equipment (772) (3,860) (736)
-------- -------- --------
NET CASH (USED) BY INVESTING ACTIVITIES (5,227) (4,166) (5,480)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of capital stock 20 171 8,455
Proceeds from notes payable 7,835 2,529
Principal payments on notes payable (4,938) (38)
Cash paid for redemption of fractional shares (7) (7) (9)
-------- -------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,910 2,655 8,446
-------- -------- --------
NET INCREASE (DECREASE) IN CASH (2,406) (905) 3,215
CASH, beginning of year 2,470 3,375 160
-------- -------- --------
CASH, end of year $ 64 $ 2,470 $ 3,375
======== ======== ========
56
57
UNITED SECURITY BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18. RELATED PARTY TRANSACTIONS
LOANS TO RELATED PARTIES:
Loans to the Corporation's officers and directors are on substantially the same
terms, including interest rates and collateral, as those prevailing at the time
for comparable transactions with unrelated persons and do not involve more than
normal risk of collectibility. The aggregate dollar amount of these loans was
approximately $8,219,000 and $9,525,000 at December 31, 1997 and 1996,
respectively. During 1997 and 1996, $5,094,000 and $8,814,000, respectively of
new or renewed related party loans were made and repayments and adjustments
totaled $6,400,000 and $7,265,000, respectively.
DEPOSITS FROM RELATED PARTIES:
Deposits from related parties totaled $3,200,000 and $5,351,000 at December 31,
1997 and 1996, respectively.
PAYMENTS TO RELATED PARTIES:
Fees paid to a Director for professional services totaled $31,000, $10,000, and
$11,000 for the years ended December 31, 1997, 1996, and 1995, respectively.
Building lease rent of $80,000 in 1997 and 1996 and $32,000 in 1995 was paid to
a Partnership partially owned by a Director.
57
58
UNITED SECURITY BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Financial Accounting Standards Board's Statement of Financial Accounting
Standards No. 107, "Disclosures about Fair Value of Financial Instruments" (SFAS
107), requires disclosure of fair value information about financial instruments,
which it is practicable to estimate fair value. As defined by SFAS 107,
financial instruments include the categories listed below. It does not include
the value of property, plant and equipment and intangible assets such as
customer relationships and core deposit intangibles. Fair values of
off-statement of condition lending commitments are based on fees currently
charged to enter into similar agreements, taking into account the remaining
terms of the agreements and the counterparties' credit standing. The fair value
of the fees at December 31, 1997 and 1996, were insignificant. See Note 12 for
the notional amount of the commitments to extend credit.
The following table summarizes carrying amounts, estimated fair values, and
assumptions used by the Corporation to estimate fair value as of December 31,
1997 and 1996:
ESTIMATED
AS OF DECEMBER 31, 1997: ASSUMPTIONS USED IN CARRYING FAIR
($ in thousands) ESTIMATING FAIR VALUE AMOUNT VALUE
FINANCIAL ASSETS:
Cash and due from banks Equal to carrying value $ 19,058 $ 19,058
Overnight interest bearing deposits
with other banks Equal to carrying value 9,656 9,656
Federal funds sold Equal to carrying value 5,210 5,210
Securities Quoted market prices 66,770 66,790
Loans Fixed-rate loans: Discounted expected future cash flows,
variable-rate loans: equal to carrying value, net of
allowance for loan losses 226,735 231,454
FINANCIAL LIABILITIES:
Deposits Fixed-rate certificates of deposit:
Discounted expected future cash flows
All other deposits: Equal to carrying value 307,586 307,681
Notes payable Variable rate, equal to carrying value 6,257 6,257
AS OF DECEMBER 31, 1996:
FINANCIAL ASSETS:
Cash and due from banks Equal to carrying value $ 10,430 $ 10,430
Overnight interest bearing deposits
with other banks Equal to carrying value 6,223 6,223
Federal funds sold Equal to carrying value 10,770 10,770
Securities Quoted market prices 15,613 15,619
Loans Fixed-rate loans: Discounted expected future cash flows,
variable-rate loans: equal to carrying value, net of
allowance for loan losses 176,386 177,487
FINANCIAL LIABILITIES:
Deposits Fixed-rate certificates of deposit:
Discounted expected future cash flows
All other deposits: Equal to carrying value 197,399 197,443
Note payable Variable rate, equal to carrying value 2,491 2,491
58
59
UNITED SECURITY BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 20. REGULATORY MATTERS
The Banks are subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory actions by regulators that, if undertaken, could have
a direct material effect on the Bank's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Banks must meet specific capital guidelines that involve quantitative
measures of the Bank's assets, liabilities, and certain off-statement of
condition items. The Banks capital amounts and classification are also subject
to qualitative judgments by the regulators about components, risk weightings,
and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Banks to maintain minimum amounts and ratios set forth in the table
below of total and Tier I capital to risk-weighted and average assets.
ACTUAL ADEQUATELY CAPITALIZED WELL CAPITALIZED
($ IN THOUSANDS) AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
AS OF DECEMBER 31, 1997:
Total capital to risk weighted assets:
Consolidated $28,762 11.61% > $19,826 8.00% > $24,783 10.00%
United Security Bank 13,740 10.34% > 10,632 8.00% > 13,290 10.00%
Home Security Bank 7,175 10.16% > 5,650 8.00% > 7,063 10.00%
Bank of Pullman 4,412 10.97% > 3,218 8.00% > 4,023 10.00%
Tier I capital to risk weighted assets:
Consolidated 26,149 10.55% > 9,913 4.00% > 14,870 6.00%
United Security Bank 12,443 9.36% > 5,316 4.00% > 7,974 6.00%
Home Security Bank 6,661 10.86% > 2,825 4.00% > 4,238 6.00%
Bank of Pullman 3,906 9.71% > 1,609 4.00% > 2,414 6.00%
Leverage capital, Tier I capital
to average assets:
Consolidated 26,149 8.08% > 12,949 4.00% > 16,186 5.00%
United Security Bank 12,443 7.01% > 7,100 4.00% > 8,875 5.00%
Home Security Bank 6,661 6.68% > 3,988 4.00% > 4,986 5.00%
Bank of Pullman 3,906 6.63% > 2,358 4.00% > 2,948 5.00%
AS OF DECEMBER 31, 1996:
Total capital to risk weighted assets:
Consolidated $30,129 16.43% > $14,659 8.00% > $18,327 10.00%
United Security Bank 16,576 13.41% > 9,878 8.00% > 12,349 10.00%
Home Security Bank 5,984 10.75% > 4,449 8.00% > 5,562 10.00%
Tier I capital to risk weighted assets:
Consolidated 28,092 15.32% > 7,325 4.00% > 10,992 6.00%
United Security Bank 15,129 12.24% > 4,936 4.00% > 7,407 6.00%
Home Security Bank 5,431 10.02% > 2,223 4.00% > 3,336 6.00%
Leverage capital, Tier I capital to
average assets:
Consolidated 28,092 12.23% > 9,175 4.00% > 11,472 5.00%
United Security Bank 15,129 10.54% > 5,733 4.00% > 7,168 5.00%
Home Security Bank 5,431 7.31% > 2,968 4.00% > 3,711 5.00%
As of December 31, 1997 United Security Bancorporation and subsidiaries, United
Security Bank, Home Security Bank, and Bank of Pullman were considered well
capitalized based on regulatory capital standards.
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UNITED SECURITY BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 21. EARNINGS PER SHARE
The following is a reconciliation of the numerators and denominators for basic
and diluted per-share computations for income from continuing operations for
1997, 1996 and 1995:
($ in thousands, except per share) 1997 1996 1995
Numerator:
Net income $ 4,864 $ 3,162 $ 3,751
Denominator:
Weighted-average number of common shares outstanding 4,051,961 4,042,811 3,441,502
Incremental shares assumed for stock options 28,426 11,148 0
---------- ---------- ----------
Total 4,080,387 4,053,959 3,441,502
========== ========== ==========
Basic earnings per common share $ 1.20 $ 0.78 $ 1.09
Diluted earnings per common share $ 1.19 $ 0.78 $ 1.09
NOTE 22. INSURANCE RECOVERY
In 1997, the Corporation recovered from its insurance provider $796,000 for a
defalcation by a former employee of its bank subsidiary, Home Security Bank. The
insurance proceeds is a full recovery of the reconciled loss except for a
$50,000 insurance policy deductible. In 1996, the Corporation detected and
recorded as an operational loss the estimated loss of $860,000.
QUARTERLY FINANCIAL DATA
CONDENSED CONSOLIDATED STATEMENT OF INCOME-QUARTERLY
($ IN THOUSANDS, EXCEPT PER SHARE)
UNAUDITED
1997, Quarter Ended 1996, Quarter Ended
Dec. 31 Sept. 30 June 30 Mar. 31 Dec. 31 Sept. 30 June 30 Mar. 31
Interest income $ 7,636 $ 6,224 $ 5,493 $ 5,322 $ 5,580 $ 5,337 $ 5,035 $ 4,767
Interest expense 3,187 2,429 2,167 2,112 2,137 2,111 1,977 1,922
-------- -------- -------- -------- -------- -------- -------- --------
Net Interest Income 4,449 3,795 3,326 3,210 3,443 3,226 3,058 2,845
Provision for loan losses 204 227 168 153 603 136 121 146
-------- -------- -------- -------- -------- -------- -------- --------
Net interest income after
provision for loan losses 4,245 3,568 3,158 3,057 2,840 3,090 2,937 2,699
Insurance proceeds 796
Other noninterest income 723 814 752 632 696 804 736 745
Operational loss 860
Other noninterest expense 3,354 2,662 2,388 2,224 2,250 2,283 2,337 2,142
-------- -------- -------- -------- -------- -------- -------- --------
Income before income taxes 1,614 2,516 1,522 1,465 426 1,611 1,336 1,302
Income tax 430 806 541 476 171 483 396 463
-------- -------- -------- -------- -------- -------- -------- --------
Net income $ 1,184 $ 1,710 $ 981 $ 989 $ 255 $ 1,128 $ 940 $ 839
======== ======== ======== ======== ======== ======== ======== ========
Basic earnings per common share $ 0.29 $ 0.42 $ 0.24 $ 0.25 $ 0.06 $ 0.28 $ 0.23 $ 0.21
Diluted earnings per common share $ 0.28 $ 0.42 $ 0.24 $ 0.25 $ 0.06 $ 0.28 $ 0.23 $ 0.21
Average common shares
outstanding (in thousands) 4,053 4,053 4,052 4,051 4,051 4,051 4,038 4,032
60