Back to GetFilings.com
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, 1999
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
Title of each class
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 29, 2000, was approximately $70,641,000. The number of shares of
common stock outstanding at such date was 7,561,218.
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.
1
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR
ENDED DECEMBER 31, 1999
TABLE OF CONTENTS
PART I Page
Item 1. Business..................................................................... 3
Item 2. Properties................................................................... 19
Item 3. Legal Proceedings............................................................ 21
Item 4. Submission of Matters to a Vote of Security Holders.......................... 21
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters..................................................................... 21
Item 6. Selected Financial Data...................................................... 22
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations....................................................... 23
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.......................... 30
Item 11. Executive Compensation...................................................... 30
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................................. 30
Item 13. Certain Relationships and Related Transactions.............................. 30
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............ 30
SIGNATURES................................................................................. 31
2
PART I
Item 1. Business.
United Security Bancorporation
United Security Bancorporation (USBN) is a multi-bank holding company
headquartered in Spokane, Washington. USBN owns five banks, United Security
Bank (Washington) (USB), Home Security Bank (Washington) (HSB), Bank of Pullman
(Idaho) (BOP), Grant National Bank (Washington) (GNB), and AmericanWest Bank
(Washington) (AWB) (collectively, Banks), and also owns USB Insurance
(Washington) (an insurance agency). USBN conducts its banking business through
thirty-seven branches located in communities throughout eastern Washington,
including Spokane and two branches in Moscow, Idaho. USBN 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, 1999, USBN had total consolidated assets of $527.7 million, loans of $422.6
million and deposits of $452.9 million. USBN was founded in 1983 and has been
profitable in every year since its inception. USBN is listed on NASDAQ under
the symbol "USBN".
The Banks
USB was formed in 1974 and serves customers in Spokane and northeastern
Washington from fifteen branches. HSB was formed in 1989 and serves customers
in southeastern Washington from eight branches. BOP was acquired in 1997 and
serves customers in eastern Washington with six branches and two branches in
Moscow, Idaho. GNB was merged in 1998 and serves customers in central eastern
Washington with two branches. AWB was merged in 1999 and serves customers in
southeastern Washington with four branches. 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, mortgage lending, equipment leasing,
various savings 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, 1999, virtually all of the loans originated by the Banks were
within the Banks' principal service areas.
USBN 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 USBN's involvement, its understanding of its service area
and its local decision-making abilities give it a distinct advantage over larger
banking institutions. USBN is well positioned to provide loans to small and
medium sized businesses because of USBN's direct knowledge of its customers'
businesses and the communities it serves. USB, HSB, BOP, GNB and AWB provide
personalized, quality financial service to its customers, which has enabled them
to maintain a stable and relatively low-cost retail deposit base.
3
USB Insurance
USB Insurance began operations 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.
Total revenues of USB Insurance for the year ended December 31, 1999 were
$997,000 as compared to revenues of $1,070,000 in 1998.
Business Strategy
USBN'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. USBN 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
. Providing superior customer service
USBN is completing a Strategic Plan. It is the vision of USBN to be, and to be
recognized as, the premier financial services company in the markets we serve.
It is the mission of USBN to provide all employees with a positive environment
in which to maximize their contribution to our success and attain their career
goals; in order to be responsive to customer needs, and partner in helping
individuals and businesses in our markets achieve their financial goals; in
order to optimize long-term shareholder value and to provide a superior rate of
return on shareholder investment.
Increase Market Share in Existing Markets. Since its formation in 1983, USBN
has focused on commercial banking to small and medium-sized businesses,
professionals and other individuals. Management believes that USBN can continue
to gain market share by targeting products and services to these businesses.
USBN 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. USBN is oriented toward the communities it serves and is
actively involved. USBN believes this community orientation gives a competitive
advantage in attracting and retaining targeted customers.
The consolidation of the banking industry in recent years has resulted in
centralized loan approval in the larger financial institutions with which USBN
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. USBN maintains local loan officers having the authority to approve
large loans.
Expand Markets Served through New Branch Openings and Acquisitions. USBN
intends to expand its presence in eastern and central Washington by opening new
branches and possibly acquiring other financial institutions in markets not
currently served by the Banks. During 1999 USB opened branches in four
supermarket locations in Spokane and in January 2000 a branch in North Spokane.
HSB opened a branch in Richland, Washington in the Columbia Center. BOP built a
new branch in Moscow, Idaho replacing its old branch and also opened a
supermarket branch in Moscow, Idaho.
4
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 USBN or would enhance the 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
USBN through carefully selected acquisitions of other financial institutions or
their branches in central and eastern Washington, eastern Oregon and northern
Idaho.
AmericanWest Bank. On February 1, 1999 USBN completed its merger with
AmericanWest Bank (AWB), Walla Walla, Washington. AWB was previously known as
Bank of the West, but sold the use of its name in 1999 for $1,250,000. AWB has
become the fifth wholly owned Bank subsidiary of USBN. AWB has four branches
located in Southeastern Washington. As of February 1, 1999 AWB had
approximately $103 million in assets, $68 million in loans, $90 million in
deposits and $12 million in equity. 1,749,300 USBN shares were issued to AWB
shareholders for the merger. The pooling-of-interests accounting method is used
for the transaction, which includes restating prior, reported amounts to reflect
the merger with AWB.
Grant National Bank. On July 20, 1998 USBN issued 468,270 common shares in
exchange for all of the outstanding shares of GNB. As of July 20, 1998 GNB had
approximately $32 million in assets, $29 million in deposits, $22 million in
loans, and $3.4 million in total equity. The-pooling of-interests accounting
method is used for the transaction, which includes restating prior, reported
amounts to reflect the merger with GNB.
Bank of Pullman. On October 20, 1997 USBN 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. The acquisition was accounted for as a purchase transaction.
Accordingly, the results of operations of BOP are included with USBN 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.
Five Branches. On July 18, 1997 USBN purchased five branches from a commercial
bank. HSB purchased three branches located in Mabton, Naches, and Walla Walla,
Washington. USB purchased two branches located in Davenport and Moses Lake,
Washington. The acquisitions increased deposits by approximately $35 million,
premises and equipment by $1.9 million, and intangible assets by $2.1 million.
During 1999 USB and GNB consolidated two branches across the street from each
other in Moses Lake, Washington with a GNB Moses Lake branch remaining. Also
HSB and AWB consolidated two downtown Walla Walla branches into one remaining
AWB downtown Walla Walla branch.
5
Provide Superior Customer Service. USBN attributes it success to its efforts to
offer superior, personal service through professional bankers at all of its
branches. USBN distinguishes itself in its markets by emphasizing a culture in
which customers are the highest priority in all aspects. Ongoing employee
training is focused on customer needs, responsiveness and courtesy to customers.
USBN's marketing efforts and operating practices emphasize ties to the local
communities it serves, and its commitment to providing the highest level of
personalized service.
Lending Activities
USBN'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, 1999, USBN had total loans outstanding of $423 million, which equals 93.3%
of the USBN's deposits and 80.1% of its assets. Approximately $180 million of
the loans were originated by USB, $89 million by HSB, $41 million by BOP, $26
million by GNB, and $87 million by AWB. Virtually all of the loans held by USBN
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 five years, have
adjustable rates and are secured by inventory, accounts receivable, equipment or
real estate. USBN also classifies commercial construction loans 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. USBN has not experienced the drought conditions suffered in
portions of the eastern United States during 1999.
Mortgage Loans. Mortgage loans include various types of loans for which USBN
holds real property as collateral. These loans include adjustable and fixed
rate first mortgage loans secured by one to four family residential properties,
second mortgage loans secured by one to four family residential properties, and
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. USBN's policy is to
require that a permanent financing commitment be in place before a construction
loan is made to an individual borrower.
Installment and Other Loans. Installment 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. Bankcard advances are generally due
within 30 days and bear interest at rates that vary from time-to-time.
6
Interest Rates. The interest rates earned 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 34% of the loans in USBN'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.
Lending and Credit Management. USB, HSB, BOP, GNB, and AWB follow loan
policies, which have been approved by each Bank's board of directors and are
overseen by USBN. 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.
Designated officers in accordance with the respective guidelines and
underwriting policies of the Banks approve all loan applications. 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 to $2,500,000 per loan. In addition, five individuals
currently can combine their credit authority, to a maximum of $750,000 for USB,
$500,000 for HSB, $500,000 for BOP, $500,000 for GNB, and $2,500,000 for AWB
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. The Banks, as a matter of policy, do not
extend credit to any single borrower in excess of $3,200,000, $1,350,000,
$900,000, $430,000, and $2,500,000 for USB, HSB, BOP, GNB, and AWB,
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, 1999, 1998 and 1997, the outstanding balance of loan
participations sold outside USBN was $17,053,000, $18,349,000, and $24,091,000,
respectively.
Secondary Mortgage Sales. USBN sells mortgage loans in the secondary market as
a correspondent and a broker. USBN offers a variety of products for refinance
and purchases; and is approved to originate FHA and VA loans. The majority of
loans originated in 1999 were fixed rate single-family loans. Such loans were
sold on a servicing released basis. USB does not retain mortgage-servicing
responsibilities. AWB retains servicing for the mortgage loans it sells, which
was $3.8 million sold in 1999. In 1999, USB sold $20.6 million in mortgage
loans, consisting of $20.1 million of fixed rate residential loans and $.5
million of adjustable rate residential loans.
7
Nonperforming Assets. The following table provides information for USBN's
nonperforming assets.
Year Ended December 31,
($ in thousands) 1999 1998 1997 1996 1995
Nonperforming loans:
Nonaccrual loans $5,875 $1,481 $2,220 $ 472 $ 777
Accrual loans 90 days or more past due 489 664 982 496 671
-------- ------ ------ ------- -------
Total nonperforming loans 6,364 2,145 3,202 968 1,448
Other real estate owned and other repossed assets 1,179 1,245 1,167 205 370
-------- ------ ------ ------- -------
Total nonperforming assets $7,543 $3,390 $4,369 $1,173 $1,818
======== ====== ====== ======= =======
Allowance for loan losses $4,349 $3,819 $3,869 $2,906 $2,154
Ratio of total nonperforming assets to total assets 1.43% 0.66% 0.90% 0.33% 0.61%
Ratio of total nonperforming loans to total loans 1.51% 0.59% 1.01% 0.38% 0.69%
Ratio of allowance for loan losses to total nonperforming loans 68.3% 178.0% 120.8% 300.2% 148.8%
USBN's nonperforming loans consist of nonaccruing loans and accruing loans 90
days or more past due. Accruing loans 90 days or more past due remain on an
accrual basis because they are adequately collateralized and in the process of
collection. For nonaccrual loans no interest is taken into income 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 a loan is placed in
nonaccrual status. The increase in nonperforming and nonaccrual loans in 1999 is
primarily due to loans to one borrower for a combined use project
(condo/retail/office) currently under redevelopment near downtown Spokane.
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, management periodically
performs valuations 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 USBN had a book value of $1,179,000 as of December 31,
1999, consisting primarily of commercial and chattel property.
Analysis of Allowance for Loan Losses
The allowance for loan losses represents management's recognition of the risks
of extending credit and its evaluation of the quality of the loan portfolios of
the Banks. The allowance is maintained at levels considered adequate by
management to provide for anticipated loan losses, and is based on management's
assessment of various factors affecting the loan portfolios, including problem
loans, business conditions and loss experience, an overall evaluation of the
quality of the underlying collateral, and collateral selling costs. The
allowance is increased by provisions charged to operations and is reduced by
loans charged off, net of any recoveries.
The decline in real estate market values in many parts of the country and the
significant losses experienced by many financial institutions in the late
1980's, have resulted in increased regulatory scrutiny of the loan portfolios of
financial institutions such as USBN and the Banks, particularly with respect to
commercial real estate and multi-family residential real estate loans.
Management of USBN periodically reviews the status of loans that are
contractually past due and the net realizable value of the collateral securing
such loans, and establishes reserves through the provision of loan losses where
ultimate collection of such loans is questionable. The provision for loan losses
also reflects a general allocation of unanticipated losses based in part on the
size of USBN's loan portfolio and management's assessment of economic conditions
within USBN's service area. Management believes that the allowance for loan
losses is adequate.
8
The following table sets forth information regarding changes in USBN's allowance
for loan losses as follows:
Year ended December 31
($ in thousands) 1999 1998 1997 1996 1995
Balance of allowance for loan losses at beginning of period $ 3,819 $ 3,869 $ 2,906 $ 2,154 $ 2,000
Charge-offs
Commercial 755 348 526 360 114
Agricultural 213 112 170
Real estate 210 157 272
Installment 199 220 191 87 41
Other 84 126 35 61 65
-------- -------- -------- -------- --------
Total charge-offs 1,248 1,064 1,136 508 390
Recoveries
Commercial 119 167 293 59 16
Agricultural 173 119
Real estate 40 22 37 17
Installment 30 31 14 6 9
Other 12 10 1 4
-------- -------- -------- -------- --------
Total recoveries 201 230 344 239 165
Net charge-offs 1,047 834 792 269 225
Provision for loan losses 1,577 784 1,055 1,021 379
Allowance acquired through acquisition 700
-------- -------- -------- -------- --------
Balance of allowance for loan losses at end of period $ 4,349 $ 3,819 $ 3,869 $ 2,906 $ 2,154
======== ======== ======== ======== ========
Ratio of net charge-offs to average loans 0.27% 0.24% 0.29% 0.11% 0.12%
Average loans and leases outstanding during the period $394,132 $344,470 $276,180 $237,112 $195,623
The following table sets forth the allowance for loan losses by loan category,
based on management's assessment of the risk associated with such categories as
of the dates indicated, and summarizes the percentage of gross loans in each
category to total gross loans.
December 31,
1999 1998 1997 1996 1995
Amount of Amount of Amount of Amount of Amount of
($ in thousands) Allowance % Allowance % Allowance % Allowance % Allowance %
Commercial $2,535 58% $2,040 53% $1,863 48% $1,401 48% $1,003 46%
Agricultural 688 16% 658 17% 691 18% 535 18% 401 19%
Real estate-mortgage 685 16% 662 17% 813 21% 572 20% 413 19%
Real estate-construction 152 3% 149 4% 104 3% 113 4% 119 6%
Installment 218 5% 214 6% 265 7% 200 7% 165 8%
Other 71 2% 96 3% 133 3% 85 3% 53 2%
------------------ ---------------- --------------- -------------- ---------------
Total $4,349 100% $3,819 100% $3,869 100% $2,906 100% $2,154 100%
================== ================ =============== ============== ===============
9
Investments
Management of the investment portfolio is consolidated into a single investment
committee of USBN, which comprises USBN's President and Chief Executive Officer,
Vice President and Chief Financial Officer, and the Presidents of USB, HSB, BOP,
GNB and AWB. The investment committee of USBN is responsible for reviewing and
approving the investment strategies and recommendations of each of the Banks,
consistent with USBN's asset/liability and investment policy.
The following table sets forth the carrying value, by type, of the securities in
USBN's portfolio at December 31, 1999, 1998 and 1997.
December 31,
($ in thousands) 1999 1998 1997
U.S. Treasury and other U.S. Government agencies $27,611 $58,588 $ 80,385
States of the U.S. and political subdivisions 8,870 10,879 14,473
Other securities 16,660 17,883 8,106
----------- ------- --------
Total securities $53,141 $87,350 $102,964
=========== ======= ========
At December 31, 1999, the amortized cost of USBN securities exceeded market
value by $1,529,000. As of December 31, 1998 and 1997, the market value of
USBN's investment portfolio exceeded its amortized cost by $297,000 and $73,000,
respectively. No portion of USBN's investment portfolio is invested in
derivative securities (being securities whose value derives from the value of an
underlying security or securities, or market index of underlying securities'
values), and to USBN's knowledge, no portion of any mutual fund held in USBN's
investment portfolio was invested in derivative securities.
10
The following table sets forth the carrying values, maturities and approximate
average aggregate yields of securities in USBN's investment portfolio by type at
December 31, 1999.
Type and Maturity
($ in thousands) Yield Amount
U.S. Treasury and other U.S. government agencies and corporations:
1 year or less 6.20% $ 3,673
Over 1 through 5 years 6.07% 19,368
Over 5 through 10 years 6.30% 12,784
Over 10 years 6.69% 19
----------
Total 6.16% 35,844
----------
States and political subdivisions
1 year or less 7.73% 1,311
Over 1 through 5 years 7.04% 3,142
Over 5 through 10 years 7.89% 2,512
Over 10 Years 8.40% 1,687
----------
Total 7.66% 8,652
----------
Other securities:
1 year or less 6.60% 5,615
Over 1 through 5 years 6.19% 573
Over 5 through 10 years 6.58% 2,457
Over 10 years
----------
Total 6.56% 8,645
----------
Total investment securities:
1 year or less 6.60% 10,599
Over 1 through 5 years 6.19% 23,083
Over 5 through 10 years 6.58% 17,753
Over 10 years 8.38% 1,706
----------
Total 6.47% $53,141
==========
The yields for tax-exempt securities have been computed on a tax equivalent
basis using an assumed tax rate of 34%. Maturities are estimated using payment
speeds as of December 31, 1999.
11
Deposits
USBN's primary source of funds has historically been customer deposits. The
Banks strive to maintain a high percentage of noninterest-bearing deposits,
which are low cost funds and result in higher interest margins. At December 31,
1999, 1998, and 1997, USBN's ratios of noninterest-bearing deposits to total
deposits were 18.2%, 18.9%, and 19.0%, respectively.
USBN offers a variety of accounts designed to attract both short-term and long-
term deposits from its customers. These accounts include negotiable order of
withdrawal ("NOW") accounts, money market investment accounts, savings accounts,
and certificates of deposit and other time deposits. Interest-bearing accounts
earn interest at rates established by management of the Banks, based on
competitive market factors and management's desire to increase or decrease
certain types or maturities of deposits consistent with the Banks policies. USBN
has not sought brokered deposits and does not intend to do so in the future.
The following table sets forth the average balances for each major category of
deposit and the weighted-average interest rate paid for deposits in 1999, 1998
and 1997.
Year Ended December 31,
1999 1998 1997
Average Interest Average Interest Average Interest
($ in thousands) Balance Rate Balance Rate Balance Rate
Interest-bearing demand deposits $146,190 3.62% $131,555 4.29% $114,477 4.19%
Savings deposits 47,227 2.84% 46,477 3.04% 33,360 3.42%
Time deposits 168,168 4.96% 173,405 5.30% 134,094 5.49%
Noninterest-bearing demand deposits 79,050 78,853 60,765
---------- ---------- -------------
Total $440,635 $430,290 $342,696
========== ========== =============
The following table shows the amounts and maturities of certificates of deposit
that had balances of more than $100,000 at December 31, 1999, 1998 and 1997.
December 31,
($ in thousands) 1999 1998 1997
Certificates of Deposit over $100,000 with remaining maturity:
Less than three months $ 31,705 $ 24,058 $ 20,642
Three months to one year 20,668 26,511 23,935
Over one year 4,057 2,626 2,931
----------- ---------- ---------
Total $ 56,430 $ 53,195 $ 47,508
=========== ========== =========
Competition
While USBN encounters a great deal of competition in its lending activities,
management believes there is less competition in USBN's specialty middle market
and neighborhood bank niche than there was a few years ago. USBN 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. USBN's strategy by
contrast, is to remain a middle market lender, which maintains close long-term
relationships with its customers.
12
USB competes for deposits and banking business in northeastern Washington from
fifteen locations in Chewelah, Colville, Davenport, Kettle Falls, Ione, and
Spokane. The Bank's market area encompasses Stevens, Ferry, Lincoln, Pend
Oreille, and Spokane Counties. 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, 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, two mutual savings banks, several credit unions and
savings and loans.
HSB serves customers in southeastern and southcentral Washington from locations
in Mabton, Naches, Sunnyside, Prosser, Richland and Yakima. The Bank's market
area encompasses Franklin, Yakima 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, Palouse, 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. BOP 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.
GNB serves customers in the Central Eastern Washington in Grant County. GNB has
branches located in Ephrata and Moses Lake, Washington. Its competition comes
from four commercial banks, two savings banks and two credit unions.
AWB serves customers in Southeastern Washington in Walla Walla and Columbia
Counties. AWB has four branches located in Walla Walla, Dayton, Eastgate and
Waitsburg, Washington. AWB competes principally with commercial banks, savings
and loan associations, credit unions, mortgage companies, and other financial
institutions. The major commercial bank competitors are the regional banks that
have a branch or branches within AWB's primary trade areas.
Employees
As of December 31, 1999, USBN had 293 employees, of which 88 were employed by
USB, 51 HSB, 50 by BOP, 18 by GNB, 48 by AWB, 16 by USB Insurance, and 22 by the
Parent Company, United Security Bancorporation. None of USBN's employees are
covered by a collective bargaining agreement. In a January 2000 Strategic
Planning meeting the USBN Board of Directors agreed to the following:
"... provide all employees with a positive environment in which to maximize
their contribution to our success and attain their career goals." United
Security Bancorporation is located at 9506 N. Newport Hwy. Spokane, WA 99218 and
the telephone number is 509-467-6949.
13
Supervision and Regulation
The following generally refers to certain significant statutes and regulations
affecting its subsidiary banking industry. These references are only intended
to provide brief summaries and, therefore, are not complete and are qualified by
the statutes and regulations referenced. Changes in applicable laws or
regulations may have a material effect on the business and prospects of USBN.
The operations of USBN may also be affected by changes in the policies of
banking and other government regulators. USBN cannot accurately predict the
nature or extent of the effects on its business and earnings that fiscal or
monetary policies, or new federal or state laws, may have in the future.
Changes in Banking Laws and Regulations
The laws and regulations that affect banks and bank holding companies have
recently undergone significant changes. On November 12, 1999, the president
signed into law the Financial Services Modernization Act of 1999. Generally,
the act (i) repeals the historical restrictions on preventing banks from
affiliating with securities firms, (ii) provides a uniform framework for the
activities of banks, savings institutions and their holding companies, (iii)
broadens the activities that may be conducted by national banks and banking
subsidiaries of bank holding companies, (iv) provides an enhanced framework for
protecting the privacy of consumers' information and (v) addresses a variety of
other legal and regulatory issues affecting both day-to-day operations and long-
term activities of financial institutions.
Bank holding companies are permitted to engage in a wider variety of financial
activities than permitted under previous law, particularly with respect to
insurance and securities activities. In addition, in a change from previous
law, bank holding companies will be in a position to be owned, controlled or
acquired by any company engaged in financially related activities, so long as
such company meets certain regulatory requirements. The act also permits
national banks (and, in states with wildcard statutes, certain state banks),
either directly or through operating subsidiaries, to engage in certain non-
banking financial activities.
USBN does not believe that the act will negatively affect the operations of it
or its subsidiaries. However, to the extent the legislation permits banks,
securities firms and insurance companies to affiliate, the financial services
industry may experience further consolidation. This consolidation could result
in a growing number of larger financial institutions that offer a wider variety
of financial services than USBN currently offers and that can aggressively
compete in the markets currently served by USBN and its subsidiary banks.
General. As a bank holding company, USBN is subject to the Bank Holding Company
Act of 1956 ("BHCA"), as amended, which places USBN under the supervision of the
Board of Governors of the Federal Reserve. USBN must file annual reports with
the Federal Reserve and must provide it with such additional information as it
may require. In addition, the Federal Reserve periodically examines USBN and
its subsidiary banks.
In general, the BHCA limits bank holding company business to owning or
controlling banks and engaging in other banking-related activities. Bank
holding companies must obtain the FRB's approval before they: (1) acquire direct
or indirect ownership or control of any voting shares of any bank that results
in total ownership or control, directly or indirectly, of more than 5% of the
voting shares of such bank; (2) merge or consolidate with another bank holding
company; or (3) acquire substantially all of the assets of any additional banks.
Subject to certain state laws, such as age and contingency laws, a bank holding
company that is adequately capitalized and adequately managed may acquire the
assets of both in-state and out-of-state banks. Under the Financial
Modernization Act of 1999, a bank holding company may apply to the FRB to become
a financial holding company, and thereby engage (directly or through a
subsidiary) in certain activities deemed financial in nature, such as securities
brokerage and insurance underwriting.
14
Control of Nonbanks. With certain exceptions, the BHCA prohibits bank holding
companies from acquiring direct or indirect ownership or control of voting
shares in any company that is not a bank or a bank holding company unless the
FRB determines that the activities of such company are incidental or closely
related to the business of banking. If a bank holding company is well-
capitalized and meets certain criteria specified by the FRB, it may engage de
novo in certain permissible nonbanking activities without prior FRB approval.
Control Transactions. The Change in Bank Control Act of 1978, as amended,
requires a person (or group of persons acting in concert) acquiring "control" of
a bank holding company to provide the FRB with 60 days' prior written notice of
the proposed acquisition. Following receipt of this notice, the FRB has 60 days
within which to issue a notice disapproving the proposed acquisition, but the
FRB may extend this time period for up to another 30 days. An acquisition may
be completed before expiration of the disapproval period if the FRB issues
written notice of its intent not to disapprove the transaction. In addition,
any "company" must obtain the FRB's approval before acquiring 25% (5% if the
"company" is a bank holding company) or more of the outstanding shares or
otherwise obtaining control over USBN.
Transactions with Affiliates. USBN and its subsidiary banks are deemed
affiliates within the meaning of the Federal Reserve Act, and transactions
between affiliates are subject to certain restrictions. Accordingly, USBN and
its subsidiary banks must comply with Sections 23A and 23B of the Federal
Reserve Act. Generally, Sections 23A and 23B (1) limit the extent to which a
financial institution or its subsidiaries may engage in "covered transactions"
with an affiliate, as defined, to an amount equal to 10% of such institution's
capital and surplus and an aggregate limit on all such transactions with all
affiliates to an amount equal to 20% of such capital and surplus, and (2)
require all transactions with an affiliate, whether or not "covered
transactions," to be on terms substantially the same, or at least as favorable
to the institution or subsidiary, as those provided to a non-affiliate. The
term "covered transaction" includes the making of loans, purchase of assets,
issuance of a guarantee and other similar types of transactions.
Regulation of Management. Federal law (1) sets forth the circumstances under
which officers or directors of a financial institution may be removed by the
institution's federal supervisory agency; (2) places restraints on lending by an
institution to its executive officers, directors, principal stockholders, and
their related interests; and (3) prohibits management personnel from serving as
a director or in other management positions with another financial institution
which has assets exceeding a specified amount or which has an office within a
specified geographic area.
Tie-In Arrangements. USBN and its subsidiary banks cannot engage in certain
tie-in arrangements in connection with any extension of credit, sale or lease of
property or furnishing of services. For example, with certain exceptions,
neither USBN nor its subsidiary banks may condition an extension of credit 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.
The FRB has 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) allow banks greater flexibility to package products
with their affiliates; and (3) establish a safe harbor from the tying
restrictions for certain foreign transactions. These amendments were designed
to enhance competition in banking and nonbanking products and to allow banks and
their affiliates to provide more efficient, lower cost service to their
customers. However, the impact of the amendments on USBN and its subsidiary
banks is unclear at this time.
15
State Law Restrictions. As a Washington business corporation, USBN may be
subject to certain limitations and restrictions as provided under applicable
Washington corporate law. In addition, Washington banking law may restrict
certain activities of its subsidiary banks.
General. With the exception of GNB and BOP, USBN's subsidiary banks are subject
to regulation by the State of Washington and the Federal Deposit Insurance
Corporation (FDIC). As an Idaho banking corporation, Bank of Pullman is subject
to regulation by the State of Idaho and the FDIC. As a national banking
association, Grant National Bank is subject to regulation by the Office of the
Comptroller of the Currency. The federal and state laws that apply to USBN's
subsidiary banks regulate, among other things, the scope of their business,
their investments, their reserves against deposits, the timing of the
availability of deposited funds and the nature and amount of and collateral for
loans. The laws and regulations governing its subsidiary banks generally have
been promulgated to protect depositors and not to protect stockholders of the
subsidiary banks or its holding company.
CRA. The Community Reinvestment Act (the "CRA") requires that, in connection
with examinations of financial institutions within their jurisdiction,
regulators must evaluate the record of the financial institutions in meeting the
credit needs of their local communities, including low and moderate-income
neighborhoods, consistent with the safe and sound operation of those banks.
These factors are also considered in evaluating mergers, acquisitions, and
applications to open a branch or facility.
Insider Credit Transactions. Banks are also subject to certain restrictions
imposed by the Federal Reserve Act on extensions of credit to executive
officers, directors, principal shareholders, or any related interests of such
persons. Extensions of credit (i) must be made on substantially the same terms,
including interest rates and collateral, and follow credit underwriting
procedures that are not less stringent than those prevailing at the time for
comparable transactions with persons not covered above and who are not
employees; and (ii) must not involve more than the normal risk of repayment or
present other unfavorable features. Banks are also subject to certain lending
limits and restrictions on overdrafts to such persons. A violation of these
restrictions may result in the assessment of substantial civil monetary
penalties on the affected bank or any officer, director, employee, agent, or
other person participating in the conduct of the affairs of that bank, the
imposition of a cease and desist order, and other regulatory sanctions.
FDICIA. Under the Federal Deposit Insurance Corporation Improvement Act of 1991
(the "FDICIA"), each federal banking agency has prescribed, by regulation,
noncapital safety and soundness standards for institutions under its authority.
These standards cover internal controls, information systems, and internal audit
systems, loan documentation, credit underwriting, interest rate exposure, asset
growth, compensation, fees and benefits, such other operational and managerial
standards as the agency determines to be appropriate, and standards for asset
quality, earnings and stock valuation. An institution, which fails to meet
these standards, must develop a plan acceptable to the agency, specifying the
steps that the institution will take to meet the standards. Failure to submit
or implement such a plan may subject the institution to regulatory sanctions.
Management of USBN believes that its subsidiary banks meets all such standards,
and therefore, does not believe that these regulatory standards materially
affect USBN's business operations.
16
Interstate Banking and Branching. The Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 (the "Interstate Act") permits nationwide
interstate banking and branching under certain circumstances. This legislation
generally authorizes interstate branching and relaxes federal law restrictions
on interstate banking. Currently, bank holding companies may purchase banks in
any state, and states may not prohibit such purchases. Additionally, banks are
permitted to merge with banks in other states as long as the home state of
neither merging bank has "opted out." The Interstate Act requires regulators to
consult with community organizations before permitting an interstate institution
to close a branch in a low-income area.
Under recent FDIC regulations, banks are prohibited from using their interstate
branches primarily for deposit production. The FDIC has accordingly implemented
a loan-to-deposit ratio screen to ensure compliance with this prohibition.
With regard to interstate bank mergers, Washington has "opted in" to the
Interstate Act and allows in-state banks to merge with out-of-state banks
subject to certain aging requirements. Washington law generally authorizes the
acquisition of an in-state bank by an out-of-state bank through merger with a
Washington financial institution that has been in existence for at least 5 years
prior to the acquisition. With regard to interstate bank branching, out-of-
state banks that do not already operate a branch in Washington may not establish
de novo branches in Washington or establish and operate a branch by acquiring a
branch in Washington.
Deposit Insurance. The deposits of its subsidiary banks are currently insured
to a maximum of $100,000 per depositor through its subsidiary banks Insurance
Fund ("BIF") administered by the FDIC. All insured banks are required to pay
semi-annual deposit insurance premium assessments to the FDIC.
The FDICIA included provisions to reform the Federal Deposit Insurance System,
including the implementation of risk-based deposit insurance premiums. The
FDICIA also permits the FDIC to make special assessments on insured depository
institutions in amounts determined by the FDIC to be necessary to give it
adequate assessment income to repay amounts borrowed from the U.S. Treasury and
other sources, or for any other purpose the FDIC deems necessary. The FDIC has
implemented a risk-based insurance premium system under which banks are assessed
insurance premiums based on how much risk they present to the BIF. Banks with
higher levels of capital and a low degree of supervisory concern are assessed
lower premiums than banks with lower levels of capital or a higher degree of
supervisory concern.
Dividends. The principal source of USBN's cash revenues is dividends received
from its subsidiary banks. The payment of dividends is subject to government
regulation, in that regulatory authorities may prohibit banks and bank holding
companies from paying dividends, which would constitute an unsafe or unsound
banking practice. In addition, a bank may not pay cash dividends if that
payment could reduce the amount of its capital below that necessary to meet
minimum applicable regulatory capital requirements. Other than the laws and
regulations noted above, which apply to all banks and bank holding companies,
neither USBN nor its subsidiary banks are currently subject to any regulatory
restrictions on its dividends.
Capital Adequacy. Federal bank regulatory agencies use capital adequacy
guidelines in the examination and regulation of bank holding companies and
banks. If capital falls below minimum guideline levels, the holding company or
bank may be denied approval to acquire or establish additional banks or nonbank
businesses or to open new facilities.
17
The FDIC and Federal Reserve use risk-based capital guidelines for banks and
bank holding companies. These are designed to make such capital requirements
more sensitive to differences in risk profiles among banks and bank holding
companies, to account for off-balance sheet exposure and to minimize
disincentives for holding liquid assets. Assets and off-balance sheet items are
assigned to broad risk categories, each with appropriate weights. The resulting
capital ratios represent capital as a percentage of total risk-weighted assets
and off-balance sheet items. The guidelines are minimums, and the Federal
Reserve has noted that bank holding companies contemplating significant
expansion programs should not allow expansion to diminish their capital ratios
and should maintain ratios well in excess of the minimum. The current
guidelines require all bank holding companies and federally-regulated banks to
maintain a minimum risk-based total capital ratio equal to 8%, of which at least
4% must be Tier I capital. Tier I capital for bank holding companies includes
common shareholders' equity, certain qualifying perpetual preferred stock and
minority interests in equity accounts of consolidated subsidiaries, less
intangibles except as described above.
The Federal Reserve also employs a leverage ratio, which is Tier I capital as a
percentage of total assets less intangibles, to be used as a supplement to risk-
based guidelines. The principal objective of the leverage ratio is to constrain
the maximum degree to which a bank holding company may leverage its equity
capital base. The Federal Reserve requires a minimum leverage ratio of 3%.
However, for all but the most highly rated bank holding companies and for bank
holding companies seeking to expand, the Federal Reserve expects an additional
cushion of at least 1% to 2%.
FDICIA created a statutory framework of supervisory actions indexed to the
capital level of the individual institution. Under regulations adopted by the
FDIC, an institution is assigned to one of five capital categories depending on
its total risk-based capital ratio, Tier I risk-based capital ratio, and
leverage ratio, together with certain subjective factors. Institutions which
are deemed to be "undercapitalized" depending on the category to which they are
assigned are subject to certain mandatory supervisory corrective actions. USBN
does not believe that these regulations have any material effect on their
operations.
Effects of Government Monetary Policy. The earnings and growth of USBN are
affected not only by general economic conditions, but also by the fiscal and
monetary policies of the federal government, particularly the Federal Reserve.
The Federal Reserve can and does implement national monetary policy for such
purposes as curbing inflation and combating recession, but its open market
operations in U.S. government securities, control of the discount rate
applicable to borrowings from the Federal Reserve, and establishment of reserve
requirements against certain deposits, influence the growth of bank loans,
investments and deposits, and also affect interest rates charged on loans or
paid on deposits. The nature and impact of future changes in monetary policies
and their impact on USBN and its subsidiary banks cannot be predicted with
certainty.
Securities Registration and Reporting. The common stock of USBN 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. In addition, the securities issued by USBN are
subject to the registration requirements of the 1933 Act and applicable state
securities laws unless exemptions are available. The periodic reports, proxy
statements, and other information filed by USBN with the SEC are available at
the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C.
20549. The public may obtain information on the operation of the Public
Reference Room by calling the SEC at 1-800-SEC-0330. USBN is an electronic
filer with the SEC and the USBN filings may be obtained at the SEC website
(http://www.sec.gov).
18
Item 2. Properties.
At December 31, 1999, USBN owned or leased facilities in thirty-eight locations
including thirty-six in eastern Washington and two 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.
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.
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 USBN. Additional administrative space of 1,850 square feet is also
leased with an expiration date of 2000.
USBN 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.
USBN 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.
Interior renovation was completed in 1999.
USBN owns the USB Northpointe branch located at North 9506 Newport Highway and
leases it to USB for a branch, square footage of approximately 10,000. The
remainder of the space or about 1,400 square feet is used by USBN 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 USBN.
USBN 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. A drive-up facility and
renovation was completed in 1999.
In 1997 USB constructed the Liberty Lake branch located at 1221 N. Liberty Lake
Road. The building has approximately 1,900 square feet. The land is leased
through June 2017.
In 1997 USB constructed the Qualchan branch located at 4233 S. Cheney Spokane
Road. The building has approximately 1,900 square feet. The land is leased
through June 2017.
USB opened four grocery store branches in Spokane in 1999. Each location was
renovated and has approximately 800 square feet.
USBN leased a 9,000 square feet building at 1611 Geiger Blvd., Spokane for a
Computer/Processing Center in 1999. The space is in the process of being
renovated.
19
USBN owns the HSB branch located in Sunnyside at 322 S. 6th Street. The
building was originally purchased in 1992 and has approximately 5,120 square
feet. This is the headquarters location for HSB. A drive-up facility and a
renovation were completed in 1999.
USBN owns the HSB branch located in Prosser at 1115 Meade Avenue. The building
was originally purchased in 1989 and has approximately 3,700 square feet.
USBN 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 1998 HSB opened a second Yakima branch at 4802 Tieton Drive. The building is
owned by HSB and has approximately 2,600 square feet.
HSB opened a branch at the Columbia Center in Richland, Washington in 1999. The
building is leased and has approximately 2,700 square feet.
BOP was acquired by USBN 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.
BOP has a second Pullman location at 1020 N. Grand. It has approximately 400
square feet of building space. The building was built in 1961. This is a
leased facility.
In 1998 BOP opened a branch in Pullman located at 1300 South Grand. It has 600
square feet.
BOP built a new branch at 605 S. Jackson in Moscow, Idaho, with approximately
3,000 square feet. It is on leased land and was opened in 1999.
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.
BOP opened a grocery store branch in Moscow, Idaho in 1999. It has
approximately 800 square feet.
GNB has two facilities. Its main branch and administrative offices is located
at 261 Basin SW in Ephrata, Washington. It has approximately 6,000 square feet.
It was built in 1989 and is leased from an association comprised of 6 of GNB's
Directors. The other branch is located at 322 S. Division Street, Moses Lake,
Washington. It was built by GNB in 1996 and has approximately 2,400 square
feet. In 1999 GNB acquired the loans and deposits of the USB Moses Lake branch
combining the two branches in the GNB location.
20
AWB has four facilities. The downtown Walla Walla branch occupies approximately
24,000 square feet. It houses the headquarters of AWB. It is a historic site
built in 1905. AWB purchased the building in 1981. AWB built its Dayton,
Washington branch in 1995, which contains approximately 2,400 square feet. The
Eastgate branch building was built in 1977 and updated in 1993 has approximately
4,000 square feet. AWB purchased the Waitsburg branch building in 1988. It
contains approximately 2,800 square feet.
Item 3. Legal Proceedings.
Periodically and in the ordinary course of business, various claims and lawsuits
are brought against USBN 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 USBN 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 USBN.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of USBN's shareholders during the fourth
quarter of 1999.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Market Information. The Common Stock is quoted on the Nasdaq National Market
System (NASDAQ) under the symbol "USBN". The following table sets out the high
and low bid prices per share for the Common Stock for 1999 and 1998 as reported
by NASDAQ.
1999 1998
High Low High Low
First Quarter $14.09 $10.00 $18.95 $14.18
Second Quarter $12.73 $10.68 $19.01 $16.53
Third Quarter $15.00 $11.82 $17.87 $13.23
Fourth Quarter $14.09 $ 9.77 $15.29 $11.57
Per share amounts have been adjusted giving retroactive effect to stock
dividends.
Holders. The number of holders of common stock of record on February 29, 2000
was approximately 3,000.
Dividends. USBN has declared and paid the following dividends subsequent to
January 1, 1997: On February 25, 1997 USBN issued a 10% stock split-up. On
February 10, 1998 and February 26, 1999, and February 24, 2000, USBN paid 10%
stock dividends. GNB paid cash dividends of $57,000 and $49,000 in 1998 and
1997, respectively.
USBN adopted a dividend policy, which is periodically reviewed and revised by
the Board of Directors. Payment of dividends, including stock dividends, is
subject to regulatory limitations. Under federal banking law, the payment of
dividends by USBN and the Banks is subject to capital adequacy requirements
established by the Federal Reserve Board and the FDIC. Under Washington general
corporate law as it applies to USBN, no cash dividend may be declared or paid,
if, after giving effect to the dividend, USBN is insolvent or the liabilities
exceed the assets. Payment of dividends, including stock dividends, on the
Common Stock is also affected by statutory limitations, which restrict the
ability of the Banks to pay upstream dividends to USBN. Under Washington banking
law as it applies to the Banks, no dividend may be declared or paid in an amount
greater than net profits then available, and after a portion of such net profits
have been added to the surplus funds of the Banks.
21
Item 6. Selected Financial Data.
The following table sets forth certain selected consolidated financial data of
USBN at and for the years ended December 31:
($ in thousands, except per share amounts) 1999 1998 1997 1996 1995
Net interest income $ 28,474 $ 26,475 $ 21,696 $ 18,947 $ 15,409
Provision for loan losses 1,577 784 1,055 1,021 379
Noninterest income 5,912 4,977 4,833 3,986 4,622
Noninterest expense 19,209 19,764 14,905 13,956 12,151
Income before income tax expense 13,600 10,904 10,569 7,956 7,501
Income tax expense 3,888 3,521 3,346 2,539 2,004
Net income 9,712 7,383 7,223 5,417 5,497
Basic earnings per common share $ 1.27 $ 0.98 $ 0.96 $ 0.72 $ 0.82
Diluted earnings per common share $ 1.26 $ 0.95 $ 0.94 $ 0.71 $ 0.81
Return on average assets 1.90% 1.49% 1.78% 1.65% 1.98%
Return on average equity 16.58% 14.66% 16.30% 14.65% 18.78%
Assets $ 527,726 $ 513,144 $ 486,778 $ 353,256 $ 296,396
Securities 53,141 87,350 102,964 47,519 49,758
Loans:
Commercial and industrial 246,796 199,798 153,344 123,814 98,717
Agricultural 67,025 57,511 56,899 47,331 39,422
Real estate mortgage 66,690 63,127 66,959 50,602 40,598
Real estate construction 14,781 14,170 8,588 9,954 11,677
Installment 21,190 20,364 21,843 17,698 16,204
Other loans 6,939 9,149 10,962 7,465 5,208
Total loans 423,421 364,119 318,595 256,864 211,826
Allowance for loan loss to loans percentage 1.03% 1.05% 1.22% 1.13% 1.02%
Deposits 452,899 452,913 425,094 305,368 256,699
Borrowings 8,198 1,348 11,284 3,242 767
Stockholders' equity 62,922 54,211 46,174 38,485 35,775
Equity to assets ratio 11.92% 10.56% 9.49% 10.89% 12.07%
Basic weighted average shares 7,630,919 7,570,706 7,538,401 7,514,784 6,739,790
See Results of Operations for a description of the nonrecurring items in 1999,
1998 and 1997. In addition 1996 net earnings were reduced by an operational loss
of $568,000 or $.08 per share. This expense was recovered in 1997 except for a
$50,000 insurance policy deductible. In 1995 net earnings were improved
$780,000 or $.12 basic earnings per share by net life insurance proceeds from
the death of a key employee.
22
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Overview
USBN'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, 1999, 1998, and 1997, USBN's
average net interest margins were 6.1%, 5.9%, and 6.0%, respectively. Prior
reported amounts have been restated to reflect the merger with AWB using the
pooling-of-interests accounting method.
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, 1999, 1998, and 1997, the provision for loan
losses was $1,577,000, $784,000, and $1,055,000, respectively. Net charge-offs
during the year ended December 31, 1999 was $1,047,000 as compared to $834,000
and $792,000 during 1998 and 1997, respectively.
Net Interest Income
The following table sets forth information with regard to average balances of
assets and liabilities, and interest income from interest-earning assets and
interest expense on interest-bearing liabilities, resultant yields or costs, net
interest income, net interest spread (the difference between the average yield
on interest-earning assets and the average cost of interest-bearing
liabilities), and the net interest margin.
Year Ended December 31,
1999 1998 1997
Average Average Average
($ in thousands) Balance Interest % Balance Interest % Balance Interest %
Assets
Loans $394,132 $39,728 10.08% $344,470 $37,393 10.86% $276,180 $30,253 10.95%
Taxable securities 52,505 3,237 6.17% 75,270 4,689 6.23% 52,404 3,435 6.55%
Nontaxable securities 10,421 725 6.96% 12,714 973 7.65% 13,876 1,033 7.44%
Federal funds sold and overnight
time deposits 7,775 420 5.40% 18,470 958 5.19% 23,537 1,288 5.47%
-------------------------- -------------------------- -------------------------
Total interest earning assets 464,833 $44,110 9.49% 450,924 $44,013 9.76% 365,997 $36,009 9.84%
============== ============== ==============
Noninterest earning assets 46,007 44,839 31,715
--------- --------- --------
Total assets $510,840 $495,763 $397,712
========= ========= ========
Liabilities
Interest-bearing demand deposits $146,190 $ 5,286 3.62% $131,555 $ 5,639 4.29% $114,477 $ 4,801 4.19%
Savings deposits 47,227 1,342 2.84% 46,477 1,412 3.04% 33,360 1,140 3.42%
Time deposits 168,168 8,335 4.96% 173,405 9,198 5.30% 134,094 7,365 5.49%
-------------------------------------------------------- -------------------------
Total interest-bearing deposits 361,585 14,963 4.14% 351,437 16,249 4.62% 281,931 13,306 4.72%
Short-term borrowings 6,503 401 6.17% 4,823 282 5.85% 3,750 224 5.97%
Long-term borrowings 701 70 9.99% 5,361 676 12.61% 4,796 432 9.01%
-------------------------------------------------------- -------------------------
Total interest-bearing liabilities 368,789 $15,434 4.19% 361,621 $17,207 4.76% 290,477 $13,962 4.81%
============== ============== ==============
Noninterest bearing demand deposits 79,050 78,853 60,765
Other noninterest bearing liabilities 4,407 4,919 4,432
--------- --------- --------
Total liabilities 452,246 445,393 355,674
Stockholders' Equity 58,594 50,370 42,038
--------- --------- --------
Total liabilities and stockholders'
equity $510,840 $495,763 $397,712
========= ========= ========
Net interest income $28,676 5.30% $26,806 5.00% $22,047 5.03%
============== ============== ==============
Net interest margin to average
earning assets 6.17% 5.94% 6.02%
==== ==== ====
Nonaccrual loans are included with loan balances. In the above table tax-exempt
securities income has been presented using a tax equivalent basis and an assumed
tax rate of 34%.
23
The following table illustrates the changes in USBN's net interest income due to
changes in volumes and interest rates.
1999 vs 1998 1998 vs 1997
Increase (decrease) in net interest income due to changes in
($ in thousands) Volume Rate Total Volume Rate Total
INTEREST EARNING ASSETS
Loans $ 5,391 ($3,056) $ 2,335 $7,481 ($341) $7,140
Securities (1,613) (87) (1,700) 1,463 (269) 1,194
Federal funds sold and overnight time deposits (555) 17 (538) (277) (53) (330)
--------------------------------- ---------------------------
Total interest earning assets 3,223 (3,126) 97 8,667 (663) 8,004
--------------------------------- ---------------------------
INTEREST BEARING LIABILITIES
Interest-bearing demand deposits 627 (980) (353) 716 122 838
Savings deposits 23 (93) (70) 448 (176) 272
Time deposits (278) (585) (863) 2,159 (326) 1,833
--------------------------------- ---------------------------
Total interest bearing deposits 372 (1,658) (1,286) 3,323 (380) 2,943
Short-term debt 98 21 119 64 (6) 58
Long-term debt (588) (18) (606) 51 193 244
--------------------------------- ---------------------------
Total interest bearing liabilities (118) (1,655) (1,773) 3,438 (193) 3,245
--------------------------------- ---------------------------
Total increase (decrease) in net interest income $ 3,341 ($1,471) $ 1,870 $5,229 ($470) $4,759
================================= ===========================
The change in interest income and interest expense due to changes in both volume
and rate, which cannot be segregated, has been allocated proportionately to the
change due to volume and the change due to rate.
The following table presents the aggregate maturities of loans in each major
category of the USBNs' loan portfolio at December 31, 1999. Actual maturities
may differ from the contractual maturities shown below as a result of renewals
and prepayments.
Aggregate Maturities at December 31, 1999
Less than One to Over five
($ in thousands) one year five years years Total
Commercial, financial and agricultural $100,726 $110,768 $102,327 $313,821
Real estate-mortgage 8,230 38,542 19,918 66,690
Real estate-construction 12,340 2,441 14,781
Installment 5,980 12,464 2,746 21,190
Other 3,876 3,063 6,939
--------------------------------------------------------
Total $131,152 $167,278 $124,991 $423,421
========================================================
24
Results of Operations
Years Ended December 31, 1999, 1998 and 1997
- --------------------------------------------
United Security Bancorporation and Subsidiaries
Performance Summary
% Change
($ in thousands, except per share) 1999 1998 1997 1999 1998
Interest income $ 43,908 $ 43,682 $ 35,658 0.52% 22.50%
Interest expense 15,434 17,207 13,962 -10.30% 23.24%
------------------------------- -----------------
Net interest income 28,474 26,475 21,696 7.55% 22.03%
Provision for loan losses 1,577 784 1,055 101.15% -25.69%
------------------------------- -----------------
Net interest income after provision for loan losses 26,897 25,691 20,641 4.69% 24.47%
Noninterest income 5,912 4,977 4,833 18.79% 2.98%
Noninterest expense 19,209 19,764 14,905 -2.81% 32.60%
------------------------------- -----------------
Income before income taxes 13,600 10,904 10,569 24.72% 3.17%
Income taxes 3,888 3,521 3,346 10.42% 5.23%
------------------------------- -----------------
Net income $ 9,712 $ 7,383 $ 7,223 31.55% 2.22%
=============================== =================
Basic earnings per common share $ 1.27 $ 0.98 $ 0.96 29.59% 2.08%
Diluted earnings per common share $ 1.26 $ 0.95 $ 0.94 32.63% 1.06%
USBN's net income was $9,712,000 in 1999, $7,383,000 in 1998, and $7,223,000 in
1997. Basic earnings per share were $1.27, $.98, and $.96 for 1999, 1998, and
1997, respectively. Diluted earnings per share were $1.26, $.95, and $.94 in
1999, 1998, and 1997, respectively.
USBN completed its merger with AmericanWest Bank (AWB) effective February 1,
1999. At the time of the merger AWB was known as Bank of the West, but in June
1999 it received $1,250,000 for the sale of its name. The income from the sale
of the name added $825,000 to net income or $.11 per share. As of February 1,
1999 AWB had approximately $103 million in total assets, $90 million in
deposits, $68 million in loans, and $12 million in total equity. 1,749,300 USBN
shares were issued to AWB shareholders for the merger. The pooling-of-interests
accounting method is being used for the transaction, which includes restating
prior, reported amounts to reflect the merger with AWB.
USBN completed its merger with Grant National Bank (GNB) effective July 20,
1998, and issued 468,270 common shares in exchange for all of the outstanding
shares of GNB. As of July 20, 1998 GNB had approximately $32 million in assets,
$29 million in deposits, $22 million in loans, and $3.4 million in total equity.
The pooling-of-interests accounting method is being used for the transaction,
which includes restating prior, reported amounts to reflect the merger with GNB.
For 1998 nonrecurring items netted out to an insignificant impact on net
earnings.
In 1997, USBN 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 $.07 per share.
USBN completed an acquisition of the Bank of Pullman (BOP) in October 1997 for
$11,955,000. The acquisition was accounted for as a purchase transaction.
Accordingly, the results of operations of BOP increased net income of USBN
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.
Return on average assets was 1.90%, 1.49%, and 1.78% for 1999, 1998, and 1997,
respectively. Return on average equity was 16.58%, 14.66%, and 16.30% for 1999,
1998, and 1997, respectively. Without the nonrecurring items described above,
return on assets would have been 1.74%, 1.49%, and 1.68% for 1999, 1998, and
1997, respectively. Return on equity would have been 15.17%, 14.66%, and 17.18%
for 1999, 1998, and 1997, respectively.
25
Net Interest Income. Net interest income increased 8% to $28,474,000 in 1999
compared to 1998. The increase in 1998 was 22% to $26,475,000 over 1997 results.
The net interest income improvements were primarily the result of loan volume
increases in 1999 and 1998. USBN's net interest margin to average earning assets
was 6.17%, 5.94%, and 6.02% in 1999, 1998, and 1997, respectively. As market
interest rates declined in late 1998 and early 1999 the yield on earning assets
declined 3% in 1999 to 9.49% from 9.76% in 1998. This was more than offset by
the decline in interest-bearing liabilities cost from 4.76% to 4.19%. The result
was a net interest margin improvement from 5.94% to 6.17% in 1999. The USBN
improvement in net interest income due to loan volume was $5,391,000 and
$7,481,000 for 1999 and 1998, respectively. The decline in the loan net interest
income due to interest rate decreases was $3,056,000 and $341,000 in 1999 and
1998, respectively.
Noninterest Income. Noninterest income, which consists of fees and service
charges, insurance commissions, securities gains and losses, and other income,
increased 19% in 1999 to $5,912,000 from $4,977,000 in 1998 and from $4,833,000
in 1997. A gain on the sale of the Bank of the West name was included in 1999
income. Fees and service charges for banking services increased by 6% in 1999
reaching $2,482,000. Insurance commissions and gains on securities sales were
down in 1999. Other income was lower in 1999 because of nonrecurring income in
1998 from the sale of commercial property and merchant credit card
relationships, which was offset by a loss on the sale of a branch building.
Insurance proceeds of $796,000 were included in 1997 noninterest income for the
recovery of an employee theft.
Noninterest Expense. Noninterest expense declined by 3% in 1999 to $19,209,000
after increasing by 33% in 1998 to $19,764,000. The 1999 decline was significant
because USBN opened 6 new branches in 1999, while consolidating and closing 2
branches. The number of employees increased 4% in 1999 to 293, while salaries
and benefits expense were nearly identical in 1999 and 1998. Occupancy expense
increased with the new locations. Noninterest expense was higher in 1998
primarily due to GNB and AWB merger expense.
Income Tax Expense. Income tax expense was reduced in 1999 due to a $400,000 tax
credit for the renovation of a historical property.
Forward Looking Statements. The following discussions contain "forward looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 (PLSRA). USBN desires to take advantage of the "safe harbor" provisions
of the PLSRA as they apply to forward looking statements. USBN's ability to
predict the results of future plans is inherently uncertain, and is subject to
factors that may cause actual results to differ materially from those projected.
Readers are cautioned not to place undue reliance on these forward-looking
statements.
Impact of the Year 2000 Issue. The rollover into the Year 2000 occurred without
any disruption to USBN and it does not anticipate any problems during 2000.
However, USBN continues to be vigilant monitoring its loan portfolio and
customer base for potential emerging problems.
26
Liquidity and Capital Resources
Management believes that USBN's cash flow will be sufficient to support its
existing operations for the foreseeable future. If USBN needs additional
liquidity, it would be required to borrow or issue additional capital stock.
USBN'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. At December 31, 1999 USBN had approximately $66 million of
unused lines of credit available for liquidity purposes.
USBN's total stockholders' equity increased to $62,922,000 at December 31, 1999,
from $54,211,000 at December 31, 1998 and $46,174,000 at December 31, 1997. At
December 31, 1999, stockholders' equity was 11.92% of total assets, compared to
10.56% at December 31, 1998. At December 31, 1999, USBN held cash and cash-
equivalent assets of $26.0 million. At December 31, 1999, virtually all of
USBN's securities ($53 million) were available-for-sale.
The capital levels of USBN and each of the Banks exceed applicable regulatory
well-capitalized guidelines at December 31, 1999.
Effects of Inflation and Changing Prices. The primary impact of inflation on
USBN'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 1999, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards (SFAS) No. 137 entitled
Accounting for Derivative Instruments and Hedging Activities-Deferral of the
Effective Date of SFAS Statement No. 133. The statement amends SFAS No. 133 to
defer its effective date to all fiscal quarters of all fiscal years beginning
after June 15, 2000. Management does not believe the adoption of this statement
will have a material effect on USBN's financial condition or results of
operation.
27
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Market Risk
Management considers interest rate risk to be a market risk that could have a
significant effect on the financial condition and results of operations of USBN.
USBN does not use derivatives including forward and futures contracts, options,
and swaps to manage its market and interest rate risks. All of USBN's
transactions are denominated in U.S. dollars. Approximately 34% of USBN's loan
portfolio has interest rates, which float with the lending Bank's reference
interest rate. Fixed rate loans are generally made with a term of five years or
less. General economic conditions, regulatory policy and competition in the
marketplace affect interest income and cost of funds. 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 USBN'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 USBN. 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.
The following table presents estimated maturity or pricing information
indicating USBN's exposure to interest rate changes as of December 31, 1999. 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 payment rates of 35%, 25%, 15%, 15%,
and 10% for the following five years, respectively. Securities principal
payments are based on payment speeds as of December 31, 1999. The expected
maturities for financial liabilities with no stated maturity reflect historical
and estimated future roll-off rates. The anticipated annual roll-off rates for
noninterest bearing deposits, interest-bearing demand deposits and savings
deposits are 15%. The interest rates disclosed are based on rates from 1999
results. Fair values are based on the calculations used in accordance with
generally accepted accounting principles as disclosed in the financial
statements.
28
Year ended December 31, 1999 Expected maturity Fair
($ in thousands) 2000 2001 2002 2003 2004 Thereafter Total Value
Financial Assets
Cash and due from banks $ 21,387 $ 21,387 $ 21,387
Time deposits with other banks 4,632 4,632 4,632
Weighted average interest rate 5.40%
Securities 10,599 12,850 5,750 2,483 2,000 19,459 53,141 53,133
Weighted average interest rate 6.30%
Fixed rate loans 97,317 69,512 41,707 41,704 27,808 278,048 269,519
Weighted average interest rate 10.25%
Variable rate loans 50,579 36,128 21,677 21,677 14,450 144,511 144,511
Weighted average interest rate 9.76%
Financial Liabilities
Noninterest bearing deposits 12,345 12,345 12,345 12,345 12,345 20,574 82,299 82,299
Interest-bearing demand deposits 22,553 22,553 22,553 22,553 22,553 37,590 150,355 150,355
Weighted average interest rate 3.62%
Savings deposits 6,924 6,924 6,924 6,924 6,924 11,538 46,158 46,158
Weighted average interest rate 2.84%
Time deposits 152,567 18,747 1,200 1,035 493 45 174,087 172,811
Weighted average interest rate 4.96%
Short-term borrowings 7,508 7,508 7,508
6.17%
Net of financial assets and liabilities (17,383) 57,921 26,112 23,007 1,943 (50,288)
Cumulative net amount (17,383) 40,538 66,650 89,657 91,600 41,312
Percentage of total assets -3.29% 7.68% 12.63% 16.99% 17.36% 7.83%
The above table presents information about USBN's interest sensitivity; it does
not predict future earnings. USBN uses budgeting and earnings projections to
forecast earnings under different interest rate projections. It requires
assumptions about the projection of loan and securities prepayments, loan
originations and liability funding sources, which may be inaccurate. Weighted
average interest rates by expected maturity are not available.
Item 8. Financial Statements and Supplementary Data.
The consolidated financial statements and supplementary data of USBN and its
subsidiaries for the years ended December 31, 1999, 1998, and 1997, which have
been audited except as indicated by Moss Adams LLP, are included as part of Item
14 of this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
During the years ended December 31, 1999, 1998, and 1997, there were no
disagreements with Moss Adams LLP 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.
29
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information requested by this item is contained in the registrant's
2000 proxy statement, and is incorporated by reference.
Item 11. Executive Compensation.
The information requested by this item is contained in the registrant's
2000 proxy statement, and is incorporated by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information requested by this item is contained in the registrant's
2000 proxy statement, and is incorporated by reference.
Item 13. Certain Relationships and Related Transactions.
The information requested by this item is contained in the registrant's
2000 proxy statement, and is incorporated by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) (1) Financial Statements
Independent Auditor's Report 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.
(a) (3) Exhibits
21 Subsidiaries of Registrant. Reference is made to "Item 1.
Business. United Security Bancorporation, The Banks and USB
Insurance for the required information.
27 Financial Data Schedule.
(b) Reports on Form 8-K.
Date Item # Subject
November 23, 1999 5 Bud Dashiell resigns from United Security
Bancorp Board of Directors; Keith Sattler
Elected Chairman of the Board
(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
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 on the 17th of March 2000.
UNITED SECURITY BANCORPORATION
By: /s/ Keith P. Sattler By: /s/ Richard C. Emery
-------------------- ----------------------------------
Keith P. Sattler, Chairman Richard C. Emery, President,
and Director Chief Executive Officer and
Director
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
17/th/ of March 2000.
Principal Executive Officer:
By: /s/ Richard C. Emery President, Chief Executive Officer and
----------------------------
Richard C. Emery Director
Principal Accounting Officer
By: /s/ Chad Galloway Vice President and Chief Financial
---------------------------- Officer
Chad Galloway
Remaining Directors
By: /s/ David C. Blankenship By: /s/ Norm McKibben
---------------------------- ----------------------------------
David C. Blankenship, Director Norm McKibben, Director
By: /s/ Wes Colley By: /s/ Buddy R. Sampson
---------------------------- ----------------------------------
Wes Colley, Director Buddy R. Sampson, Director
By: /s/ Rand Elliott By: /s/ Dann Simpson
---------------------------- ----------------------------------
Rand Elliott, Director Dann Simpson, Director
By: /s/ Dave Frame By: /s/ Don Swartz
---------------------------- ----------------------------------
Dave Frame, Director Don Swartz, Director
By: /s/ Robert J. Gardner By: /s/ Ron Wachter
---------------------------- ----------------------------------
Robert J. Gardner, Director Ron Wachter, Director
By: /s/ Robert L. Golob
----------------------------
Robert L. Golob, Director
31
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, 1999 and
1998, and the related consolidated statements of income, changes in
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1999. 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 provided 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, 1999 and 1998, and the
results of their operations and their cash flows for each of the three years
ended December 31, 1999, in conformity with generally accepted accounting
principles.
Everett, Washington /s/ Moss Adams LLP
January 21, 2000
CONSOLIDATED STATEMENTS OF CONDITION
DECEMBER 31, 1999 AND 1998
($ In thousands)
1999 1998
ASSETS
Cash and due from banks $ 21,387 $ 24,438
Overnight interest bearing deposits with other banks 4,632 12,166
Federal funds sold 485
--------- ---------
Cash and cash equivalents 26,019 37,089
Securities 53,141 87,350
Loans, net of allowance for loan losses of $4,349 in 1999 and
$3,819 in 1998 418,210 359,532
Accrued interest receivable 4,494 4,565
Premises and equipment, net 13,133 12,146
Foreclosed real estate and other foreclosed assets 1,179 1,245
Life insurance and salary continuation assets 4,049 3,438
Intangible assets 6,189 6,525
Other assets 1,312 1,254
--------- ---------
TOTAL ASSETS $ 527,726 $ 513,144
========= =========
LIABILITIES
Noninterest bearing - demand deposits $ 82,299 $ 85,407
Interest bearing deposits:
NOW and savings accounts 196,513 198,812
Time, $100,000 and over 56,430 53,195
Other time 117,657 115,499
--------- ---------
TOTAL DEPOSITS 452,899 452,913
Short-term borrowings 7,508 636
Capital lease obligations 690 712
Accrued interest payable 1,367 1,646
Other liabilities 2,340 3,026
--------- ---------
TOTAL LIABILITIES 464,804 458,933
Commitments and contingencies
STOCKHOLDERS' EQUITY
Common stock, no par, shares authorized 15 million; issued and outstanding
6,942,439 in 1999 and 6,735,999 in 1998 44,471 41,852
Retained earnings 19,460 12,163
Accumulated other comprehensive income, net of tax (1,009) 196
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 62,922 54,211
--------- ---------
TOTAL LIABILITIES and STOCKHOLDERS' EQUITY $ 527,726 $ 513,144
========= =========
The accompanying notes are an integral part of these financial statements.
33
CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED
DECEMBER 31, 1999, 1998 and 1997
($ In thousands, except per share amounts)
1999 1998 1997
INTEREST INCOME
Interest and fees on loans $ 39,728 $ 37,393 $ 30,253
Interest on securities 3,760 5,331 4,117
Other interest income 420 958 1,288
----------- --------- ---------
TOTAL INTEREST INCOME 43,908 43,682 35,658
----------- --------- ---------
INTEREST EXPENSE
Interest on deposits 14,963 16,249 13,306
Interest on borrowings 471 958 656
----------- --------- ---------
TOTAL INTEREST EXPENSE 15,434 17,207 13,962
----------- --------- ---------
NET INTEREST INCOME 28,474 26,475 21,696
Provision for loan losses 1,577 784 1,055
----------- --------- ---------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 26,897 25,691 20,641
----------- --------- ---------
NONINTEREST INCOME
Fees and service charges 2,482 2,342 2,101
Insurance commissions 985 1,031 1,125
Securities gains, net 66 141 (16)
Insurance proceeds 796
Gain on sale of Bank of the West name 1,250
Other 1,129 1,463 827
----------- --------- ---------
TOTAL NONINTEREST INCOME 5,912 4,977 4,833
----------- --------- ---------
NONINTEREST EXPENSE
Salaries and employee benefits 11,450 11,439 9,063
Occupancy expense, net 1,562 1,426 1,012
Equipment expense 1,380 1,466 1,056
Legal expense 190 515 338
State business and occupation tax 579 559 467
Director fees 501 417 248
Intangible assets amortization 381 405 163
Other 3,166 3,537 2,558
----------- --------- ---------
TOTAL NONINTEREST EXPENSE 19,209 19,764 14,905
----------- --------- ---------
INCOME BEFORE INCOME TAX EXPENSE 13,600 10,904 10,569
INCOME TAX EXPENSE 3,888 3,521 3,346
----------- --------- ---------
NET INCOME $ 9,712 $ 7,383 $ 7,223
=========== ========= =========
Basic earnings per common share $ 1.27 $ 0.98 $ 0.96
Diluted earnings per common share $ 1.26 $ 0.95 $ 0.94
Basic weighted average shares 7,630,919 7,570,706 7,538,401
outstanding
Diluted weighted average shares 7,734,668 7,739,466 7,677,027
outstanding
The accompanying notes are an integral part of these financial statements.
34
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998, and 1997
($ in thousands)
Accumulated
Other
Common Stock Retained Comprehensive Comprehensive
Shares Amount Earnings Income (Loss) Total Income (Loss)
Balances, January 1, 1997 5,807,353 $26,772 $12,027 ($ 314) $ 38,485
Common stock issued for options exercised 30,239 160 160
Net income 7,223 7,223 $ 7,223
Redemption of fractional shares (7) (7)
Net change in unrealized loss on
available-for-sale
securities, net of taxes 362 362 362
Grant National Bank cash dividend (49) (49)
10% stock dividend 368,434 7,369 (7,369)
------------------------------------------------------- ----------
Balances, December 31, 1997 6,206,026 34,294 11,832 48 46,174 $ 7,585
==========
Common stock issued for options exercised 75,772 581 581
Net income 7,383 7,383 $ 7,383
Redemption of fractional shares (737) (18) (18)
Net change in unrealized gain on
available-for-sale
securities, net of taxes 148 148 148
Grant National Bank cash dividend (57) (57)
10% stock dividend 454,938 6,995 (6,995)
------------------------------------------------------- ----------
Balances, December 31, 1998 6,735,999 41,852 12,163 196 54,211 $ 7,531
==========
Common stock issued for options exercised 32,628 221 221
Net income 9,712 9,712 $ 9,712
AmericanWest Bank portion of 10% 174,930 2,415 (2,415)
stock dividend
Redemption of fractional shares (1,118) (17) (17)
Net change in unrealized gain on
available-for-sale
securities, net of taxes (1,205) (1,205) (1,205)
------------------------------------------------------- ----------
Balances, December 31, 1999 6,942,439 $44,471 $19,460 ($1,009) $ 62,922 $ 8,507
======================================================= ==========
The accompanying notes are an integral part of these financial statements.
35
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998 and 1997
($ in thousands)
1999 1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 9,712 $ 7,383 $ 7,223
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 1,577 784 1,055
Depreciation and amortization 930 908 733
Deferred income taxes (465) 172 457
Gain on sale of premises and equipment (50) (189)
(Increase) decrease in assets:
Accrued interest receivable 71 (163) 10
Life insurance and salary continuation assets (611) (843) (201)
Other assets 743 (152) 417
Increase/(decrease) in liabilities:
Accrued interest payable (279) 342 502
Other liabilities (686) (9) (555)
Proceeds from sale of mortgage loans held for sale 3,827 1,374 2,078
-------- ------- --------
NET CASH FROM OPERATING ACTIVITIES 14,769 9,607 11,719
-------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available-for-sale:
Maturities 37,642 46,839 11,057
Sales 10,150 22,226 13,304
Purchases (14,832) (53,399) (58,800)
Securities held-to-maturity:
Maturities 44 1,126 1,776
Purchases (1,030) (1,776)
Net increase in loans and leases (64,082) (47,762) (33,532)
Purchase of Bank of Pullman, net of cash received (5,297)
Cash received from Wells Fargo branch acquisition 30,356
Purchases of premises and equipment (2,388) (2,472) (1,319)
Proceeds from sale of premises and equipment 521 1,717
Foreclosed assets activity 66 (78) 688
-------- ------- --------
NET CASH FROM INVESTING ACTIVITIES (32,879) (32,833) (43,543)
-------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase/(decrease) in deposits (14) 27,819 31,981
Short-term borrowings activity 6,872 (3,659) 4,295
Proceeds from notes payable 8,704
Principal payments on notes payable (6,257) (4,938)
Principal payments on capital lease obligations (22) (20) (19)
Proceeds from issuance of capital stock 221 581 160
Cash dividends and fractional shares (17) (75) (2,855)
-------- ------- --------
NET CASH FROM FINANCING ACTIVITIES 7,040 18,389 37,328
-------- ------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS (11,070) (4,837) 5,504
Cash and cash equivalents at January 1 37,089 41,926 36,422
-------- ------- --------
Cash and cash equivalents at December 31 $ 26,019 $ 37,089 $ 41,926
======== ======== ========
Interest paid $ 15,713 $ 16,918 $ 16,766
Income taxes paid $ 3,981 $ 3,461 $ 3,351
Supplemental Schedule of Noncash Investing and Financing Activities
Foreclosed real estate acquired in settlement of loans $ 1,570 $ 1,412 $ 1,612
Transfers from securities at cost to securities at fair value $ 8,025 $ 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 financial statements.
36
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 (Corporation) and its wholly-owned subsidiaries collectively
(USBN), United Security Bank (USB), Home Security Bank (HSB), Bank of Pullman
(BOP), Grant National Bank (GNB), AmericanWest Bank (AWB) formerly Bank of the
West, and USB Insurance Agencies, Inc. after eliminating all significant
intercompany balances and transactions.
Nature of business:
USB, HSB, and AWB are state-chartered commercial banks under the laws of the
State of Washington, and provide banking services primarily throughout eastern
and central Washington. BOP is a banking corporation organized under the laws of
the State of Idaho. GNB is a national chartered commercial bank. USBN is subject
to competition from other financial institutions, as well as nonfinancial
intermediaries and to the regulations of certain federal and state agencies and
it undergoes 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 USBN allowance for loan losses and other real
estate owned. Such agencies may require USBN 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 consists of debt and marketable equity securities. Debt securities
consist primarily of obligations of the U.S. government, state governments and
domestic corporations.
37
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 USBN 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, management periodically
performs valuations and the real estate is carried at the lower of carrying
amount or fair value less cost to sell.
38
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 30
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. USBN periodically evaluates
these intangible assets for impairment.
Income taxes:
USBN files 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 of Financial Accounting Standards (SFAS) 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 dividends. USBN is
following 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 Principles 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 USBN's stock option plans. USBN 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 15).
39
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 USBN 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 held for purposes
other than trading and are recorded in the financial statements when they are
funded or related fees are incurred or received.
Reclassifications:
Certain reclassifications of December 31, 1998 and 1997 balances have been made
to conform to the December 31, 1999 presentation; there was no impact on net
income, earnings per share or stockholders' equity as previously reported.
Note 2. Mergers and Acquisitions:
American West Bank (AWB) and Grant National Bank (GNB):
On February 1, 1999 USBN completed its merger with AWB. AWB had been previously
known as Bank of the West, but received $1,250,000 for the sale of its name in
1999. As of February 1, 1999 AWB had approximately $103 million in total assets,
$90 million in deposits, $68 million in loans, and $12 million in total equity.
1,749,300 USBN shares were issued to AWB shareholders for the merger. On July
20, 1998 USBN completed its merger with GNB. As of July 20, 1998 GNB had
approximately $32 million in total assets, $29 million in deposits, $22 million
in loans, and $3 million in total equity. 468,270 USBN shares were issued to GNB
shareholders for the merger. The pooling-of-interests accounting method was used
for both of these transactions, which includes restating prior reported amounts.
The effects of the restatement on revenue, net income and stockholders' equity
are shown below:
($ in thousands) 1998 1997
Net interest income and noninterest income:
Original USBN amounts reported $25,003 $18,497
GNB 2,025
AWB 6,449 6,007
------- -------
As restated $31,452 $26,529
======= =======
Net income:
Original USBN amounts reported $ 5,364 $ 4,864
GNB 428
AWB 2,019 1,931
------- -------
As restated $ 7,383 $ 7,223
======= =======
December 31,
1998
Stockholders' equity:
Original USBN amounts reported $42,201
AWB 12,010
-------
As restated $54,211
=======
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2. Mergers and Acquisitions (Continued):
Bank of Pullman (BOP):
Effective October 1, 1997 USBN 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 had
seven branches, six in Washington and one in Idaho. USBN 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 USBN. The acquisition was
accounted for as a purchase transaction. Accordingly, the results of operations
of Bank of Pullman are included with USBN for periods subsequent to the date of
acquisition. Intangible assets increased by $4.8 million. Goodwill is amortized
using the straight-line method over 25 years. The following unaudited pro forma
combined summary of income gives effect to the combination as if the acquisition
was effective January 1, 1997.
Unaudited Pro Forma Combined Financial Data
($ in thousands, except per share data)
Year Ended December 31,
1997
Summary of Income
Net interest income $ 24,000
Provision for loan losses 1,062
Noninterest income 5,079
Noninterest expense 16,641
Net income 7,844
Basic earnings per common share $ 1.04
Diluted earnings per common share $ 1.02
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3. Accounting Pronouncements
In June 1999, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 137 entitled Accounting for Derivative
Instruments and Hedging Activities-Deferral of the Effective Date of SFAS
Statement No. 133. The statement amends SFAS No. 133 to defer its effective date
to all fiscal quarters of all fiscal years beginning after June 15, 2000.
Management does not believe the adoption of this statement will have a material
effect on USBN's financial condition or results of operation.
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, 1999 and 1998 were
approximately $2,762,000 and $2,630,000, respectively. The average amounts of
federal funds sold and overnight interest bearing deposits with other banks for
the years ended December 31, 1999 and 1998, were $7,683,000 and $16,323,000,
respectively. Similarly, averages of short-term borrowings were $6,524,000 and
$4,580,000 for 1999 and 1998, respectively. The balance of short-term borrowings
at December 31, 1999 and 1998 was $7,508,000 and $636,000, respectively.
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5. Securities
Debt and equity securities have been classified according to management's
intent. The amortized cost of securities and their fair values at December 31
were as follows:
December 31, 1999 Gross Gross
($ in thousands) Amortized Unrealized Unrealized Fair Financial
Cost Gains Losses Value Statements
Securities available-for-sale:
U.S. Treasury securities $ 2,503 $ 4 $ 4 $ 2,503 $ 2,503
Obligations of federal government
agencies 16,888 571 16,317 16,317
Obligations of states, municipalities
and political subdivisions 8,201 6 44 8,163 8,163
Mortgage backed securities 10,014 202 9,812 9,812
Other securities 16,356 717 15,639 15,639
---------- ----------- ------------ ----------- --------------
53,962 10 1,538 52,434 52,434
Securities held-to-maturity:
Obligations of states, municipalities
and political subdivisions 707 4 12 699 707
---------- ----------- ------------ ----------- --------------
Total $ 54,669 $ 14 $ 1,550 $ 53,133 $ 53,141
========== =========== ============ =========== ==============
December 31, 1998 Gross Gross
($ in thousands) Amortized Unrealized Unrealized Fair Financial
Cost Gains Losses Value Statements
Securities available-for-sale:
U.S. Treasury securities $ 4,309 $ 92 $ 4,401 $ 4,401
Obligations of federal government
agencies 26,314 175 $ 46 26,443 26,443
Obligations of states, municipalities
and political subdivisions 2,061 42 2,103 2,103
Mortgage backed securities 27,949 77 33 27,993 27,993
Other securities 17,646 107 119 17,634 17,634
---------- ----------- ------------ ----------- --------------
78,279 493 198 78,574 78,574
========== =========== ============ =========== ==============
Securities held-to-maturity:
Obligations of states, municipalities
and political subdivisions 8,776 268 12 9,032 8,776
---------- ----------- ------------ ----------- --------------
Total $ 87,055 $ 761 $ 210 $ 87,606 $ 87,350
========== =========== ============ =========== ==============
As of December 31, 1998 AWB had $8,025,000 in securities classified as held-to-
maturity. When it merged with USBN these securities were reclassified to
available-for-sale. The change is consistent with the classification and
interest rate risk policies for the other USBN subsidiary Banks.
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5. Securities (Continued)
Securities taxable interest income was $3,009,000, $4,471,000, and $3,244,000
for 1999, 1998 and 1997, respectively. Securities nontaxable interest income was
$522,000, $642,000 and $682,000 for 1999, 1998, and 1997, respectively. Dividend
income was $229,000, $218,000, and $191,000 for 1999, 1998, and 1997,
respectively. Securities with an amortized cost of $16,848,000 and $12,025,000
at December 31, 1999 and 1998, respectively, were pledged to secure public
deposits for purposes required or permitted by law. Market value of these
securities was $16,517,000 and $12,192,000 at December 31, 1999 and 1998,
respectively. Included in other securities are marketable equity securities with
amortized costs totaling $2,663,000 and $2,598,000, and market values of
$2,277,000 and $2,504,000 at December 31, 1999 and 1998, respectively. Also
included in other securities are $3,265,000 in 1999 and $2,996,000 in 1998 of
Federal Home Loan Bank (FHLB) Stock, which is carried at cost and 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 USBN business activity with the FHLB.
Gross realized gains on sales of securities available for sale were $69,000,
$141,000, and $29,000 for 1999, 1998, and 1997, respectively. Gross realized
losses were $3,000, $0, and $45,000 for 1999, 1998, and 1997, respectively.
The contractual scheduled maturity of securities available-for-sale and
securities held-to-maturity at December 31, 1999 were as follows:
Available-for-Sale Held-to-Maturity
Amortized Fair Amortized Fair
($ in thousands) Cost Value Cost Value
Due in one year or less $ 5,034 $ 5,032
Due from one year to five years 16,785 16,504 $ 228 $ 232
Due from five to ten years 15,305 14,695 261 255
Due after ten years 6,824 6,391 218 212
Mortgage backed securities 10,014 9,812
---------- ---------- ---------- ----------
$ 53,962 $ 52,434 $ 707 $ 699
========== ========== ========== ==========
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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6. Loans and Allowance for Loan Losses
Loan categories as of December 31, 1999 and 1998 were as follows:
($ in thousands) 1999 1998
Commercial and industrial $ 246,796 $ 199,798
Agricultural 67,025 57,511
Real estate mortgage 66,690 63,127
Real estate construction 14,781 14,170
Installment 21,190 20,364
Bank cards and other 6,939 9,149
Total loans 423,421 364,119
Allowance for loan losses (4,349) (3,819)
Deferred loan fees, net of deferred costs (862) (768)
--------- ---------
Net loans $ 418,210 $ 359,532
========= =========
Variable rate loans were $144,511,000 and $115,402,000 as of December 31, 1999
and 1998, respectively. Remaining loans were fixed rate loans. A summary of
loans by contractual maturity as of December 31, 1999 and 1998 is as follows:
($ in thousands) 1999 1998
Maturity within one year $141,131 $119,812
One to five years 164,026 103,777
Over five years 118,264 140,530
-------- --------
$423,421 $364,119
======== ========
Changes in the allowance for loan losses are as follows:
($ in thousands) 1999 1998 1997
Balance, beginning of year $ 3,819 $ 3,869 $ 2,906
Allowance acquired through acquisition 700
Provision charged to operations 1,577 784 1,055
Loans charged-off (1,248) (1,064) (1,136)
Recoveries 201 230 344
------- ------- -------
Balance, end of year $ 4,349 $ 3,819 $ 3,869
======= ======= =======
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6. Loans and Allowance for Loan Losses (Continued)
Impaired loan information as of December 31, 1999, 1998 and 1997 is as follows:
($ in thousands) 1999 1998 1997
Balance, beginning of year $ 3,819 $ 3,869 $ 2,906
Allowance acquired through acquisition 700
Provision charged to operations 1,577 784 1,055
Loans charged-off (1,248) (1,064) (1,136)
Recoveries 201 230 344
------- ------- -------
Balance, end of year $ 4,349 $ 3,819 $ 3,869
======= ======= =======
Note 7. Premises and Equipment
Major classifications of premises and equipment are summarized as of December
31, 1999 and 1998 as follows:
($ in thousands) 1999 1998
Premises, including premises under capital lease,
1999 and 1998 $802 $ 11,315 $ 10,022
Furniture, fixtures, and equipment 5,720 5,720
Leasehold improvements 649 565
17,684 16,307
Less accumulated depreciation, including accumulated
amortization on assets under capital lease,
1999 $364; 1998 $324 (7,025) (6,637)
10,659 9,670
Land 2,474 2,476
Premises and equipment, net $ 13,133 $ 12,146
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8. Life Insurance and Salary Continuation Plan
The Banks 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, 1999 and 1998:
($ in thousands) 1999 1998
Cash surrender value $4,049 $3,438
Present value at age 65 of all participants after full vesting is obtained 5,040 4,671
Present value at age 65 of the current fully vested participants 2,825 2,193
Recorded liability for future benefit obligation 739 578
Vested participants are eligible to receive benefits at age 65. In its merger
with AWB a salary continuation plan was included, which is fully vested and the
key employee is eligible to receive benefits at age 71. It is an employee funded
deferred compensation plan.
47
NOTES TO CONSOLIDATION FINANCIAL STATEMENTS
Note 9. Income Taxes
The components of income tax expense for the years presented are as follows:
($ in thousands) 1999 1998 1997
Current expense $4,353 $3,349 $2,889
Deferred tax expense (465) 172 457
------------ ------------ -------------
Income tax expense $3,888 $3,521 $3,346
============ ============ =============
The effective tax rate differs from the statutory tax rate as follows:
($ in thousands) 1999 1998 1997
Income tax at statutory rates $4,647 $3,707 $3,593
Effect of tax-exempt interest income (204) (267) (248)
Effect of tax credit (400)
Effect of nondeductible expenses and other (155) 81 1
------------ ------------ -------------
Income tax expense $3,888 $3,521 $3,346
============ ============ =============
The following are the significant components of deferred tax assets and
liabilities. The net amount is classified with other assets in 1999 and other
liabilities in 1998 in the consolidated financial statements:
($ in thousands) 1999 1998
Deferred tax assets:
Allowance for loan losses $1,074 $920
Unrealized (gains) losses on available-for-sale securities 520 (101)
Deferred compensation expense 284 122
Other 155 146
------------ -------------
Total deferred tax assets 2,033 1,087
------------ -------------
Deferred tax liabilities:
Deferred loan costs 408 343
Lease financing 131 242
FHLB stock dividend income 413 333
Other 400 574
------------ -------------
Total deferred tax liabilities 1,352 1,492
------------ -------------
Net deferred tax assets/(liabilities) $681 ($405)
============ =============
The applicable tax (benefit)/expense, net for securities gains and losses was
$22,000, $48,000, and (5,000) for 1999, 1998, and 1997, respectively.
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10. Time Deposit Maturities
At December 31, 1999, the scheduled maturities of time deposits were as follows:
($ in thousands)
2000 $152,567
2001 18,747
2002 1,200
2003 1,035
2004 493
Later years 45
--------
Total $174,087
========
Note 11. Commitments and Contingent Liabilities
In the ordinary course of business, USBN has various outstanding commitments and
contingent liabilities that are not reflected in the accompanying consolidated
financial statements. In addition, USBN is a defendant in certain claims and
legal actions arising in the ordinary course of business. In the opinion of
management, after consultation with legal counsel, the ultimate disposition of
these matters is not expected to have a material adverse effect on the
consolidated financial condition of USBN.
The minimum annual rental commitments on capital and operating leases at
December 31, 1999, exclusive of taxes and other charges, are summarized as
follows:
($ in thousands)
2000 $ 544
2001 557
2002 555
2003 562
2004 502
Later years 3,719
--------
Total minimum payments due 6,439
Less: Amount representing interest (473)
--------
Present value of net minimum lease payments $ 5,966
========
United Security Bank 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. Grant National Bank leases its headquarters and a branch
facility from an Association of 6 of its Directors. USBN rental expense for
1999, 1998, and 1997 was $494,000, $359,000, and $149,000, respectively.
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11. Commitments and Contingent Liabilities (Continued)
Other commitments and contingent liabilities:
USBN is a party to financial instruments with off-statement of condition risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit, standby
letters of credit and financial guarantees. Those instruments involve, to
varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the statement of condition. The contract or notional
amounts of those instruments reflect the extent of involvement USBN has in
particular classes of financial instruments.
USBN's exposure to credit loss in the event of nonperformance by the other party
to the financial instrument for commitments to extend credit and standby letters
of credit and financial guarantees written is represented by the contractual
notional amount of those instruments. USBN uses the same credit policies in
making commitments and conditional obligations as it does for statement of
condition instruments. Generally, USBN does not require collateral or other
security to support financial instruments with credit risk.
Contract or
Notional Amount
($ in thousands) 1999 1998
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit $68,703 $88,387
Standby letters of credit and financial guarantees written 1,412 1,676
Unused commitments on bankcards 13,317 13,333
----------- ------------
TOTAL $83,432 $103,396
=========== ============
USBN 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. USBN evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained if
deemed necessary by USBN 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 USBN to guarantee the performance of a customer of a third
party. Those guarantees are primarily issued to support public and private
borrowing arrangements,
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11. Commitments and Contingent Liabilities (Continued)
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 affect the Bank's 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. USBN's related party loans
and deposits are disclosed in Note 17. The Banks, as a matter of policy, do not
extend credit to any single borrower in excess of $3,200,000, $1,350,000,
$900,000, $430,000, and $2,500,000 for USB, HSB, BOP, GNB, and AWB,
respectively.
As of December 31, 1999 and 1998, USBN had unused lines of credit of $66,180,000
and $64,735,000, respectively. The lines were available for short-term and long-
term borrowings.
Note 12. Common Stock
Stock dividends:
In January 2000, 1999 and 1998 the Board of Directors declared 10% common stock
dividends. USBN recorded a transfer from retained earnings to common stock for
the market value of the additional shares issued. Per share amounts and weighted
average shares outstanding have been retroactively adjusted to reflect the stock
dividends.
Note 13. Restrictions on Dividends and Loans
The Banks are subject to banking regulations relating to the payment of
dividends and the amount of loans that it may extend. The Banks are allowed to
pay dividends out of retained earnings. At December 31, 1999, the amount of
retained earnings of USB, HSB, BOP, GNB, and AWB available for dividends were
$15,333,000, $4,322,000, $1,247,000, $1,578,000 and $9,465,000, respectively. At
December 31, 1998, the amount of retained earnings of USB, HSB, BOP, GNB, and
AWB available for dividends were $12,162,000, $2,757,000, $729,000, $1,656,000
and $7,677,000, respectively. USBN has the full amount of retained earnings
available for dividends.
51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 13. Restrictions on Dividends and Loans (Continued)
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 14. Employee Stock Ownership Plan (ESOP) and Profit Sharing 401(k) Plan
USBN sponsors an ESOP. An ESOP is a form of retirement plan whereby USBN
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 USBN.
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 $322,000,
$278,000 and $206,000 for 1999, 1998 and 1997, respectively and are based on a
percentage of USBN earnings. Contributions are allocated pro rata based on
eligible annual compensation on December 31. USBN has a Profit Sharing 401(k)
Plan. There were no employer contributions in 1999, 1998 and 1997 to the plan.
Note 15. Stock Option Plans
USBN'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 USBN, including directors and executive officers. The
total shares available for option are the lesser of 8% of the common stock then
outstanding or 399,300 shares. A Board of Directors Compensation Committee and
an Executive Remuneration Committee were formed to direct the granting of the
options. When the Plan was established in 1995, 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 Plan. Additional 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. When USBN merged with AWB there were 108,878 options outstanding from
the AWB stock plan, which have been adjusted using the exchange ratio applicable
to the merger. These options are administered separately from the original USBN
plan. The AWB options terminate from 2000 through 2003 with exercise prices
ranging from $4.99 to $9.29. All of the AWB options are fully vested and are
included in the status, outstanding and earnings results information, which
follows.
52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 15. Stock Option Plans (Continued)
The status of the Plans as of December 31, 1999, 1998 and 1997 is as follows:
1999 1998 1997
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Number Price Number Price Number Price
Outstanding at beginning of year 339,230 9.99 299,738 7.81 264,348 6.71
Granted 33,079 14.04 114,900 13.60 63,706 10.98
Exercised (34,391) 6.35 (69,619) 7.04 (23,736) 3.87
Forfeited (5,789) 6.79 (4,580) 5.61
------- ------- -------
Outstanding at year-end 337,918 10.75 339,230 9.99 299,738 7.81
======= ======= =======
Exercisable at year-end 211,278 9.06 245,663 8.69 170,395 6.74
Weighted average fair value of options granted
during the year 13.72 17.35 12.87
The following table summarizes information about stock options outstanding at
December 31, 1999:
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
$4.81 15,587 4.0 years $ 4.81 15,587 $ 4.81
$4.99 - $5.49 31,686 .1 years $ 5.07 31,686 $ 5.07
$6.14 - $6.75 14,723 1.1 years $ 6.22 14,723 $ 6.22
$8.28 45,893 .8 years $ 8.28 45,893 $ 8.28
$7.29 - $8.87 30,682 2.1 years $ 7.84 30,682 $ 7.84
$8.45 - $9.29 31,787 3.1 years $ 8.55 31,787 $ 8.55
$9.58 - $10.47 40,736 1.6 years $10.05
$13.98 29,079 4.2 years $13.98
$14.09 2,200 3.8 years $14.09 2,200 $14.09
$14.50 4,000 4.2 years $14.50
$14.89 4,510 3.9 years $14.89
$15.14 - $15.34 27,140 2.8 years $15.26
$17.15 59,895 3.0 years $17.15 38,720 $17.15
53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 15. Stock Option Plans (Continued)
If the fair value based method of accounting under SFAS No. 123 had been used
for 1999, 1998 and 1997 the results and related assumptions would have been as
follows:
($ in thousands, except per share) 1999 1998 1997
Results using fair value based method of accounting:
Net income $ 9,608 $ 6,841 $ 6,984
Basic earnings per common share $ 1.26 $ 0.90 $ 0.93
Diluted earnings per common share $ 1.24 $ 0.88 $ 0.91
Assumptions used to make the fair value calculation:
Risk free interest rate 5.50% 5.00% 5.40%
Expected volatility 28.25% 28.25% 28.30%
Expected cash dividends 0% 0% 0%
Expected stock option life 5.0 years 5.0 years 5.0 years
Note 16. 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,
1999 1998
Cash $ 2,405 $ 388
Investment in:
Bank subsidiaries 55,462 49,216
Nonbank subsidiary 209 200
Premises and equipment 4,802 4,359
Other assets 105 191
----------- ----------
TOTAL ASSETS $ 62,983 $ 54,354
=========== ==========
Accrued expenses and other liabilities $ 61 $ 143
Stockholders' equity 62,922 54,211
----------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 62,983 $ 54,354
=========== ==========
54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 16. Parent Company Only Statements (Continued)
Condensed Statements of Income
($ in thousands)
Years Ended December 31,
1999 1998 1997
Income:
Bank subsidiaries dividends $ 3,099 $ 1,237 $ 702
Rent income 476 470 483
Other income 155 670 150
------------- ------------- -------------
3,730 2,377 1,335
------------- ------------- -------------
Expenses:
Salaries and benefits 1,029 1,457 790
Interest expense 414 331
Depreciation 169 192 183
Other operating expenses 712 982 501
------------- ------------- -------------
1,910 3,045 1,805
------------- -------------- -------------
Income/(loss) before tax benefit and equity in
undistributed net income of subsidiaries 1,820 (668) (470)
Income tax benefit 498 744 425
Income/(loss) before equity in undistributed net income of
subsidiaries 2,318 76 (45)
------------- -------------- -------------
Equity in undistributed net income of:
Bank subsidiaries 7,333 7,230 6,997
Nonbank subsidiaries 61 77 271
------------- ------------- -------------
Net income $ 9,712 $ 7,383 $ 7,223
============= ============= =============
55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 16. Parent Company Only Statements (Continued)
Condensed Statements of Cash Flows
($ in thousands)
Years Ended December 31,
1999 1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 9,712 $ 7,383 $ 7,223
Adjustments to reconcile net income to cash provided
by operating activities:
Equity in undistributed net income of subsidiaries (7,394) (7,307) (7,268)
Depreciation 169 192 183
(Increase) decrease in other assets 65 (1) (54)
Increase (decrease) in other liabilities (82) (26) (173)
------- ------- -------
NET CASH FROM OPERATING ACTIVITIES 2,470 241 (89)
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in subsidiaries (750)
Return of investment in subsidiaries 52 4,571 8,250
Bank of Pullman acquisition (11,955)
Purchase of premises and equipment (612) (125) (772)
Sale of premises and equipment 759
------- ------- -------
NET CASH FROM INVESTING ACTIVITIES (560) 5,205 (5,227)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of capital stock 124 284 20
Proceeds from notes payable 7,835
Principal payments on notes payable (5,388) (4,938)
Cash paid for redemption of fractional shares (17) (18) (7)
------- ------- -------
NET CASH FROM FINANCING ACTIVITIES 107 (5,122) 2,910
------- ------- -------
NET CHANGE IN CASH 2,017 324 (2,406)
CASH, beginning of year 388 64 2,470
------- ------- -------
CASH, end of year $ 2,405 $ 388 $ 64
======= ======= =======
56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 17. Related Party Transactions
Loans to related parties:
Loans to USBN'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. Such loans had the following balances and
activity during 1999 and 1998:
($ in thousands) 1999 1998
Balance at beginning of year $ 13,429 $ 12,277
New loans or advances 21,489 10,595
Repayments and adjustments (14,403) (9,443)
-------- --------
Balance at end of year $ 20,515 $ 13,429
======== ========
Deposits from related parties:
Deposits from related parties totaled $5,958,000 and $5,152,000 at December 31,
1999 and 1998, respectively.
Payments to related parties:
Building lease rent of $85,000, $93,000, and $80,000 in 1999, 1998 and 1997,
respectively was paid to a Partnership partially owned by a Director. Grant
National Bank paid $84,000, $64,000, and $60,000 in 1999, 1998, and 1997,
respectively to an Association of 6 of its Directors for the rent of its
headquarters and branch.
57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 18. Fair Value of Financial Instruments
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments" requires
disclosure of fair value information about financial instruments for which it is
practicable to estimate fair value. As defined by SFAS No. 107, financial
instruments include the categories listed below. It does not include the value
of property, plant and equipment and intangible assets such as customer
relationships and core deposit intangibles. Fair values of off-statement of
condition lending commitments are based on fees currently charged to enter into
similar agreements, taking into account the remaining terms of the agreements
and the counterparties' credit standing. The fair value of the fees at December
31, 1999 and 1998, were insignificant. See Note 11 for the notional amount of
the commitments to extend credit. The following table summarizes carrying
amounts, estimated fair values, and assumptions used by the Corporation to
estimate fair value as of December 31, 1999 and 1998:
Estimated
As of December 31, 1999: Assumptions Used in Carrying Fair
($ in thousands) Estimating Fair Value Amount Value
Financial Assets:
Cash and due from banks Equal to carrying value $ 21,387 $ 21,387
Overnight interest bearing deposits
with other banks Equal to carrying value 4,632 4,632
Securities Quoted market prices 53,141 53,133
Loans Fixed-rate loans: Discounted expected future cash flows,
variable-rate loans: equal to carrying value, net of
allowance for loan losses 418,210 409,681
Financial Liabilities:
Deposits Fixed-rate certificates of deposit:
Discounted expected future cash flows
All other deposits: Equal to carrying value 452,899 451,623
Short-term borrowings Equal to carrying value 7,508 7,508
As of December 31, 1998:
Financial Assets:
Cash and due from banks Equal to carrying value $ 24,438 $ 24,438
Overnight interest bearing deposits
with other banks Equal to carrying value 12,166 12,166
Federal funds sold Equal to carrying value 485 485
Securities Quoted market prices 87,350 87,606
Loans Fixed-rate loans: Discounted expected future cash flows,
variable-rate loans: equal to carrying value, net of
allowance for loan losses 359,532 360,689
Financial Liabilities:
Deposits Fixed-rate certificates of deposit:
Discounted expected future cash flows
All other deposits: Equal to carrying value 452,913 453,193
Short-term borrowings Equal to carrying value 636 636
58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 19. Regulatory Matters
The Banks are subject to various regulatory capital requirements administered by
the 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 following table of total and Tier I capital to risk-weighted and average
assets. As of December 31, 1999 USBN, USB, HSB, BOP, GNB and AWB were considered
well capitalized based on regulatory capital standards.
59
As of December 31, 1999 and 1998 the regulatory ratios for USBN, USB, HSB, BOP,
GNB, and AWB were as follows:
Actual Adequately Capitalized Well Capitalized
($ in thousands) Amount Ratio Amount Ratio Amount Ratio
As of December 31, 1999:
Total capital to risk weighted assets:
USBN $61,836 13.42% *$36,876 8.00% *$46,094 10.00%
USB 20,739 10.50% * 15,801 8.00% * 19,751 10.00%
HSB 10,454 11.61% * 7,205 8.00% * 9,007 10.00%
BOP 5,772 11.34% * 4,073 8.00% * 5,091 10.00%
GNB 3,286 11.75% * 2,237 8.00% * 2,797 10.00%
AWB 14,431 13.53% * 8,532 8.00% * 10,665 10.00%
Tier I capital to risk weighted assets:
USBN 57,487 12.47% * 18,438 4.00% * 27,657 6.00%
USB 18,813 9.53% * 7,900 4.00% * 11,851 6.00%
HSB 9,606 10.67% * 3,603 4.00% * 5,404 6.00%
BOP 5,379 10.56% * 2,037 4.00% * 3,055 6.00%
GNB 3,024 10.81% * 1,119 4.00% * 1,678 6.00%
AWB 13,511 12.67% * 4,473 4.00% * 6,399 6.00%
Leverage capital, Tier I capital to average assets:
USBN 57,487 10.98% * 20,936 4.00% * 26,170 5.00%
USB 18,813 9.44% * 7,973 4.00% * 9,966 5.00%
HSB 9,606 9.13% * 4,207 4.00% * 5,259 5.00%
BOP 5,379 8.35% * 2,577 4.00% * 3,222 5.00%
GNB 3,024 7.05% * 1,716 4.00% * 2,145 5.00%
AWB 13,511 12.08% * 4,473 4.00% * 5,591 5.00%
As of December 31, 1998:
Total capital to risk weighted assets:
USBN $38,491 11.86% *$25,968 8.00% *$32,459 10.00%
USB 16,951 10.21% * 13,279 8.00% * 16,599 10.00%
HSB 8,449 10.37% * 6,518 8.00% * 8,148 10.00%
BOP 4,971 10.04% * 3,960 8.00% * 4,950 10.00%
GNB 3,408 13.92% * 1,959 8.00% * 6,537 10.00%
AWB 12,889 17.40% * 5,907 8.00% * 7,384 10.00%
Tier I capital to risk weighted assets:
USBN 35,545 10.95% * 12,984 4.00% * 19,476 6.00%
USB 15,320 9.23% * 6,640 4.00% * 9,959 6.00%
HSB 7,726 9.48% * 3,259 4.00% * 4,889 6.00%
BOP 4,635 9.36% * 1,980 4.00% * 2,970 6.00%
GNB 3,152 12.87% * 979 4.00% * 1,469 6.00%
AWB 12,016 16.30% * 2,954 4.00% * 4,430 6.00%
Leverage capital, Tier I capital to average assets:
USBN 35,545 8.88% * 16,008 4.00% * 20,010 5.00%
USB 15,320 7.83% * 7,823 4.00% * 9,779 5.00%
HSB 7,726 7.43% * 4,160 4.00% * 5,199 5.00%
BOP 4,635 7.09% * 2,615 4.00% * 3,269 5.00%
GNB 3,152 8.28% * 1,523 4.00% * 1,904 5.00%
AWB 12,016 16.30% * 2,954 4.00% * 3,692 5.00%
* Greater Than
60
UNITED SECURITY BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 20. Earnings Per Share
The following is a reconciliation of the numerators and denominators for basic
and diluted per-share computations for net income for 1999, 1998 and 1997:
($ in thousands, except per share) 1999 1998 1997
Numerator:
Net income $ 9,712 $ 7,383 $ 7,223
Denominator:
Weighted-average number of common shares outstanding 7,630,919 7,570,706 7,538,401
Incremental shares assumed for stock options 103,749 168,760 138,626
----------------------------------------
Total 7,734,668 7,739,466 7,677,027
========================================
Basic earnings per common share $ 1.27 $ 0.98 $ 0.96
Diluted earnings per common share $ 1.26 $ 0.95 $ 0.94
Options to purchase 139,506 shares of common stock at a range of $12.71 to
$15.59 a share were outstanding during 1999. They were not included in the
computation of diluted earnings per common share because they were antidilutive.
The shares and price have been adjusted to reflect the stock dividend declared
in January 2000.
Note 21. Noninterest income
In 1999, AWB received $1,250,000 for releasing use of its former name Bank of
the West. In 1997, USBN recovered from its insurance provider $796,000 for a
defalcation by a former employee of its bank subsidiary, HSB. The insurance
proceeds are a full recovery of the reconciled loss except for a $50,000
insurance policy deductible.
QUARTERLY FINANCIAL DATA
CONDENSED CONSOLIDATED STATEMENT OF INCOME-QUARTERLY
($ in thousands, except per share)
UNAUDITED
1999, Quarter Ended 1998, Quarter Ended
Dec. 31 Sept. 30 June 30 Mar. 31 Dec. 31 Sept. 30 June 30 Mar. 31
Interest income $ 11,369 $ 11,174 $ 10,753 $ 10,612 $ 11,278 $ 11,222 $ 10,833 $ 10,349
Interest expense 4,070 3,838 3,812 3,714 4,248 4,512 4,270 4,178
------------------------------------------- ----------------------------------------------
Net Interest Income 7,299 7,336 6,941 6,898 7,030 6,710 6,563 6,171
Provision for loan losses 511 549 250 267 360 236 (32) 220
------------------------------------------- ----------------------------------------------
Net interest income after
provision for loan losses 6,788 6,787 6,691 6,631 6,670 6,474 6,595 5,951
Sale of name income 1,250
Other noninterest income 1,006 1,136 1,255 1,265 931 1,217 1,259 1,566
Noninterest expense 4,851 4,718 4,822 4,818 5,301 5,014 4,898 4,546
------------------------------------------ ----------------------------------------------
Income before income taxes 2,943 3,205 4,374 3,078 2,300 2,677 2,956 2,971
Income tax 876 564 1,449 999 816 852 958 895
------------------------------------------- ----------------------------------------------
Net income $ 2,067 $ 2,641 $ 2,925 $ 2,079 $ 1,484 $ 1,825 $ 1,998 $ 2,076
=========================================== ==============================================
Basic earnings per common share $ 0.27 $ 0.35 $ 0.38 $ 0.27 $ 0.20 $ 0.24 $ 0.26 $ 0.27
Diluted earnings per common share $ 0.27 $ 0.34 $ 0.38 $ 0.27 $ 0.19 $ 0.24 $ 0.26 $ 0.27
Basic average shares 7,634,477 7,633,462 7,633,462 7,622,110 7,591,441 7,569,049 7,560,100 7,561,930
Diluted average shares 7,736,527 7,740,431 7,728,480 7,731,503 7,724,025 7,728,465 7,747,148 7,748,169
61