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United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to ____________
Commission file number 0-18561
UNITED SECURITY BANCORPORATION
(Exact name of registrant as specified in its charter)
Washington 91-1259511
(State or other jurisdiction (IRS Employer
of incorporation) Identification No.)
9506 North Newport Highway
Spokane, Washington 99218-1200
(Address of principal executive offices)
Registrant's telephone number, including area code (509) 467-6949
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act:
Common Stock, no par value NASDAQ National Market System
Title of each class Name of each exchange on which registered
Check whether the registrant (1) filed all reports required to be filed by
Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for such
shorter period as the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. YES [X] NO [ ]
Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendments to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, computed by reference to the stock closing prices on stock at
February 26, 1999, was $86,783,000. The number of shares of common stock
outstanding at such date was 6,928,552.
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
UNITED SECURITY BANCORPORATION
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR
ENDED DECEMBER 31, 1998
TABLE OF CONTENTS
PART I Page
Item 1. Business..................................................... 3
Item 2. Properties................................................... 18
Item 3. Legal Proceedings............................................ 20
Item 4. Submission of Matters to a Vote of Security Holders.......... 20
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters...................................................... 20
Item 6. Selected Financial Data...................................... 21
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................... 22
Item 7A. Quantitative and Qualitative Disclosures About Market Risk... 28
Item 8. Financial Statements and Supplementary Data.................. 29
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure..................................... 29
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 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
UNITED SECURITY BANCORPORATION
PART I
Item 1. Business.
United Security Bancorporation
United Security Bancorporation (USBN) is a multi-bank holding company
headquartered in Spokane, Washington. USBN owns four banks, United Security
Bank (Washington) (USB), Home Security Bank (Washington) (HSB), Bank of Pullman
(Idaho) (BOP), and Grant National Bank (Washington) (GNB) (collectively, Banks),
and also owns USB Insurance (Washington) (an insurance agency), USB Leasing
(Washington) (a leasing company), and USB Mortgage (Washington) (a mortgage
company). USBN conducts its banking business through twenty-seven branches
located in communities throughout eastern Washington, including Spokane and a
branch 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, 1998, USBN had total
consolidated assets of $405.0 million, loans of $293.1 million and deposits of
$358.8 million. USBN was founded in 1983 and has been profitable in every year
since its inception. In 1995, USBN completed a public offering and is listed on
NASDAQ under the symbol "USBN". On February 1, 1999 USBN completed its merger
with Bank of the West.
The Banks
USB was formed in 1974 and serves customers in Spokane and northeastern
Washington from eleven branches. HSB was formed in 1989 and serves customers in
southeastern Washington from seven branches. BOP was acquired in 1997 and
serves customers in eastern Washington with six branches and one branch in
Moscow, Idaho. GNB was acquired in 1998 and serves customers in central eastern
Washington with two 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 saving programs, checking accounts, installment and personal loans, and
bank credit cards. The Banks also provide a broad range of depository and
lending services to commercial, industrial and agricultural enterprises,
governmental entities and individuals. The Banks' deposit-taking and lending
activities are primarily directed to the communities in which their branches are
located. The Banks' primary marketing focus is on small to medium-sized
businesses and professionals in these communities.
The loan portfolios of the Banks consist primarily of commercial, agricultural,
real estate (both mortgage and construction loans) and installment loans. At
December 31, 1998, 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, and GNB provide
personalized, quality financial service to its customers, which has enabled them
to maintain a stable and relatively low-cost retail deposit base.
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UNITED SECURITY BANCORPORATION
USB Insurance
USB Insurance began operating in April 1987 and is engaged in selling a full
line of insurance and financial products such as annuities and mutual funds on
an agency basis to individuals, commercial, industrial and agricultural
enterprises from locations in Colville, Chewelah and Kettle Falls, Washington.
Total revenues of USB Insurance for the year ended December 31, 1998 were
$1,070,000 as compared to revenues of $1,170,000 in 1997.
USB Leasing and USB Mortgage
USB Leasing and USB Mortgage sold their assets and liabilities to USB during
1998. This was done to reduce interest and noninterest expenses. These
companies remain incorporated for possible future use.
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
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 and servicing functions in the larger financial
institutions with whom 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 loan officers in each
branch, and branch managers have the authority to approve loans in amounts up to
$100,000.
Expand Markets Served through New Branch Openings and Acquisitions. USBN
intends to expand its presence in eastern and central Washington by opening new
branches and acquiring other financial institutions in markets not currently
served by USB, HSB, BOP, and GNB. HSB recently opened new branches in Yakima
and Richland, Washington.
4
UNITED SECURITY BANCORPORATION
Management considers a variety of criteria in evaluating potential branch
expansion, including the demographics and short and long-term growth prospects
for the location, the management and other resources needed to integrate the
branch into its existing operations, the degree to which the branch would
enhance the geographic diversity of 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.
Bank of the West. On February 1, 1999 USBN completed its merger with Bank of
the West (BOW), Walla Walla, Washington. BOW was a wholly-owned subsidiary of
Bancwest Financial Corporation (BFC). BFC was dissolved following the merger.
BOW has become the fifth wholly owned subsidiary of USBN. BOW has four branches
located in Southeastern Washington. As of February 1, 1999 BOW had
approximately $103 million in assets, $68 million in loans, $90 million in
deposits and $12 million in equity. The pooling-of-interests accounting method
will be used for the transaction. Approximately 1.7 million shares of USBN
common stock is expected to be issued to complete this transaction.
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 being used for the transaction, which includes restating prior
reported amounts to reflect the acquisition of 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. It has seven branches, six in Washington and one in Idaho. USBN
initially purchased Community Ban Corporation, and its wholly owned subsidiary
BOP. Shortly following the acquisition Community Ban Corporation was dissolved,
and BOP became a wholly owned subsidiary of United Security Bancorporation. The
acquisition was accounted for as a purchase transaction. Accordingly, the
results of operations of BOP are included with the Company for periods
subsequent to the date of acquisition. The acquisition increased assets by $64
million, intangible assets by $4.8 million, and deposits by $55 million as of
December 31, 1997.
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.
USB and GNB have branches across the street from each other in Moses Lake,
Washington. Also HSB and BOW have branches close to each other in downtown
Walla Walla, Washington. USBN is planning to consolidate these branches to
continue its superior customer service and to reduce noninterest expenses. The
consolidation is subject to regulatory approval. Following the consolidation
planned for second quarter 1999 there will be one GNB branch in Moses Lake,
Washington and one BOW branch in downtown Walla Walla, Washington.
5
UNITED SECURITY BANCORPORATION
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, 1998, USBN had total loans and leases outstanding of approximately $294
million, which equals 81.7% of the USBN's deposits and 72.4% of its assets.
$157 million of the loans were originated by USB; $75 million were originated by
HSB, $39 million by BOP, and $23 million by GNB. 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 also reduced its loan exposure to timber-related
borrowers in northeastern Washington in recent years, due to consolidation of
the timber industry in the area generally and the gradual elimination of some
timber-related businesses attributable to increased environmental concerns.
Mortgage Loans. Mortgage loans include various types of loans for which USBN
holds real property as collateral. At December 31, 1998, loans included
approximately $20.0 million of adjustable and fixed rate first mortgage loans
secured by one to four family residential properties, approximately $4.6 of
second mortgage loans secured by one to four family residential properties,
approximately $9.9 million in loans secured by multifamily (five or more)
residential properties. Mortgage loans typically mature in one to five years
and require payments on amortization schedules ranging from one year to twenty
years.
Construction Loans. Construction loans are made to individuals and contractors
to construct primarily single-family principal residences. These loans have
maturities of three months to six months. Interest rates are typically
adjustable, although some fixed-rate loans are made. USBN's policy is to
require that a permanent financing commitment be in place before a construction
loan is made to an individual borrower.
Consumer and Other Loans. Consumer loans are primarily automobile and home
equity loans. Consumer loans generally have maturities of five years or less,
and fixed interest rates. Other loans consist of personal lines of credit and
bank card advances. Personal lines of credit generally have maturities of one
year or less, and fixed interest rates. Bankcard advances are generally due
within 30 days and bear interest at rates that vary from time-to-time.
6
UNITED SECURITY BANCORPORATION
Interest Rates. The interest rates charged on loans vary with the degree of
risk and amount of the loan, and are further subject to competitive pressures,
money market rates, the availability of funds and government regulations.
Approximately 39% 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, and GNB each 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. All
loan applications are approved by designated officers in accordance with the
respective guidelines and underwriting policies of the Banks. Credit limits
generally vary according to the type of loan and the individual loan officer's
experience. The maximum current loan limits available to any one individual
vary from $25,000 per loan to $300,000 per loan. In addition, five individuals
currently can combine their credit authority, to a maximum of $750,000 for USB,
$500,000 for HSB, $500,000 for BOP, and $500,000 for GNB with respect to certain
loans. Loans in excess of the above amounts require the approval of the board
of directors of the lending Bank.
Under applicable federal and state law, permissible loans to one borrower by
either of the Banks are also limited. As of December 31, 1998, the Banks, as a
matter of policy, do not extend credit to any single borrower in excess of
$2,500,000, $1,350,000, $900,000, and $500,000 for USB, HSB, BOP, and GNB,
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, 1998, 1997 and 1996, the outstanding balance of loan
participations sold outside USBN were $18,349,000, $24,091,000, and $25,205,000,
respectively.
Secondary Mortgage Sales. USB sells mortgage loans in the secondary market as a
correspondent and a broker. USB offers a variety of products for refinance and
purchases; and is approved to originate FHA and VA loans. The majority of loans
originated in 1998 were fixed rate single family loans. Such loans were sold on
a servicing released basis. USB does not retain mortgage-servicing
responsibilities. In 1998, USB sold $33.3 million in mortgage loans, consisting
of $32.8 million of fixed rate residential loans and $.5 million of adjustable
rate residential loans.
7
UNITED SECURITY BANCORPORATION
Nonperforming Assets. The following table provides information for USBN's
nonperforming assets.
Year ended December 31,
($ in thousands) 1998 1997 1996 1995 1994
Nonperforming loans:
Nonaccrual loans $1,481 $2,220 $472 $777 $775
Accrual loans 90 days or more past due 649 764 444 612 228
------ ------ ------ ------ ------
Total nonperforming loans 2,130 2,984 916 1,389 1,003
Other real estate owned and other repossed assets 1,165 967 205 370 231
------ ------ ------ ------ ------
Total nonperforming assets $3,295 $3,951 $1,121 $1,759 $1,234
====== ====== ====== ====== ======
Allowance for loan losses $2,946 $2,865 $2,295 $1,594 $1,432
Ratio of total nonperforming assets to total assets 0.81% 1.03% 0.43% 0.82% 0.67%
Ratio of total nonperforming loans to total loans 0.73% 1.19% 0.47% 0.88% 0.74%
Ratio of allowance for loan losses to total
nonperforming loans 138.3% 96.0% 250.6% 114.8% 142.8%
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.
Real estate properties acquired through, or in lieu of, loan foreclosure are to
be sold and are initially recorded at fair value at the date of foreclosure
establishing a new cost basis. After foreclosure, valuations are periodically
performed by management and the real estate is carried at the lower of carrying
amount or fair value less cost to sell. Real estate properties and other
repossessed assets of USBN had a book value of $1,165,000 as of December 31,
1998, consisting primarily of commercial and chattel property.
Analysis of Allowance for Loan Losses
The allowance for loan losses represents management's recognition of the risks
of extending credit and its evaluation of the quality of the loan portfolios of
the Banks. The allowance is maintained at levels considered adequate by
management to provide for anticipated loan losses, and is based on management's
assessment of various factors affecting the loan portfolios, including problem
loans, business conditions and loss experience, an overall evaluation of the
quality of the underlying collateral, and collateral selling costs. The
allowance is increased by provisions charged to operations and is reduced by
loans charged off, net of any recoveries.
The decline in real estate market values in many parts of the country and the
significant losses experienced by many financial institutions in the late
1980's, have resulted in increased regulatory scrutiny of the loan portfolios of
financial institutions such as USBN and the Banks, particularly with respect to
commercial real estate and multi-family residential real estate loans.
Management of USBN periodically reviews the status of loans that are
contractually past due and the net realizable value of the collateral securing
such loans, and establishes reserves through the provision of loan losses where
ultimate collection of such loans is questionable. The provision for loan
losses also reflects a general allocation of unanticipated losses based in part
on the size of USBN's loan portfolio and management's assessment of economic
conditions within USBN's service area. Management believes that the allowance
for loan losses is adequate.
8
UNITED SECURITY BANCORPORATION
The following table sets forth information regarding changes in USBN's allowance
for loan losses as follows:
Years ended December 31,
($ in thousands) 1998 1997 1996 1995 1994
Balance of allowance for loan losses at beginning of period $2,865 $2,295 $1,594 $1,432 $1,002
Charge-offs
Commercial 344 453 255 114 154
Agricultural 112 1
Real estate (mortgage and construction) 157 272 14
Consumer 197 153 67 26 4
Other 102 22 61 52 28
------------ ------------- ------------ ------------- -------------
Total charge-offs 800 1,012 383 192 201
Recoveries
Commercial, financial and agricultural 167 86 59 14 44
Consumer 24 7 3 6 1
Real estate (mortgage and construction) 22 37 17
Other 10 1 1
------------ ------------- ------------ ------------- -------------
Total recoveries 223 130 63 37 46
Net charge-offs 577 882 320 155 155
Provision for loan losses 658 752 1,021 317 585
Allowance acquired through acquisition 700
------------ ------------- ------------ ------------- -------------
Balance of allowance for loan losses at end of period $2,946 $2,865 $2,295 $1,594 $1,432
============ ============= ============ ============= =============
Ratio of net charge-offs to average loans 0.21% 0.42% 0.18% 0.11% 0.13%
Average loans and leases outstanding during the period $273,540 $212,416 $180,149 $145,951 $119,532
The following table sets forth the allowance for loan losses by loan category,
based on management's assessment of the risk associated with such categories as
of the dates indicated, and summarizes the percentage of gross loans in each
category to total gross loans.
December 31,
1998 1997 1996 1995 1994
Amount of Amount of Amount of Amount of Amount of
($ in thousands) Allowance % Allowance % Allowance % Allowance % Allowance %
Commercial $1,680 57% $1,461 51% $1,239 54% $829 52% $716 50%
Agricultural 412 14% 430 15% 321 14% 223 14% 201 14%
Real estate-mortgage 501 17% 602 21% 367 16% 287 18% 286 20%
Real estate-construction 147 5% 86 3% 138 6% 112 7% 100 7%
Consumer 147 5% 172 6% 138 6% 96 6% 86 6%
Other 59 2% 114 4% 92 4% 47 3% 43 3%
-------------- ---------------- ---------------- --------------- --------------
Total $2,946 100% $2,865 100% $2,295 100% $1,594 100% $1,432 100%
============== ================ ================ =============== ==============
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UNITED SECURITY BANCORPORATION
Investments
Management of the investment portfolio is consolidated into a single investment
committee of USBN, which comprises USBN's President and Chief Executive Officer,
Vice President and Chief Financial Officer, and the Presidents of USB, HSB, BOP
and GNB. The investment committee of USBN is responsible for reviewing and
approving the investment strategies and recommendations of each of the Banks,
consistent with USBN's asset/liability and investment policy.
The following table sets forth the carrying value, by type, of the securities in
USBN's portfolio at December 31, 1998, 1997 and 1996.
December 31,
($ in thousands) 1998 1997 1996
U.S. Treasury and other U.S. Government agencies $44,557 $60,985 $11,390
States of the U.S. and political subdivisions 2,854 7,188 4,264
Other securities 14,303 5,410 4,841
------- ------- -------
Total securities $61,714 $73,583 $20,495
======= ======= =======
At December 31, 1998, the market value of USBN securities exceeded amortized
cost by $138,000. As of December 31, 1997 and 1996, the amortized cost of USBN's
investment portfolio exceeded its market value by $82,000 and $426,000,
respectively. No portion of USBN's investment portfolio is invested in
derivative securities (being securities whose value derives from the value of an
underlying security or securities, or market index of underlying securities'
values), and to USBN's knowledge, no portion of any mutual fund held in USBN's
investment portfolio was invested in derivative securities.
10
UNITED SECURITY BANCORPORATION
The following table sets forth the carrying values, maturities and approximate
average aggregate yields of securities in USBN's investment portfolio by type at
December 31, 1998.
Type and Maturity
($ in thousands) Yield Amount
U.S. Treasury and other U.S. government agencies and corporations:
1 year or less $20,809
Over 1 through 5 years 23,748
Over 5 through 10 years
Over 10 years
---------
Total 6.07% 44,557
---------
States and political subdivisions
1 year or less 1,333
Over 1 through 5 years 1,521
Over 5 through 10 years
Over 10 Years
---------
Total 7.39% 2,854
---------
Other securities:
1 year or less 4,935
Over 1 through 5 years 4,956
Over 5 through 10 years
Over 10 years 4,412
---------
Total 6.37% 14,303
---------
Total investment securities:
1 year or less 27,077
Over 1 through 5 years 30,225
Over 5 through 10 years
Over 10 years 4,412
=========
Total 6.20% $61,714
=========
The yields for tax-exempt securities have been computed on a full tax equivalent
basis using an assumed tax rate of 34%. Maturities are estimated using payment
speeds as of December 31, 1998.
11
UNITED SECURITY BANCORPORATION
Deposits
USBN's primary source of funds has historically been customer deposits. The
Banks strive to maintain a high percentage of noninterest-bearing deposits,
which are low cost funds and result in higher interest margins. At December 31,
1998, 1997, and 1996, USBN's ratios of noninterest-bearing deposits to total
deposits were 17.9%, 18.5%, and 16.8%, respectively.
USBN offers a variety of accounts designed to attract both short-term and long-
term deposits from its customers. These accounts include negotiable order of
withdrawal ("NOW") accounts, money market investment accounts, savings accounts,
and certificates of deposit and other time deposits. Interest-bearing accounts
earn interest at rates established by management of the Banks, based on
competitive market factors and management's desire to increase or decrease
certain types or maturities of deposits consistent with the Banks policies.
USBN traditionally has not sought brokered deposits and does not intend to do so
in the future.
The following table sets forth the average balances for each major category of
deposit and the weighted-average interest rate paid for deposits in 1998, 1997
and 1996.
Year Ended December 31,
1998 1997 1996
Average Interest Average Interest Average Interest
($ in thousands) Balance Rate Balance Rate Balance Rate
Interest-bearing demand deposits $114,074 4.44% $94,105 4.41% $67,136 4.15%
Savings deposits 36,803 3.06% 24,024 3.60% 18,895 3.00%
Time deposits 129,383 5.24% 96,329 5.43% 87,419 5.88%
Noninterest-bearing demand deposits 62,255 43,841 32,913
-------- -------- --------
Total $342,515 $258,299 $206,363
======== ======== ========
The following table shows the amounts and maturities of certificates of deposit
that had balances of more than $100,000 at December 31, 1998, 1997 and 1996.
December 31,
($ in thousands) 1998 1997 1996
Certificates of Deposit over $100,000 with remaining maturity:
Less than three months $10,651 $11,983 $12,203
Three to six months 7,411 5,927 3,885
Over six months to one year 11,103 11,059 8,414
Over one year 2,391 2,372 604
-------- -------- --------
Total $31,556 $31,341 $25,106
======== ======== ========
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
UNITED SECURITY BANCORPORATION
USB competes for deposits and banking business in northeastern Washington from
eleven locations in Chewelah, Colville, Davenport, Kettle Falls, Ione, Moses
Lake, and Spokane. The Bank's market area encompasses Stevens, Ferry, Grant,
Lincoln and Pend Oreille Counties, and the northern and eastern portions of
Spokane County. USB competes against two commercial banks and one mutual
savings bank in Stevens County, one commercial bank and one credit union in
Ferry County, four commercial banks, one federal savings bank and several credit
unions in Grant County, and five commercial banks and two credit unions in
Lincoln County and two commercial banks and one credit union in Pend Oreille
County. In Spokane County, USB competes against approximately seven commercial
banks, 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, Yakima and Walla Walla. The Bank's
market area encompasses Yakima and Walla Walla Counties and the western portion
of Benton County. HSB competes against commercial banks, savings and loans, and
credit unions in its market area.
BOP serves customers in the southeastern corner of the State of Washington and
Latah County, Idaho. BOP is located in Whitman County with branches in Pullman,
Colton, 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.
Employees
As of December 31, 1998, USBN had 237 employees, of which 87 were employed by
USB, 49 were employed by HSB, 45 were employed by BOP, 15 were employed by GNB,
17 were employed by USB Insurance, and 24 were employed by the Parent Company,
United Security Bancorporation. None of USBN's employees are covered by a
collective bargaining agreement. Management believes relations with USBN's
employees are good. United Security Bancorporation is located at 9506 N.
Newport Hwy., Spokane, WA 99218 and the telephone number is 509-467-6949.
Effect of Governmental Policy
One of the most significant factors affecting the Banks earnings is the
difference between the interest rates paid by the Banks on its deposits and its
other borrowings and the interest rates earned by the Banks on loans to its
customers and securities owned by the Banks. The yields of its assets and the
rates paid on its liabilities are sensitive to changes in prevailing interest
rates. Thus, the earnings and growth of the Banks will be influenced by general
economic conditions, the monetary and fiscal policies of the federal government,
and the policies of regulatory agencies, particularly the Federal Reserve Board,
which implements national monetary policy. An important function of the Federal
Reserve System is to regulate the money supply and credit conditions in order to
mitigate recessionary and inflationary pressures. Among the techniques used to
implement these objectives are open market operations in United Sates government
securities, changes in reserve requirements of banks, and in the cost of short-
term borrowings. These techniques influence overall growth and distribution of
credit, bank loans, investments and deposits, and may also affect interest rates
charged on loans or paid on deposits. The nature and impact of future changes
in monetary policies cannot be predicted.
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UNITED SECURITY BANCORPORATION
From time to time, legislation has been enacted which has the effect of
increasing the cost of doing business, limiting or expanding permissible
activities, or affecting the competitive balance between bank and other
financial institutions. Legislative proposals which could affect USBN and the
banking business in general have been proposed and may be introduced before the
United States Congress and other governmental bodies. These proposals may alter
USBN's structure, regulation, disclosure and reporting requirements. In
addition, various banking regulatory agencies frequently propose rules and
regulations to implement and enforce existing legislation. It cannot be
predicted whether or in what form any such legislation or regulations will be
enacted or the extent to which the business of USBN would be affected thereby.
Supervision and Regulation
General. As a bank holding company, USBN is subject to regulation under Bank
Holding Company Act of 1956, as amended (the "BHCA"), and its examination and
reporting requirements. Under the BHCA, a bank holding company may not directly
or indirectly acquire the ownership or control of more than 5% of the voting
shares or substantially all of the assets of any company, including a bank or
savings and loan association, without the prior approval of the Federal Reserve
Board. In addition, bank holding companies are generally prohibited under the
BHCA from engaging in nonbanking activities, subject to certain exceptions. The
Economic Growth and Regulatory Paperwork Reduction Act of 1996 ("Economic Growth
Act") amended the BHCA to eliminate the requirement that bank holding companies
seek approval of the Board of Governors of the Federal Reserve ("FRB") before
engaging de novo in permissible nonbanking activities if the holding company is
well-capitalized and meets certain other specified criteria. A bank holding
company meeting those specifications need only notify the FRB within 10 business
days after beginning the activity. The Economic Growth Act also established an
expedited procedure for well-capitalized bank holding companies meeting certain
criteria to obtain FRB approval to acquire smaller companies that engage in
permissible non-banking activities pre-approved by FRB order.
USBN is subject to supervision and examination by applicable federal and state
banking agencies. The earnings of USBN's subsidiaries, and therefore the
earnings of the Company, are affected by general economic conditions, management
policies and the legislative and governmental actions of various regulatory
authorities, including the Federal Reserve Board, the FDIC, the Division of
Finance and various other state financial institution regulatory agencies. In
addition, there are numerous governmental requirements and regulations that
affect the activities of USBN.
Certain Transactions with Affiliates. There are various legal restrictions on
the extent to which a bank holding company and certain of its nonbank
subsidiaries can borrow or otherwise obtain credit from its bank subsidiaries.
In general, these restrictions require that any such extensions of credit must
be on nonpreferential terms and secured by designated amounts of specified
collateral and be limited, as to any one of the holding company or such nonbank
subsidiaries, to 10% of the lending bank's capital stock and surplus, and as to
the holding company and all such nonbank subsidiaries in the aggregate, to 20%
of such capital stock and surplus.
Tie-In Arrangements. USBN cannot engage in certain tie-in arrangements relating
to any extension of credit, sale or lease of property or furnishing of services.
For example, with certain exceptions, USBN may not condition an extension of
credit to a customer on either (1) a requirement that the customer obtain
additional services provided by it or (2) an agreement by the customer to
refrain from obtaining other services from a competitor. In April of 1997, the
FRB adopted significant amendments to its anti-tying rules that: (1) removed
FRB-imposed anti-tying restrictions on bank holding companies and their non-bank
subsidiaries; (2) allowed banks greater flexibility to package products with
their affiliates; and (3) established a safe harbor from the tying restrictions
for certain foreign transactions. These amendments are designed to
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UNITED SECURITY BANCORPORATION
enhance competition in banking and nonbanking products and allow banks and their
affiliates to provide more efficient, lower cost service to their customers.
However, the impact of the amendments on USBN is unclear at this time.
Payment of Dividends. USBN is a legal entity separate and distinct from the
Banks. The principal source of USBN's revenues is dividends from the Banks.
Various federal and state statutory provisions limit the amount of dividends the
Banks can pay to USBN without regulatory approval. The approval of appropriate
federal or state bank regulatory agencies is required for any dividend if the
total of all dividends declared by the Banks in any calendar year would exceed
the total of the institution's net profits, as defined by regulatory agencies,
for such year combined with its retained net profits for the preceding two
years. The payment of dividends by the Banks may also be affected by other
factors, such as the maintenance of adequate capital.
Capital Adequacy. The Federal Reserve Board has issued standards for measuring
capital adequacy for bank holding companies. These standards are designed to
provide risk-responsive capital guidelines and to incorporate a consistent
framework for use by financial institutions operating in major international
financial markets. The banking regulators have issued standards of banks that
are similar to, but not identical with, the standards of bank holding companies.
In general, the risk-related standards require financial institutions and
financial institution holding companies to maintain capital levels based on
"risk adjusted" assets, so that categories of assets with potentially higher
credit risk will require more capital backing than categories with lower credit
risk. In addition, financial institutions and financial institution holding
companies are required to maintain capital to support off-balance sheet
activities such as loan commitments.
FDIC Insurance Assessments. The subsidiary depository institutions of USBN are
subject to FDIC deposit insurance assessments. The FDIC has adopted a risk-
based premium schedule. Each financial institution is assigned to one of three
capital groups--well capitalized, adequately capitalized or undercapitalized--
and further assigned to one of three subgroups within a capital group, on the
basis of supervisory evaluations by the institution's primary federal and, if
applicable, state supervisors, and on the basis of other information relevant to
the institution's financial condition and the risk posed to the applicable
insurance fund. The actual assessment rate applicable to a particular
institution will, therefore, depend in part upon the risk assessment
classification so assigned to the institution by the FDIC. See "--FIRREA and
FDICIA."
The Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA"), adopted in August 1989 to provide for the resolution of insolvent
savings associations, required the FDIC to establish separate deposit insurance
funds--the Bank Insurance Fund ("BIF") for bank and the Savings Association
Insurance Fund ("SAIF") for savings associations. FIRREA also required the FDIC
to set deposit insurance assessments at such levels as would cause BIF and SAIF
to reach their "designated reserve ratios" of 1.25 percent of the deposits
insured by them within a reasonable period of time. Due to low costs of
resolving bank insolvencies in the last few years, BIF reached its designated
reserve ratio in May 1995. As a result, effective January 1, 1996, the FDIC
eliminated deposit insurance assessments (except for the minimum $2,000 payment
required by law) for banks that are well capitalized and well managed and
reduced the deposit insurance assessments for all other banks. With the
enactment of the Deposit Insurance Funds Act of 1996 ("Funds Act"), for the
three-year period beginning in 1997, BIF-insured deposits such as those of the
Bank are subject to a Financing Corporation ("FICO") premium assessment on
domestic deposits at one-fifth the premium rate (roughly 1.3 basis points)
imposed on SAIF-insured deposits (roughly 6.5 basis points). Beginning in the
year 2000, BIF-insured institutions like the Bank will be required to pay the
FICO obligations on a pro-rata basis with all thrift institutions; annual
assessments are expected to equal approximately 2.4 basis points until 2017, to
be phased out completely by 2019. The Funds Act provides for the merger of the
BIF and SAIF on January 1, 1999, only if no thrift institutions exist on that
date.
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UNITED SECURITY BANCORPORATION
Support of Subsidiary Banks. Under Federal Reserve Board policy, USBN is
expected to act as a source of financial strength to the Banks and to commit
resources to support the Banks in circumstances where it may not choose to do so
absent such a policy. This support may be required at times when USBN may not
find itself able to provide it. In addition, any capital loans by USBN to the
Banks would also be subordinate in right of payment to deposits and certain
other indebtedness of such subsidiary. Consistent with this policy regarding
bank holding companies serving as a source of financial strength for their
subsidiary banks, the Federal Reserve Board has stated that, as a matter of
prudent banking, a bank holding company generally should not maintain a rate of
cash dividends unless its net income available to common shareholders has been
sufficient to fully fund the dividends and the prospective rate of earnings
retention appears consistent with the bank holding company's capital needs,
asset quality and overall financial condition.
FIRREA and FDICIA. FIRREA contains a cross-guarantee provision which could
result in insured depository institutions owned by USBN being assessed for
losses incurred by the FDIC in connection with assistance provided to, or the
failure of, any other insured depository institution owned by USBN. Under
FIRREA, failure to meet the capital guidelines could subject a banking
institution to a variety of enforcement remedies available to federal regulatory
authorities, including the termination of deposit insurance by the FDIC.
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
made extensive changes to the federal banking laws. FDICIA instituted certain
changes to the supervisory process, including provisions that mandate certain
regulatory agency actions against undercapitalized institutions within specified
time limits. FDICIA contain various other provisions that may affect the
operations of banks and savings institutions.
The prompt corrective action provision of FDICIA requires the federal banking
regulators to assign each insured institution to one of five capital categories
("well capitalized," "adequately capitalized" or one of three "undercapitalized"
categories) and to take progressively more restrictive actions based on the
capital categorization, as specified below. Under FDICIA, capital requirements
would include a leverage limit, a risk-based capital requirement and any other
measure of capital deemed appropriate by the federal banking regulators for
measuring the capital adequacy of an insured depository institution. All
institutions, regardless of their capital levels, are restricted from making any
capital distribution or paying any management fees that would cause the
institution to fail to satisfy the minimum levels for any relevant capital
measure.
The FDIC and the Federal Reserve Board adopted capital-related regulations under
FDICIA. Under those regulations, a bank will be well capitalized if it: (i) had
a risk-based capital ratio of 10% or greater; (ii) had a ratio of Tier 1 capital
to risk-weighted assets of 6% or greater; (iii) had a Tier 1 capital to average
assets of 5% or greater and (iv) was not subject to an order, written agreement,
capital directive or prompt correction action directive to meet and maintain a
specific capital level for any capital measure. A bank will be adequately
capitalized if it was not "well capitalized" and: (i) had a risk-based capital
ratio of 8% or greater; (ii) had a ratio of Tier 1 capital to risk-weighted
assets of 4% or greater; and (iii) had a ratio of Tier 1 capital to average
assets of 4% or greater (except that certain associations rated "Composite 1"
under the federal banking agencies' CAMEL rating system may be adequately
capitalized if their ratios of core capital to adjusted total assets were 3% or
greater). FDICIA also makes extensive changes in existing rules regarding
audits, examinations and accounting. It generally requires annual on-site, full
scope examinations by each bank's primary federal regulatory. It also imposes
new responsibilities on management, the independent audit committee and outside
accountants to develop or approve reports regarding the effectiveness of
internal controls, legal compliance and off-balance sheet liabilities and
assets.
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UNITED SECURITY BANCORPORATION
Depositor Preference Statute. Legislation enacted in August 1993 provides a
preference for deposits and certain claims for administrative expenses and
employee compensation against an insured depository institution, in the
liquidation or other resolution of such an institution by any receiver. Such
obligations would be afforded priority over other general unsecured claims
against such an institution, including federal funds and letters of credit, as
well as any obligation to shareholders of such an institution in their capacity
as such.
The Interstate Banking and Community Development Legislation. In September
1994, legislation was enacted that is expected to have a significant effect in
restructuring the banking industry in the United States. The Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994 ("Riegle-Neal")
facilitates the interstate expansion and consolidation of banking organizations
by permitting (i) bank holding companies that are adequately capitalized and
managed, one year after enactment of the legislation, to acquire banks located
in states outside their home states regardless of whether such acquisitions are
authorized under the law of the host state, (ii) the interstate merger of banks
after June 1, 1997, subject to the right of individual states to "opt in" or to
"opt out" of this authority before that date, (iii) banks to establish new
branches on an interstate basis provided that such action is specifically
authorized by the law of the host state, (iv) foreign banks to establish, with
approval of the regulators in the United States, branches outside their home
states to the same extent that national or state banks located in the home state
would be authorized to do so, and (v) banks to receive deposits, renew time
deposits, close loans, service loans and receive payments on loans and other
obligations as agent for any bank or thrift affiliate, whether the affiliate is
located in the same state or a different state. One effect of Riegle-Neal is to
permit USBN to acquire banks located in any state and to permit bank holding
companies located in any state to acquire banks and bank holding companies in
Washington. Under recent banking agency regulations, banks are prohibited from
using their interstate branches primarily for deposit production. The FDIC and
other banking agencies have accordingly implemented a loan-to-deposit ratio
screen to ensure compliance with this prohibition. Overall, Riegle-Neal is
likely to have the effects of increasing competition and promoting geographic
diversification in the banking industry.
Securities Registration and Reporting. The common stock of 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. The periodic reports, proxy statements, and other
information filed by USBN under that Act can be inspected and copied at or
obtained from the office of the SEC in Washington, D.C. In addition, the
securities issued by USBN are subject to the registration requirements of the
1933 Act and applicable state securities laws unless exemptions are available.
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UNITED SECURITY BANCORPORATION
Item 2. Properties.
At December 31, 1998, USBN owned or leased facilities in twenty-six locations in
eastern Washington and one location in Moscow, Idaho. A description of the
property is as follows:
USB's Chewelah branch is a leased facility located at S. 106 2nd E. The
building has approximately 9,600 square feet and was last renovated in 1983.
Approximately 720 square feet is subleased to USB Insurance. The lease is
treated as a capital lease. The lease agreement expires in 2010.
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.
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.
In 1997 USB purchased its branch located in Moses Lake at 101 E. 4th Ave. The
building has approximately 3,100 square feet. USB is in the process of
combining this branch into the GNB branch located across the street.
In 1997 USBN constructed the USB branch located in Liberty Lake at 1221 N.
Liberty Lake Road. The building has approximately 1,900 square feet. The land
is leased through June 2017.
In 1997 USBN constructed the USB branch located in Qualchan at 4233 S. Cheney
Spokane Road. The building has approximately 1,900 square feet. The land is
leased through June 2017.
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UNITED SECURITY BANCORPORATION
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.
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 1997 HSB purchased its branch located in Walla Walla at 33 E. Main St. The
building has approximately 6,000 square feet. The building was sold in 1998
with a short-term leaseback agreement. HSB is in the process of combining this
branch into the BOW downtown Walla Walla branch.
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.
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 has a leased branch in Moscow, Idaho at 505 S. Jackson, which was opened in
1997. The building area is approximately 1,440 square feet. Plans are in
process to move this branch allowing more customer service space.
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.
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 7 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.
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UNITED SECURITY BANCORPORATION
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 1998.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Market Information. Effective in May 1995 the Common Stock was approved for
quotation on the Nasdaq National Market System (NASDAQ) under the symbol "USBN".
The following table sets out the high and low bid prices per share for the
Common Stock for 1998 and 1997 as reported by NASDAQ.
1998 1997
High Low High Low
First Quarter $ 20.85 $ 15.60 $ 12.60 $ 10.52
Second Quarter $ 20.91 $ 18.18 $ 11.98 $ 10.54
Third Quarter $ 19.66 $ 14.55 $ 15.40 $ 11.47
Fourth Quarter $ 16.82 $ 12.73 $ 17.35 $ 14.67
Per share amounts have been adjusted giving retroactive effect to stock split-
ups and stock dividends.
Holders. The number of holders of common stock of record on February 26, 1999
was approximately 1,700.
Dividends. USBN has declared and paid the following dividends subsequent to
January 1, 1996: On February 5, 1996 and February 25, 1997 the Company issued
10% stock split-ups. On February 10, 1998 and February 26, 1999, USBN paid 10%
stock dividends. GNB paid cash dividends of $57,000 and $49,000 in 1998 and
1997, respectively.
USBN adopted a dividend policy, which is periodically reviewed and revised by
the Board of Directors. USBN expects that future dividends, if declared, will
be paid in the form of stock dividends.
Payment of dividends, including stock dividends, is subject to regulatory
limitations. Under federal banking law, the payment of dividends by USBN and
the Banks is subject to capital adequacy requirements established by the Federal
Reserve Board and the FDIC. Under Washington general corporate law as it
applies to USBN, no cash dividend may be declared or paid, if, after giving
effect to the dividend, USBN is insolvent or the liabilities exceed the assets.
Payment of dividends, including stock dividends, on the Common Stock is also
affected by statutory limitations, which restrict the ability of the Banks to
pay upstream dividends to USBN. Under Washington banking law as it applies to
the Banks, no dividend may be declared or paid in an amount greater than net
profits then available, and after a portion of such net profits have been added
to the surplus funds of the Banks.
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UNITED SECURITY BANCORPORATION
Item 6. Selected Financial Data.
The following table sets forth certain selected consolidated financial data of
USBN at and for the years ended December 31:
($ in thousands, except per share amounts) 1998 1997 1996 1995 1994
Net interest income $21,016 $16,564 $14,114 $11,347 $9,129
Provision for loan losses 658 752 1,021 317 585
Noninterest income 3,987 3,958 3,206 3,970 2,398
Noninterest expense 16,360 12,014 11,189 9,433 7,557
Income before income tax expense 7,985 7,756 5,110 5,567 3,385
Income tax expense 2,621 2,464 1,656 1,489 1,143
Net income 5,364 5,292 3,454 4,078 2,242
Basic earnings per common share $1.08 $1.06 $0.70 $0.95 $0.78
Diluted earnings per common share $1.06 $1.05 $0.69 $0.95 $0.78
Return on average assets 1.37% 1.77% 1.43% 2.03% 1.35%
Return on average equity 13.64% 15.83% 11.86% 18.67% 17.74%
Assets $405,041 $384,269 $259,744 $214,563 $185,524
Securities 61,714 73,583 20,495 27,527 29,263
Loans:
Commercial and industrial 166,262 126,835 100,709 76,885 64,111
Agricultural 40,903 37,356 28,774 23,761 21,087
Real estate mortgage 50,626 53,795 38,108 29,972 28,441
Real estate construction 13,906 8,440 9,954 11,677 9,739
Installment 14,383 14,926 12,408 11,318 9,943
Lease financing 3,546 5,209 3,038 1,336
Bank cards and other loans 4,256 4,762 3,618 3,207 3,310
Total loans 293,882 251,323 196,609 158,156 136,631
Allowance for loan loss to loans percentage 1.01% 1.14% 1.17% 1.01% 1.05%
Deposits 358,810 337,804 222,998 183,941 164,680
Borrowings 712 6,989 3,242 767 5,145
Stockholders' equity 42,201 36,485 31,012 27,568 14,494
Equity to assets ratio 10.42% 9.49% 11.94% 12.85% 7.81%
Book value per common share $8.43 $7.34 $6.24 $5.57 $4.68
Number of common shares outstanding 5,004,322 4,972,885 4,970,465 4,949,542 3,097,456
Basic weighted average shares outstanding 4,982,221 4,971,990 4,961,925 4,300,485 2,874,825
See Results of Operations for a description of the nonrecurring items in 1998,
1997 and 1996. In addition 1995 net earnings were improved $780,000 or $.16
basic earnings per share by net life insurance proceeds from the death of a key
employee.
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UNITED SECURITY BANCORPORATION
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, 1998, 1997, and 1996, USBN's
average net interest margins were 6.0%, 6.1%, and 6.4%, respectively. Prior
reported amounts have been restated to reflect the acquisition of GNB 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, 1998, 1997, and 1996, the provision for loan
losses was $658,000, $752,000, and $1,021,000, respectively. Net charge-offs
during the year ended December 31, 1998 were $577,000 as compared to $882,000
and $320,000 during 1997 and 1996, respectively. For the three years ended
December 31, 1998, 1997, and 1996 noninterest income as a percentage of
personnel expenses was 42%, 55%, and 49%, respectively.
Net Interest Income
The following table sets forth information with regard to average balances of
assets and liabilities, and interest income from interest-earning assets and
interest expense on interest-bearing liabilities, resultant yields or costs, net
interest income, net interest spread (the difference between the average yield
on interest-earning assets and the average cost of interest-bearing
liabilities), and the net interest margin.
Year Ended December 31,
1998 1997 1996
Average Average Average
($ in thousands) Balance Interest % Balance Interest % Balance Interest %
Assets
Loans $273,540 $30,079 11.00% $212,416 $23,571 11.10% $180,494 $20,545 11.38%
Taxable securities 57,051 3,477 6.09% 31,630 2,106 6.66% 19,251 1,255 6.52%
Nontaxable securities 5,183 383 7.39% 6,304 402 6.38% 3,955 299 7.56%
Federal funds sold 7,390 388 5.25% 11,323 623 5.50% 7,460 402 5.39%
Time deposits with other
banks 10,462 537 5.13% 11,960 651 5.44% 9,361 486 5.19%
-------- ------- ------ -------- ------ ------ ------- ------- ------
Total interest earning
assets 353,626 $34,864 9.86% 273,633 $27,353 10.00% 220,521 $22,987 10.42%
======= ====== ======= ====== ======= ======
Noninterest earning
assets 38,392 26,068 21,025
-------- -------- -------
Total assets $392,018 $299,701 $241,546
======== ======== ========
Liabilities
Interest-bearing demand
deposits $114,074 $5,066 4.44% $94,105 $4,153 4.41% $67,136 $2,789 4.15%
Savings deposits 36,803 1,127 3.06% 24,024 865 3.60% 18,895 567 3.00%
Time deposits 129,383 6,780 5.24% 96,329 5,234 5.43% 87,419 5,138 5.88%
-------- ------- ------ -------- ------ ------ ------- ------- ------
Total interest-bearing
deposits 280,260 12,973 4.63% 214,458 10,252 4.78% 173,450 8,494 4.90%
Short-term debt 1,255 69 5.50% 105 5 4.76%
Long-term debt 5,361 676 12.61% 4,796 432 9.01% 3,077 292 9.49%
-------- ------- ------ -------- ------ ------ ------- ------- ------
Total interest-bearing
liabilities 286,876 $13,718 4.78% 219,254 $10,684 4.87% 176,632 $8,791 4.98%
======= ===== ======= ===== ======= ======
Noninterest bearing
demand deposits 62,255 43,841 32,913
Other noninterest bearing
liabilities 3,557 3,171 2,870
-------- -------- -------
Total liabilities 352,688 266,266 212,415
Stockholders' Equity 39,330 33,435 29,131
-------- -------- -------
Total liabilities and
stockholders equity $392,018 $299,701 $241,546
======== ======== ========
Net interest income $21,146 5.08% $16,669 5.12% $14,196 5.45%
======= ===== ======= ===== ======= ======
Net interest margin to
average earning assets 5.98% 6.09% 6.44%
===== ===== ======
Nonaccrual loans are included with loan balances. In the above table tax-exempt
securities income has been presented using a tax equivalent basis and an assumed
tax rate of 34%.
22
UNITED SECURITY BANCORPORATION
The following table illustrates the changes in USBN's net interest income due to
changes in volumes and interest rates.
1998 vs 1997 1997 vs 1996
---------------------------- ----------------------------
Increase (decrease) in net interest income due to changes in
-------------------------------------------------------------
($ in thousands) Volume Rate Total Volume Rate Total
------ ----- ------ ------ ----- -------
INTEREST EARNING ASSETS
Loans $6,783 ($275) $6,508 $3,634 ($573) $3,061
Securities 1,539 (212) 1,327 934 (22) 912
Federal funds sold (216) (19) (235) 208 13 221
Interest-bearing deposits in other banks (82) (32) (114) 135 28 163
------ ----- ------ ------ ----- -------
Total interest earning assets 8,024 (538) 7,486 4,911 (554) 4,357
------ ----- ------ ------ ----- -------
INTEREST BEARING LIABILITIES
Interest-bearing demand deposits 881 32 913 1,120 244 1,364
Savings deposits 460 (198) 262 154 144 298
Time deposits 1,796 (250) 1,546 524 (428) 96
------ ----- ------ ------ ----- -------
Total interest bearing deposits 3,137 (416) 2,721 1,798 (40) 1,758
------ ----- ------ ------ ----- -------
Short-term debt 69 69 (5) (5)
Long-term debt 51 193 244 163 (23) 140
------ ----- ------ ------ ----- -------
Total interest bearing liabilities 3,188 (154) 3,034 1,956 (63) 1,893
------ ----- ------ ------ ----- -------
Total increase (decrease) in net interest income $4,836 ($384) $4,452 $2,955 ($491) $2,464
====== ===== ====== ====== ===== =======
The change in interest income and interest expense due to changes in both volume
and rate, which cannot be segregated, has been allocated proportionately to the
change due to volume and the change due to rate.
The following table presents the aggregate maturities of loans in each major
category of the USBNs' loan portfolio at December 31, 1998. Actual maturities
may differ from the contractual maturities shown below as a result of renewals
and prepayments.
Aggregate maturities at December 31, 1998
----------------------------------------------------
Less than One to Over five
($ in thousands) one year five years years Total
--------- ---------- --------- --------
Commercial, financial and agricultural $46,948 $41,995 $118,222 $207,165
Real estate-mortgage 23,100 16,401 11,125 50,626
Real estate-construction 13,022 874 10 13,906
Consumer 2,871 9,691 1,821 14,383
Other 4,258 3,544 7,802
------- ------- -------- --------
Total $90,199 $72,505 $131,178 $293,882
======= ======= ======== ========
23
UNITED SECURITY BANCORPORATION
Results of Operations
Years Ended December 31, 1998, 1997 and 1996
General. USBN's net income was $5,364,000 in 1998, $5,292,000 in 1997, and
$3,453,000 in 1996. Basic earnings per share were $1.08, $1.06, and $.70 for
1998, 1997, and 1996, respectively. There were several nonrecurring items in
1998, which impacted the quarterly results, but the overall net impact for the
year was minimal.
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 $.11 per share. In 1996,
USBN detected and recorded an estimated operational loss of $860,000 for the
theft. This reduced after tax net income by $568,000 or $.11 per share.
Without the impact of the theft recovery and loss net income would have been
$5,364,000, $4,767,000 and $4,022,000 for 1998, 1997 and 1996, respectively.
Basic earnings per share would have been $1.08, $.95 and $.81 for 1998, 1997 and
1996, respectively.
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 acquisition of
GNB.
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.
In July, 1997 USBN purchased five branches from Wells Fargo Bank. USB purchased
two branches located in Davenport and Moses Lake, Washington. HSB purchased
three branches located in Mabton, Naches, and Walla Walla, Washington. The
acquisition increased deposits by approximately $35 million, premises and
equipment by $1.9 million, and intangible assets by $2.1 million.
Return on average assets was 1.37%, 1.77%, and 1.43% for 1998, 1997, and 1996,
respectively. Return on average equity was 13.64%, 15.83%, and 11.86% for 1998,
1997, and 1996, respectively. Without the nonrecurring items described above,
return on assets would have been 1.37%, 1.59%, and 1.67% for 1998, 1997, and
1996, respectively. Return on equity would have been 13.64%, 14.26%, and 13.81%
for 1998, 1997, and 1996, respectively.
Net Interest Income. Net interest income increased 27% to $21,016,000 in 1998
compared to 1997. The increase in 1997 was 17% to $16,564,000 over 1996
results. The net interest income improvements were primarily the result of loan
volume increases in 1998 and 1997. USBN's net interest margin to average
earning assets was 5.98%, 6.09%, and 6.44% in 1998, 1997, and 1996,
respectively. Consistent with the decline in market interest rates the yield on
earning assets dropped by .14% in 1998 while the decline on interest-bearing
liabilities was .09%. The yield on loans declined to 11.00% in 1998 from 11.10%
in 1997 from 11.38% in 1996. USBN's cost of funds declined to 4.78% in 1998
from 5.87% in 1997 from 4.98% in 1996.
24
UNITED SECURITY BANCORPORATION
Noninterest Income. Noninterest income, which consists of fees and service
charges, insurance commissions, securities gains and losses, and other income,
increased to $3,987,000 in 1998 from $3,958,000 in 1997 and from $3,206,000 in
1996. Insurance proceeds of $796,000 were included in 1997 noninterest income
for the recovery of an employee theft described above. Without this
nonrecurring income noninterest income would have been $3,987,000, $3,162,000
and $3,206,000 for 1998, 1997 and 1996, respectively. Fees and service charges
for banking services increased by 16% in 1998. The customer deposit base growth
income was offset by declines in insurance commissions. Gains on the sale of
securities were recorded as USBN reduced its securities portfolio to provide
liquidity for its loan growth. Other income increased in 1998 when USBN sold
commercial property and had a gain on the sale of merchant credit card
relationships, which was offset by a loss on the sale of a branch building.
Noninterest Expense. Noninterest expense increased by 36% in 1998 to
$16,360,000 and 7% in 1997 to $12,014,000. An increase in noninterest expense
was due to normal growth and acquisition expenses related to the acquisition of
GNB in 1998 and BOW in 1999. USBN purchased five branches in the middle of 1997
and BOP in fourth quarter 1997, while 1998 expenses include the 1997
acquisitions for the full year. The operational theft loss of $860,000
described above was reported in 1996.
Subsequent Event. Effective February 1, 1999 USBN merged with Bank of the West
(BOW), Walla Walla, Washington per a definitive agreement announced on November
10, 1998. BOW has become the fifth Banking subsidiary of USBN and will continue
to operate under its current name and management and in its current locations.
The pooling-of-interests accounting method is being used for the transaction.
Approximately 1.7 million shares of USBN common stock is expected to be issued
to complete this transaction. Based on the December 31, 1998 Call Report BOW
will add approximately $108 million in assets, $70 million in loans, $94 million
in deposits, and $12 million in stockholders' equity.
25
UNITED SECURITY BANCORPORATION
Year 2000
The Year 2000 Problem. The century date change creates a problem because some
computer programs and systems were designed to store calendar years with only
two numbers, rather than four numbers. Computer programs and systems may
recognize a date using "00" as 1900 rather than the Year 2000. The extent of
the impact of this Year 2000 problem is not yet known and could affect the
global economy and every organization. USBN is addressing these issues.
The Challenges faced by USBN. The Year 2000 problem is of concern to USBN and
other financial institutions because most financial transactions including
interest accruals and payments are date sensitive. The Year 2000 problem could
impact all automated systems including automated teller machines, alarm systems,
and vaults. Some systems are more difficult to assess and repair.
USBN's State of Readiness. USBN is reviewing its automated systems and business
processes to identify and correct any date-related problems that may arise with
the change of the century at December 31, 1999. In September 1998, USBN and the
provider of USBN's mainframe computer applications completed an installation and
upgrade of the mainframe operating systems to comply with changes for the Year
2000. Testing of the new software will continue through September 30, 1999.
USBN also continues to review its PC hardware and software and its major
automated systems suppliers for Year 2000 compliance. A small number of PCs and
PC systems required upgrades, which has been completed.
Third Party Concerns. USBN has numerous customers, vendors, and third party
service providers whose failure to address the Year 2000 problem may create
significant business disruption and costs to USBN. It is impossible for any one
party to eliminate the risks related to the Year 2000 problem. It is possible
that USBN's service could be disrupted through the loss of electric power, phone
service, or other reasons outside of USBN's control. USBN is in contact with
its outside providers of services on an ongoing basis to evaluate their progress
in addressing the Year 2000 problem.
The Banks are incorporating Year 2000 issues into their standards of
creditworthiness for new and renewed loans and are reviewing significant
existing borrowers for Year 2000 risk. Review in this area will continue
through 1999. No significant risks have been identified.
Estimated Cost. The cost of complying with the Year 2000 issues is estimated to
be $175,000 including staff time expenses. About $125,000 of this amount has
already been incurred.
USBN's Contingency Plans. USBN is in the process of developing and implementing
contingency plans to handle the most reasonably likely worst case scenarios.
Since these worst case scenarios are difficult or even impossible to predict at
this time, these contingency plans are particularly challenging. USBN intends
to develop contingency plans that are reasonably necessary to address the Year
2000 problem and to revise them as necessary on an ongoing basis until the
problem is confronted and resolved.
26
UNITED SECURITY BANCORPORATION
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, 1998 USBN had approximately $55 million of
unused lines of credit available for liquidity purposes.
USBN's total stockholders' equity increased to $42,201,000 at December 31, 1998,
from $36,485,000 at December 31, 1997 and $31,012,000 at December 31, 1996. At
December 31, 1998, stockholders' equity was 10.42% of total assets, compared to
9.49% at December 31, 1997. At December 31, 1998, USBN held cash and cash-
equivalent assets of $27.7 million. At December 31, 1998, virtually all of
USBN's securities ($61 million) were available-for-sale.
The capital levels of USBN and each of the Banks currently exceeded applicable
regulatory capital guidelines at December 31, 1998.
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. The Financial Accounting Standards Board issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities".
This Statement establishes accounting and reporting standards for derivative
financial instruments and for hedging activities. Upon adoption of the
Statement, all derivatives must be recognized at fair value as with assets or
liabilities in the statement of financial position. Changes in the fair value
of the derivatives not designated as hedging instruments are to be recognized
currently in earnings or are to be recognized as a component of other
comprehensive income, depending on the intended use of the derivatives and the
resulting designations. Upon adoption, retroactive application of this
Statement to financial statements in prior periods is not permitted. The
standard becomes effective January 1, 2000 for USBN, and is not anticipated to
have a material effect on its financial position or results of operation. USBN
does not use interest rate risk management products such as interest rate swaps,
hedges, or derivatives, nor does management intend to use such products in the
future.
The Financial Accounting Standards Board also issued SFAS No. 134, "Accounting
for Mortgage-Backed Securities Retained After Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise" in October of 1998. The
Statement establishes accounting and reporting standards for certain activities
of mortgage banking enterprises. SFAS No. 134 becomes effective for fiscal
quarters beginning after December 15, 1998. Management believes that adoption
of this standard will not have a material impact on its reported financial
condition or results of operation.
27
UNITED SECURITY BANCORPORATION
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 39% of USBN's loan
portfolio have 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, 1998.
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, 1998. 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 is 15%. The interest rates disclosed are based on rates from
1998 results. Fair values are based on the calculations used in accordance with
generally accepted accounting principles as disclosed in the financial
statements.
28
UNITED SECURITY BANCORPORATION
Year ended December 31, 1998 Expected maturity
-------------------------------------------------------------- Fair
($ in thousands) 1999 2000 2001 2002 2003 Thereafter Total Value
------- ------ ------ ------ ------ ---------- ------- -------
Financial Assets
Cash and due from banks $18,286 $18,286 $18,286
Time deposits with other banks 8,901 8,901 8,901
Weighted average interest rate 5.13%
Federal funds sold 485 485 485
Weighted average interest rate 5.25%
Securities 27,077 10,132 11,478 5,048 3,567 4,412 61,714 61,741
Weighted average interest rate 6.20%
Fixed rate loans 61,184 43,703 26,222 26,222 17,481 174,811 175,789
Weighted average interest rate 11.04%
Variable rate loans 40,375 28,839 17,304 17,304 11,536 115,357 115,357
Weighted average interest rate 10.92%
Financial Liabilities
Noninterest bearing deposits 9,650 9,650 9,650 9,650 9,650 16,083 64,333 64,333
Interest-bearing demand deposits 19,943 19,943 19,943 19,943 19,943 33,236 132,951 132,951
Weighted average interest rate 4.44%
Savings deposits 5,572 5,572 5,572 5,572 5,572 9,284 37,144 37,144
Weighted average interest rate 3.06%
Time deposits 114,030 8,349 1,458 331 163 51 124,382 124,662
Weighted average interest rate 5.24%
Net of financial assets and liabilities 7,113 39,160 18,380 13,077 (2,744) (54,242)
Cumulative net amount 7,113 46,273 64,653 77,730 74,986 20,744
Percentage of total assets 1.76% 11.42% 15.96% 19.19% 18.51% 5.12%
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 is 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, 1998, 1997, and 1996, 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.
In 1997 USBN selected Moss Adams LLP as its independent auditors. During the
years ended December 31, 1998, 1997, and 1996, 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. Effective January 1, 1999, the prior independent auditors,
McFarland & Alton, P.S., who audited 1996 and earlier financial statements were
merged into Moss Adams LLP.
29
UNITED SECURITY BANCORPORATION
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information requested by this item is contained in the registrant's
1999 proxy statement, and is incorporated by reference.
Item 11. Executive Compensation.
The information requested by this item is contained in the registrant's
1999 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
1999 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
1999 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, USB
Insurance, USB Leasing, and USB Mortgage" for the required
information.
27 Financial Data Schedule.
(b) Reports on Form 8-K filed in fourth quarter 1998.
Date Item # Subject
November 10, 1998 Item 5. United Security Bancorporation to Acquire Bank of
the West
(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
UNITED SECURITY BANCORPORATION
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized on the 23rd of March 1999.
UNITED SECURITY BANCORPORATION
By: /s/ William C. Dashiell By: /s/ Richard C. Emery
----------------------------- ------------------------------------
William C. Dashiell, 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
23rd of March 1999.
Principal Executive Officer:
By: /s/ Richard C. Emery President, Chief Executive Officer and Director
----------------------------
Richard C. Emery
Principal Accounting Officer
By: /s/ Chad Galloway Vice President and Chief Financial Officer
----------------------------
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/ Keith P. Sattler
------------------------------ -----------------------------
Rand Elliott, Director Keith P. Sattler, Director
By: /s/ Dave Frame By: /s/ Dann Simpson
------------------------------ -----------------------------
Dave Frame, Director Dann Simpson, Director
By: /s/ Robert J. Gardner By: /s/ Don Swartz
------------------------------ -----------------------------
Robert J. Gardner, Director Don Swartz, Director
By: /s/ Robert L. Golob By: /s/ Ron Wachter
------------------------------ -----------------------------
Robert L. Golob, Director Ron Wachter, Director
31
UNITED SECURITY BANCORPORATION
Independent Auditor's Report
Board of Directors and Shareholders
United Security Bancorporation
Spokane, Washington
We have audited the accompanying consolidated statement of financial condition
of United Security Bancorporation and subsidiaries as of December 31, 1998 and
1997, 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, 1998. 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, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998, in conformity with generally accepted
accounting principles.
Everett, Washington /s/ Moss Adams LLP
January 28, 1999
32
UNITED SECURITY BANCORPORATION
CONSOLIDATED STATEMENTS OF CONDITION
DECEMBER 31, 1998 AND 1997
($ In thousands)
1998 1997
-------- --------
ASSETS
Cash and due from banks $18,286 $21,090
Overnight interest bearing deposits with other banks 8,901 12,556
Federal funds sold 485 5,210
--------- ---------
Cash and cash equivalents 27,672 38,856
Securities 61,714 73,583
Loans, net of allowance for loan losses of $2,946 in 1998 and
$2,865 in 1997 290,168 247,715
Accrued interest receivable 3,354 3,189
Premises and equipment, net 9,917 9,903
Foreclosed real estate and other foreclosed assets 1,165 967
Life insurance and salary continuation assets 3,355 2,512
Intangible assets 6,519 6,910
Other assets 1,177 634
========= =========
TOTAL ASSETS $405,041 $384,269
========= =========
LIABILITIES
Noninterest bearing - demand deposits $64,333 $62,453
Interest bearing deposits:
NOW and savings accounts 170,095 156,968
Time, $100,000 and over 31,556 31,341
Other time 92,826 87,042
--------- ---------
TOTAL DEPOSITS 358,810 337,804
Notes payable 6,257
Capital lease obligations 712 732
Accrued interest payable 1,151 928
Other liabilities 2,167 2,063
--------- ---------
TOTAL LIABILITIES 362,840 347,784
Commitments and contingencies
STOCKHOLDERS' EQUITY
Common stock, no par, shares authorized 15 million; issued and outstanding
5,004,322 in 1998 and 4,972,885 in 1997 37,640 30,379
Retained earnings 4,486 6,174
Accumulated other comprehensive income, net of tax 75 (68)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 42,201 36,485
========= =========
TOTAL LIABILITIES and STOCKHOLDERS' EQUITY $405,041 $384,269
========= =========
The accompanying notes are an integral part of these financial statements.
33
UNITED SECURITY BANCORPORATION
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1998, 1997 and 1996
($ In thousands, except per share amounts)
1998 1997 1996
INTEREST INCOME
Interest and fees on loans $30,079 $23,571 $20,545
Interest on securities 3,730 2,403 1,472
Other interest income 925 1,274 888
--------------- --------------- ---------------
TOTAL INTEREST INCOME 34,734 27,248 22,905
--------------- --------------- ---------------
INTEREST EXPENSE
Interest on deposits 12,973 10,252 8,494
Interest on borrowings 745 432 297
--------------- --------------- ---------------
TOTAL INTEREST EXPENSE 13,718 10,684 8,791
--------------- --------------- ---------------
NET INTEREST INCOME 21,016 16,564 14,114
Provision for loan losses 658 752 1,021
--------------- --------------- ---------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 20,358 15,812 13,093
--------------- --------------- ---------------
NONINTEREST INCOME
Fees and service charges 1,737 1,503 1,272
Insurance commissions 1,031 1,125 1,200
Securities gains, net 134 (21) 53
Insurance proceeds 796
Other 1,085 555 681
--------------- --------------- ---------------
TOTAL NONINTEREST INCOME 3,987 3,958 3,206
--------------- --------------- ---------------
NONINTEREST EXPENSE
Salaries and employee benefits 9,386 7,145 6,584
Occupancy expense, net 1,219 831 725
Equipment expense 1,229 899 803
Operational loss 860
Legal expense 411 303 73
State business and occupation tax 445 363 311
Intangible assets amortization 404 162 86
Other 3,266 2,311 1,747
--------------- --------------- ---------------
TOTAL NONINTEREST EXPENSE 16,360 12,014 11,189
--------------- --------------- ---------------
INCOME BEFORE INCOME TAX EXPENSE 7,985 7,756 5,110
FEDERAL INCOME TAX EXPENSE 2,621 2,464 1,656
=============== =============== ===============
NET INCOME $5,364 $5,292 $3,454
=============== =============== ===============
Basic earnings per common share $1.08 $1.06 $0.70
Diluted earnings per common share $1.06 $1.05 $0.69
Basic weighted average shares outstanding 4,982,221 4,971,990 4,961,925
Diluted weighted average shares outstanding 5,052,445 5,019,206 4,982,300
The accompanying notes are an integral part of these financial statements.
34
UNITED SECURITY BANCORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997, and 1996
($ in thousands)
Accumulated
Other
Common Stock Retained Comprehensive Comprehensive
Shares Amount Earnings Income (Loss) Total Income (Loss)
Balances, January 1, 1996 3,800,580 $22,833 $4,846 ($111) $27,568
Common stock issued for options
exercised 15,720 171 171
Net income 3,454 3,454 $ 3,454
Redemption of fractional shares (7) (7)
Net change in unrealized loss on
available-for-sale securities,
net of taxes (174) (174) (174)
10% stock split-up 334,311
----------------------------------------------------------------- -------
Balances, December 31, 1996 4,150,611 22,997 8,300 (285) 31,012 $ 3,280
=======
Common stock issued for options
exercised 2,000 20 20
Net income 5,292 5,292 $ 5,292
Redemption of fractional shares (7) (7)
Net change in unrealized gain on
available-for-sale securities,
net of taxes 217 217 217
Grant National Bank cash dividend (49) (49)
10% stock dividend 368,434 7,369 (7,369)
----------------------------------------------------------------- -------
Balances, December 31, 1997 4,521,045 30,379 6,174 (68) 36,485 $ 5,509
=======
Common stock issued for options
exercised 29,076 284 284
Net income 5,364 5,364 $ 5,364
Redemption of fractional shares (737) (18) (18)
Net change in unrealized gain on
available-for-sale
securities, net of taxes 143 143 143
(57) (57)
10% stock dividend 454,938 6,995 (6,995)
----------------------------------------------------------------- -------
Balances, December 31, 1998 5,004,322 $37,640 $4,486 $75 $42,201 $ 5,507
================================================================= =======
The accompanying notes are an integral part of these financial statements.
35
UNITED SECURITY BANCORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 and 1996
($ in thousands)
1998 1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $5,364 $5,292 $3,454
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 658 752 1,021
Depreciation and amortization 734 574 574
Deferred income taxes 113 395 141
Gain on sale of premises and equipment (189)
(Increase) decrease in assets:
Accrued interest receivable (165) (100) (496)
Life insurance and salary continuation assets (843) (201) 4
Other assets (152) 417 87
Increase/(decrease) in liabilities:
Accrued interest payable 223 138 39
Other liabilities (9) (555) 165
----------- ------------- ------------
NET CASH FROM OPERATING ACTIVITIES 5,734 6,712 4,989
----------- ------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available-for-sale:
Maturities 40,125 8,766 10,704
Sales 22,226 12,050 7,215
Purchases (50,899) (52,311) (10,909)
Securities held-to-maturity:
Maturities 635 1,181 25
Purchases (75) (1,665) (266)
Net increase in loans and leases (43,111) (24,237) (38,901)
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 (2,276) (966) (721)
Proceeds from sale of premises and equipment 1,717
Foreclosed assets activity (198) 688 365
----------- ------------- ------------
NET CASH FROM INVESTING ACTIVITIES (31,856) (31,435) (32,488)
----------- ------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 21,006 27,061 39,057
Proceeds from notes payable 8,704 2,529
Principal payments on notes payable (6,257) (4,938) (38)
Principal payments on capital lease obligations (20) (19) (16)
Proceeds from issuance of capital stock 284 20 171
Cash dividends and fractional shares (75) (57) (7)
----------- ------------- ------------
NET CASH FROM FINANCING ACTIVITIES 14,938 30,771 41,696
----------- ------------- ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (11,184) 6,048 14,197
Cash and cash equivalents at January 1 38,856 32,808 18,611
----------- ------------- ------------
Cash and cash equivalents at December 31 $27,672 $38,856 $32,808
=========== ============= ============
Interest paid $13,495 $10,465 $8,897
Income taxes paid $2,561 $2,052 $1,808
Supplemental Schedule of Noncash Investing and Financing Activities
Foreclosed real estate acquired in settlement of loans $1,412 $1,372 $210
Transfers from securities at cost to securities at fair value $111
Purchase of Bank of Pullman
Fair value of assets acquired $65,813
Cash paid for the capital stock ($11,955)
-------------
Liabilities assumed $53,858
=============
The accompanying notes are an integral part of these financial statements.
36
UNITED SECURITY BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Business and Summary of Significant Accounting Policies
Basis of consolidation:
The consolidated financial statements include the accounts of United Security
Bancorporation (Corporation) and its wholly-owned subsidiaries (collectively,
USBN), United Security Bank, Home Security Bank, Bank of Pullman, Grant National
Bank, USB Insurance Agencies, Inc., USB Mortgage Company, and USB Leasing, Inc.
after eliminating all significant intercompany balances and transactions.
Nature of business:
United Security Bank and Home Security Bank are state-chartered commercial banks
under the laws of the State of Washington, and provide banking services
primarily throughout eastern and central Washington. Bank of Pullman is a
banking corporation originally organized under the laws of the State of
Washington. In 1997, Bank of Pullman relocated its charter to the State of
Idaho. Grant National Bank is a national chartered commercial bank. The
Corporation and its subsidiaries are subject to competition from other financial
institutions, as well as nonfinancial intermediaries. USBN is also subject 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
UNITED SECURITY BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Business and Summary of Significant Accounting Policies (Continued)
Marketable equity securities consist primarily of mutual funds whose portfolios
consist primarily of U.S. Government backed debt securities. Unrealized holding
gains and losses, net of tax, on available-for-sale securities are included as
comprehensive income in the accompanying consolidated statement of stockholders'
equity. 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. Revenue and expenses from operations
and changes in the valuation allowance were insignificant at December 31, 1998,
1997, and 1996.
38
UNITED SECURITY BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Business and Summary of Significant Accounting Policies (Continued)
Premises and equipment:
Land is carried at cost. Premises and equipment are stated at cost less
accumulated depreciation over estimated useful lives, which range from 3 to 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 split-ups and stock
dividends. The Corporation 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 16).
39
UNITED SECURITY BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Business and Summary of Significant Accounting Policies (Continued)
Other off-statement of condition instruments:
In the ordinary course of business 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, 1997 and 1996 balances have been made
to conform with the December 31, 1998 presentation; there was no impact on net
income, earnings per share or stockholders' equity as previously reported.
Note 2. Mergers and Acquisitions:
Grant National Bank (GNB):
On July 20, 1998 USBN issued 468,270 common shares in exchange for all of the
outstanding shares of GNB, following approval by GNB shareholders and regulatory
agencies. As of July 20, 1998 GNB had approximately $32 million in total
assets, $29 million in deposits, $22 million in loans, and $3.4 million in total
equity. The pooling-of-interests accounting method is being used for the
transaction, which includes restating prior reported amounts to reflect the
acquisition of GNB. The effects of the restatement on revenue, net income and
stockholders' equity are shown below:
($ in thousands) 1997 1996
Net interest income and noninterest income:
Original USBN amounts reported $ 18,497 $ 15,553
GNB 2,025 1,767
============ =============
As restated $ 20,522 $ 17,320
============ =============
Net income:
Original USBN amounts reported $ 4,864 $ 3,162
GNB 428 292
============ =============
As reported $ 5,292 $ 3,454
============ =============
December 31,
1997
Stockholders' equity:
Original USBN amounts reported $ 33,089
GNB 3,396
============
As reported $ 36,485
============
40
UNITED SECURITY BANCORPORATION
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 has 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 $4.8
million. Goodwill is amortized using the straight-line method over 25 years.
The following unaudited pro forma combined summary of income gives effect to the
combination as if the acquisition were effective January 1, 1996.
Unaudited Pro Forma Combined Financial Data
($ in thousands, except per share data)
Year Ended December 31,
-------------------------
1997 1996
------- -------
Summary of Income
Net interest income $18,868 $17,091
Provision for loan losses $ 759 $ 1,006
Noninterest income $ 4,204 $ 3,611
Noninterest expense $13,750 $13,371
Net income $ 5,913 $ 4,308
Basic earnings per common share $ 1.19 $ 0.87
Diluted earnings per common share $ 1.18 $ 0.86
Five Branches:
On July 18, 1997 USBN purchased five branches from a commercial bank. Home
Security Bank purchased three branches located in Mabton, Naches, and Walla
Walla, Washington. United Security Bank purchased two branches located in
Davenport and Moses Lake, Washington. These branches are located in the
identified market place for the Banks. The acquisitions increased deposits by
approximately $35 million, premises and equipment by $1.9 million, and
intangible assets by $2.1 million primarily for the core deposit acquisition
cost.
41
UNITED SECURITY BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3. Accounting Pronouncements
Effective January 1, 1998, USBN adopted two recently issued SFAS standards as
follows:
SFAS No. 130, "Reporting Comprehensive Income" established standards for
reporting and display of comprehensive, or all-inclusive income. In USBN's case,
based on current operations, it includes as an addition or deduction to reported
net income, the net change in unrealized gains or losses on securities. This
statement has no effect on net income of USBN. All prior periods shown on the
financial statements have been restated to conform with the statement.
SFAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information" establishes standards for the way that public business enterprises
report information about operating segments in annual financial statements.
Management determined the provisions of the statement did not have a material
effect on its financial condition or reported results of operations.
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, 1998 and 1997 were
approximately $2,170,000 and $1,878,000, respectively. The average amounts of
federal funds sold and overnight interest bearing deposits with other banks for
the years ended December 31, 1998 and 1997, were $15,916,000 and $20,430,000,
respectively. Similarly, averages of federal funds purchased were $1,012,000 and
$11,000, for 1998 and 1997, respectively. The balance of federal funds purchased
at December 31, 1998 and 1997 was $0.
42
UNITED SECURITY BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5. Securities
Debt and equity securities have been classified according to management's
intent. The amortized cost of securities and their fair values at December 31
were as follows:
December 31, 1998 Gross Gross
($ in thousands) Amortized Unrealized Unrealized Fair Financial
Cost Gains Losses Value Statements
Securities available-for-sale:
U.S. Treasury securities $1,502 $13 $1,515 $1,515
Obligations of federal government
agencies 15,436 62 $ 18 15,480 15,480
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 13,904 87 119 13,872 13,872
------------- ------------- -------------- ------------ ---------------
60,852 281 170 60,963 60,963
Securities held-to-maturity:
Obligations of states, municipalities
and political subdivisions 751 27 778 751
--------------------------------------------------------- ---------------
Total $61,603 $308 $170 $61,741 $61,714
============= ============= ============== ============ ===============
December 31, 1997 Gross Gross
($ in thousands) Amortized Unrealized Unrealized Fair Financial
Cost Gains Losses Value Statements
Securities available-for-sale:
U.S. Treasury securities $6,775 $12 $6,787 $6,787
Obligations of federal government
agencies 32,170 65 $ 30 32,205 32,205
Obligations of states, municipalities
and political subdivisions 5,818 64 6 5,876 5,876
Mortgage backed securities 22,030 35 58 22,007 22,007
Other securities 5,580 3 187 5,396 5,396
------------- ------------- -------------- ------------ ---------------
72,373 179 281 72,271 72,271
Securities held-to-maturity:
Obligations of states, municipalities
and political subdivisions 1,312 20 1,332 1,312
--------------------------------------------------------- ---------------
Total $73,685 $199 $281 $73,603 $73,583
============= ============= ============== ============ ===============
43
UNITED SECURITY BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5. Securities (Continued)
Securities taxable interest income was $3,326,000, $1,977,000, and $1,135,000
for 1998, 1997 and 1996, respectively. Securities nontaxable interest income
was $253,000, $297,000 and $217,000 for 1998, 1997, and 1996, respectively.
Dividend income was $151,000, $129,000, and $120,000 for 1998, 1997, and 1996,
respectively. Securities with an amortized cost of $8,325,000 and $4,572,000 at
December 31, 1998 and 1997, respectively, were pledged to secure public deposits
for purposes required or permitted by law. Market value of these securities was
$8,392,000 and $4,567,000 at December 31, 1998 and 1997, respectively. Included
in other securities are marketable equity securities with amortized costs
totaling $2,598,000 and $2,450,000, and market values of $2,504,000 and
$2,266,000 at December 31, 1998 and 1997, respectively. Also included in other
securities is $2,082,000 in 1998 and $1,696,000 in 1997 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 $134,000,
$24,000, and $54,000 for 1998, 1997, and 1996, respectively. Gross realized
losses were $0, $45,000, and $1,000 for 1998, 1997, and 1996, respectively.
The contractual scheduled maturity of securities available-for-sale and
securities held-to-maturity at December 31, 1998 were as follows:
Available-for-Sale Held-to-Maturity
Amortized Fair Amortized Fair
($ in thousands) Cost Value Cost Value
Due in one year or less $4,606 $4,519 $40 $41
Due from one year to five years 18,515 18,649 182 192
Due from five to ten years 6,522 6,541 262 268
Due after ten years 3,260 3,261 267 277
Mortgage backed securities 27,949 27,993
========== ========== ========== ==========
$60,852 $60,963 $751 $778
========== ========== ========== ==========
Expected maturities will differ from contractual maturities because the issues
of certain debt securities have the right to call or prepay their obligations
without any penalties.
44
UNITED SECURITY BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6. Loans and Allowance for Loan Losses
Loan categories as of December 31, 1998 and 1997 were as follows:
($ in thousands) 1998 1997
Commercial and industrial $166,262 $126,835
Agricultural 40,903 37,356
Real estate mortgage 50,626 53,795
Real estate construction 13,906 8,440
Installment 14,383 14,926
Lease financing 3,546 5,209
Bank cards and other 4,256 4,762
------------ ------------
Total loans 293,882 251,323
Allowance for loan losses (2,946) (2,865)
Deferred loan fees, net of deferred costs (768) (743)
============ ============
Net loans $290,168 $247,715
============ ============
Variable rate loans were $115,357,000 and $113,316,000 as of December 31, 1998
and 1997, respectively. Remaining loans were fixed rate loans. A summary of
loans by contractual maturity as of December 31, 1998 and 1997 is as follows:
($ in thousands) 1998 1997
Maturity within one year $90,199 $103,753
One to five years 72,505 83,196
Over five years 131,178 64,374
========== ==========
$293,882 $251,323
========== ==========
Changes in the allowance for loan losses are as follows:
($ in thousands) 1998 1997 1996
Balance, beginning of year $2,865 $2,295 $1,594
Allowance acquired through acquisition 700
Provision charged to operations 658 752 1,021
Loans charged-off (800) (1,012) (383)
Recoveries 223 130 63
=========== ========= ========
Balance, end of year $2,946 $2,865 $2,295
=========== ========= ========
45
UNITED SECURITY BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6. Loans and Allowance for Loan Losses (Continued)
Impaired loan information as of December 31, 1998, 1997 and 1996 is as follows:
($ in thousands) 1998 1997 1996
Impaired loans with specific
allowance for loan losses $58 $287 $987
Impaired loans without a specific
allowance for loan losses 2,060 2,653 1,531
======= ======= =======
Total impaired loans $2,118 $2,940 $2,518
======= ======= =======
Impaired loans allowance for
loan losses $25 $118 $234
Average impaired loans 2,619 2,601 1,418
Interest income recognized for
impaired loans 148 138 182
Note 7. Premises and Equipment
Major classifications of premises and equipment are summarized a
31, 1998 and 1997 as follows:
($ in thousands) 1998 1997
Premises, including premises under capital lease,
1998 and 1997 $802 $7,695 $7,463
Furniture, fixtures, and equipment 4,468 4,641
Leasehold improvements 546 457
------------- ----------
12,709 12,561
Less accumulated depreciation, including accumulated
amortization on assets under capital lease,
1998 $324; 1997 $281 (5,031) (5,045)
------------- ----------
7,678 7,516
Land 2,239 2,387
============= ==========
Premises and equipment, net $9,917 $9,903
============= ==========
46
UNITED SECURITY BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8. Life Insurance and Salary Continuation Plan
The Banks maintain salary continuation plans for the benefit of certain of their
directors, executive officers and other key employees. The plan provides for
monthly payments to such persons, or their designated beneficiaries, for a
period of ten years following retirement at age 65, or death prior to
retirement. Amounts payable to eligible participants are determined by
reference to such person's salary or directors' fee as of the date of each such
person's agreement under the plan.
The plan is generally available to most directors, executive officers and other
key employees of the Banks, and vests according to years of service. Persons
employed by the Banks for at least six continuous years following the effective
date of the plan are deemed vested with respect to 20% of the salary
continuation benefits available to them, and become vested in an additional 20%
of such benefits for each succeeding year of employment thereafter until the
employee becomes fully vested. Eligible persons employed by the Banks for at
least ten continuous years prior to the effective date of the plans are deemed
fully vested. The Banks' obligations under the salary continuation plan are
funded by prepaid policies of universal life insurance covering the lives of the
plan participants. The Banks are the beneficiaries of the life insurance
policies.
Cash surrender values, salary continuance benefit obligations at age 65, and the
recorded liability were as follows as of December 31, 1998 and 1997:
($ in thousands) 1998 1997
Cash surrender value $3,355 $2,512
Present value at age 65 of all participants after full vesting is obtained 3,391 1,640
Present value at age 65 of the current fully vested participants 913 597
Recorded liability for future benefit obligation 408 302
Vested participants are eligible to receive benefits at age 65.
47
UNITED SECURITY BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9. Federal Income Taxes
The components of federal income tax expense for the years presented are as
follows:
($ in thousands) 1998 1997 1996
Current expense $2,508 $2,069 $1,515
Deferred tax expense 113 395 141
--------- --------- --------
Federal income tax expense $2,621 $2,464 $1,656
========= ========= ========
The effective tax rate differs from the statutory federal tax rate as follows:
($ in thousands) 1998 1997 1996
Federal Income tax at statutory rates $2,715 $2,637 $1,738
Effect of tax-exempt interest income (113) (110) (81)
Effect of nondeductible expenses and other 19 (63) (1)
---------- ---------- ----------
Federal income tax expense $2,621 $2,464 $1,656
========== ========== ==========
The following are the significant components of deferred tax assets and
liabilities. The net amount is classified with other liabilities in 1998 and
1997 in the consolidated financial statements:
($ in thousands) 1998 1997
Deferred tax assets:
Allowance for loan losses $670 $647
Unrealized (gains) losses on available-for-sale securities (39) 34
Deferred compensation expense 64 74
Other 146 88
-------- ---------
Total deferred tax assets 841 843
-------- ---------
Deferred tax liabilities:
Deferred loan costs 338 380
Lease financing 242 242
FHLB stock dividend income 218 169
Other 324 189
-------- ---------
Total deferred tax liabilities 1,122 980
-------- ---------
Net deferred tax assets/(liabilities) ($281) ($137)
======== =========
The applicable tax (benefit)/expense, net for securities gains and losses was
$46,000, ($7,000), and $18,000 for 1998, 1997, and 1996, respectively.
48
UNITED SECURITY BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10. Time Deposit Maturities
At December 31, 1998, the scheduled maturities of time deposits were as follows:
($ in thousands)
1999 $114,030
2000 8,349
2001 1,458
2002 331
2003 163
Later years 51
-----------
Total $124,382
===========
Note 11. Notes Payable
Notes payable consisted of the following at year-end:
($ in thousands) 1998 1997
Parent Company, prime plus .25%, note due 2001 $2,445
Parent Company, at prime, revolving note due 2002 2,943
USB Leasing, prime plus 1.00% notes due 2000 and 2001 766
Bank of Pullman treasury tax note 103
---------------------
$0 $6,257
=====================
As of December 31, 1997 Parent Company notes payable consists of borrowings to
finance the purchase of real estate from its Bank subsidiaries and to acquire
the Bank of Pullman. The debt reprices annually. The USB Leasing notes were to
fund its commercial equipment leasing program. During 1998 the notes payable
were paid off.
Note 12. Commitments and Contingent Liabilities
In the ordinary course of business, USBN has various outstanding commitments and
contingent liabilities that are not reflected in the accompanying consolidated
financial statements. In addition, USBN is a defendant in certain claims and
legal actions arising in the ordinary course of business. In the opinion of
management, after consultation with legal counsel, the ultimate disposition of
these matters is not expected to have a material adverse effect on the
consolidated financial condition of USBN.
49
UNITED SECURITY BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12. Commitments and Contingent Liabilities (Continued)
The minimum annual rental commitments on capital and operating leases at
December 31, 1998, exclusive of taxes and other charges, are summarized as
follows:
($ in thousands)
1999 $429
2000 351
2001 361
2002 353
2003 359
Later years 3,132
--------
Total minimum payments due 4,985
Less: Amount representing interest (543)
========
Present value of net minimum lease payments $4,442
========
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. Total rental expense on operating leases amounted to
$93,000, $80,000, and $80,000 for 1998, 1997, and 1996, respectively (Note 18).
Grant National Bank leases its headquarters and a branch facility from an
Association of 6 of its Directors. Rent expense for the facility was $64,000,
$60,000, and $60,000 for 1998, 1997, and 1996, respectively.
Other commitments and contingent liabilities:
USBN is a party to financial instruments with off-statement of condition risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit, standby
letters of credit and financial guarantees. Those instruments involve, to
varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the statement of condition. The contract or notional
amounts of those instruments reflect the extent of involvement USBN has in
particular classes of financial instruments.
USBN's exposure to credit loss in the event of nonperformance by the other party
to the financial instrument for commitments to extend credit and standby letters
of credit and financial guarantees written is represented by the contractual
notional amount of those instruments. USBN uses the same credit policies in
making commitments and conditional obligations as it does for statement of
condition instruments. Generally, USBN does not require collateral or other
security to support financial instruments with credit risk.
50
UNITED SECURITY BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12. Commitments and Contingent Liabilities (Continued)
Contract or
Notional Amount
-------------------
($ in thousands) 1998 1997
-------- --------
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit $70,257 $45,307
Standby letters of credit and financial guarantees written 1,589 2,256
Unused commitments on bankcards 10,752 7,847
--------- ---------
TOTAL $82,598 $55,410
========= =========
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 to a third
party. Those guarantees are primarily issued to support public and private
borrowing arrangements, including commercial paper, bond financing and similar
transactions. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to customers.
All the Banks' loans, commitments, and commercial and standby letters of credit
have been granted to customers in the Banks' market area. As such, significant
changes in economic conditions in the State of Washington or within its primary
industries could adversely effect the 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 18. The Banks, as a matter of policy, do not
extend credit to any single borrower in excess of $2,500,000, $1,350,000,
$900,000, and $500,000 for United Security Bank, Home Security Bank, Bank of
Pullman, and Grant National Bank, respectively.
As of December 31, 1998 and 1997, USBN had unused lines of credit of $54,935,000
and $53,659,000, respectively. The lines were available for short-term and long-
term borrowings.
51
UNITED SECURITY BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 13. Capital Stock
Stock split-ups, and stock dividends:
In January, 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. In January, 1996 and 1997 the
Board of Directors declared 10% common stock dividends in the form of split-ups.
The intent of the stock split-ups was to obtain a reduction in the unit market
price of shares and to obtain wider distribution and improved marketability of
the stock. No transfers from retained earnings to capital stock were recorded.
Per share amounts and weighted average shares outstanding have been
retroactively adjusted to reflect the stock dividends and split-ups.
Note 14. 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, 1998, the amount of
retained earnings of United Security Bank, Home Security Bank, Bank of Pullman,
and Grant National Bank available for dividends were $12,162,000, $2,757,000,
$729,000 and $1,656,000, respectively. At December 31, 1997, the amount of
retained earnings of United Security Bank, Home Security Bank, Bank of Pullman,
and Grant National Bank available for dividends were $8,662,000, $1,751,000,
$225,000 and $1,403,000, respectively. USBN has the amount of retained earnings
available for dividends.
Certain loans to any person, including liabilities of a firm or association,
cannot exceed twenty percent of the capital and surplus of the Bank. Loans that
are secured or covered by guarantees, or by commitments or agreements to take
over or to purchase the same, made by any federal reserve bank or by the United
States, including any corporation wholly-owned directly or indirectly by the
United States, are not subject to these restrictions. No loans can be made
unless the Bank has more than the minimum available funds required by law.
Note 15. Employee Stock Ownership Plan (ESOP) and Profit Sharing 401(k) Plan
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 $278,000,
$206,000 and $185,000 for 1998, 1997 and 1996, 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 1998, 1997 and 1996 to the plan.
52
UNITED SECURITY BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 16. Stock Option Plan
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. The status of the Plan as of December 31, 1998, 1997 and 1996
is as follows:
1998 1997 1996
-------------------- ------------------ -----------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Number Price Number Price Number Price
---------- -------- ------- -------- ------- --------
Outstanding at beginning of year 162,661 9.65 137,521 8.54 123,281 8.25
Granted 77,832 16.20 27,140 15.26 40,736 10.05
Exercised (29,076) 9.78 (2,000) 9.82 (15,720) 10.91
Forfeited (10,776) 10.91
----------- --------- ---------
Outstanding at year-end 211,417 12.04 162,661 9.65 137,521 8.54
=========== ========= =========
Exercisable at year-end 117,405 10.85 94,785 7.87 96,785 7.91
Weighted average fair value of options
granted during the year 17.15 12.88 9.66
The following table summarizes information about stock options outstanding at
December 31, 1998:
Options Outstanding
-------------------------- Options Exercisable
Weighted ----------------------
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
-------- ----------- ----------- -------- ----------- --------
$4.81 15,587 5.0 years $ 4.81 15,587 $ 4.81
$8.28 60,898 1.8 years $ 8.28 60,898 $ 8.28
$9.58 - $10.47 40,736 2.6 years $10.05
$14.09 2,200 4.8 years $14.09 2,200 $14.09
$15.14 - $15.34 27,140 3.8 years $15.26
$17.15 64,856 4.0 years $17.15 38,720 $17.15
53
UNITED SECURITY BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 16. Stock Option Plan (Continued)
If the fair value based method of accounting per SFAS No. 123 had been used for
1998, 1997 and 1996 the results and related assumptions would have been as
follows:
( $ in thousands, except per share) 1998 1997 1996
Results using fair value based method of accounting:
Net income $5,351 $5,292 $3,454
Basic earnings per common share $1.07 $1.06 $0.70
Diluted earnings per common share $1.06 $1.05 $0.69
Assumptions used to make the fair value calculation:
Risk free interest rate 5.00% 5.40% 5.40%
Expected volatility 28.25% 28.30% 28.30%
Expected cash dividends 0% 0% 0%
Expected stock option life 4.0 years 4.8 years 4.7 years
Note 17. Parent Company Only Statements
The following are the condensed statements of condition, income, and cash flows
for the parent company only, United Security Bancorporation. These statements
are presented using the equity method of accounting; therefore, accounts of the
subsidiaries have not been included. Intercompany transactions and balances
have not been eliminated. The following information should be read in
conjunction with the other notes to the consolidated financial statements.
Condensed Statements of Condition
($ in thousands)
December 31,
1998 1997
Cash $ 388 $ 64
Investment in:
Bank subsidiaries 37,206 33,162
Nonbank subsidiaries 200 3,444
Premises and equipment 4,359 5,185
Other assets 191 187
----------- -----------
TOTAL ASSETS $42,344 $42,042
=========== ===========
Notes payable $ 5,388
Accrued expenses and other liabilities $ 143 169
Stockholders' equity 42,201 36,485
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $42,344 $42,042
=========== ===========
54
UNITED SECURITY BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 17. Parent Company Only Statements (Continued)
Condensed Statements of Income
($ in thousands)
Years Ended December 31,
1998 1997 1996
Income:
Dividends:
Bank subsidiaries $ 1,237 $ 702 $ 647
Rent income 470 483 470
Computer service income 475
Other income 195 150 200
--------- --------- ---------
2,377 1,335 1,317
--------- --------- ---------
Expenses:
Salaries and benefits 1,457 790 701
Interest expense 414 331 216
Depreciation 192 183 169
Other operating expenses 982 501 277
--------- --------- ---------
3,045 1,805 1,363
--------- --------- ---------
Income/(loss) before tax benefit and equity in
undistributed net income of subsidiaries (668) (470) (46)
Income tax benefit 744 425 241
Income/(loss) before equity in undistributed net income of
--------- --------- ---------
subsidiaries 76 (45) 195
Equity in undistributed net income of:
Bank subsidiaries 5,211 5,066 3,043
Nonbank subsidiaries 77 271 216
--------- --------- ---------
Net income $ 5,364 $ 5,292 $ 3,454
========= ========= =========
55
UNITED SECURITY BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 17. Parent Company Only Statements (Continued)
Condensed Statements of Cash Flows
($ in thousands)
Years Ended December 31,
1998 1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 5,364 $ 5,292 $ 3,454
Adjustments to reconcile net income to cash provided
by operating activities:
Equity in undistributed net income of subsidiaries (5,288) (5,337) (3,259)
Depreciation 192 183 169
(Increase) decrease in other assets (4) (54) 46
Increase (decrease) in other liabilities (26) (173) 196
--------- ---------- ---------
NET CASH FROM OPERATING ACTIVITIES 238 (89) 606
--------- ---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in subsidiaries (750) (1,109)
Return of investment in subsidiaries 4,571 8,250
Bank of Pullman acquisition (11,955)
Sale of investment securities 803
Purchase of premises and equipment (125) (772) (3,860)
Sale of premises and equipment 759
--------- ---------- ---------
NET CASH FROM INVESTING ACTIVITIES 5,205 (5,227) (4,166)
--------- ---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of capital stock 284 20 171
Proceeds from notes payable 7,835 2,529
Principal payments on notes payable (5,388) (4,938) (38)
Cash paid for redemption of fractional shares (15) (7) (7)
--------- ---------- ---------
NET CASH FROM FINANCING ACTIVITIES (5,119) 2,910 2,655
--------- ---------- ---------
NET CHANGE IN CASH 324 (2,406) (905)
CASH, beginning of year 64 2,470 3,375
--------- ---------- ---------
CASH, end of year $ 388 $ 64 $ 2,470
========= ========== =========
56
UNITED SECURITY BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 18. 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. The aggregate dollar amount of these loans was
approximately $6,102,000 and $9,068,000 at December 31, 1998 and 1997,
respectively. During 1998 and 1997, $5,052,000 and $5,094,000, respectively of
new or renewed related party loans were made and repayments and adjustments
totaled $8,018,000 and $6,500,000, respectively.
Deposits from related parties:
Deposits from related parties totaled $4,773,000 and $4,200,000 at December 31,
1998 and 1997, respectively.
Payments to related parties:
Fees paid to a Director for professional services totaled $11,000, $31,000, and
$10,000 for the years ended December 31, 1998, 1997, and 1996, respectively.
Building lease rent of $93,000, $80,000, and $80,000 in 1998, 1997 and 1996,
respectively was paid to a Partnership partially owned by a Director. Grant
National Bank paid $64,000, $60,000, and $60,000 in 1998, 1997, and 1996,
respectively to an Association of 6 of its Directors for the rent of its
headquarters and branch.
57
UNITED SECURITY BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 19. Fair Value of Financial Instruments
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments" requires
disclosure of fair value information about financial instruments for which it is
practicable to estimate fair value. As defined by SFAS No. 107, financial
instruments include the categories listed below. It does not include the value
of property, plant and equipment and intangible assets such as customer
relationships and core deposit intangibles. Fair values of off-statement of
condition lending commitments are based on fees currently charged to enter into
similar agreements, taking into account the remaining terms of the agreements
and the counterparties' credit standing. The fair value of the fees at December
31, 1998 and 1997, were insignificant. See Note 12 for the notional amount of
the commitments to extend credit.
The following table summarizes carrying amounts, estimated fair values, and
assumptions used by the Corporation to estimate fair value as of December 31,
1998 and 1997:
Estimated
As of December 31, 1998: Assumptions Used in Carrying Fair
($ in thousands) Estimating Fair Value Amount Value
Financial Assets:
Cash and due from banks Equal to carrying value $18,286 $18,286
Overnight interest bearing deposits
with other banks Equal to carrying value 8,901 8,901
Federal funds sold Equal to carrying value 485 485
Securities Quoted market prices 61,714 61,741
Loans Fixed-rate loans: Discounted expected future cash flows,
variable-rate loans: equal to carrying value, net of
allowance for loan losses 290,168 291,146
Financial Liabilities:
Deposits Fixed-rate certificates of deposit:
Discounted expected future cash flows
All other deposits: Equal to carrying value 358,810 359,090
As of December 31, 1997:
Financial Assets:
Cash and due from banks Equal to carrying value $21,090 $21,090
Overnight interest bearing deposits
with other banks Equal to carrying value 12,556 12,556
Federal funds sold Equal to carrying value 5,210 5,210
Securities Quoted market prices 73,583 73,603
Loans Fixed-rate loans: Discounted expected future cash flows,
variable-rate loans: equal to carrying value, net of
allowance for loan losses 247,715 252,432
Financial Liabilities:
Deposits Fixed-rate certificates of deposit:
Discounted expected future cash flows
All other deposits: Equal to carrying value 337,804 337,899
Note payable Variable rate, equal to carrying value 6,257 6,257
58
UNITED SECURITY BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 20. Regulatory Matters
The Banks are subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory actions by regulators that, if undertaken, could have
a direct material effect on the Bank's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Banks must meet specific capital guidelines that involve quantitative
measures of the Bank's assets, liabilities, and certain off-statement of
condition items. The Banks capital amounts and classification are also subject
to qualitative judgments by the regulators about components, risk weightings,
and other factors. Quantitative measures established by regulation to ensure
capital adequacy require the Banks to maintain minimum amounts and ratios set
forth in the table below of total and Tier I capital to risk-weighted and
average assets.
Actual Adequately Capitalized Well Capitalized
----------------- ------------------------------- ------------------------------
($ in thousands) Amount Ratio Amount Ratio Amount Ratio
------- ------ ---------- ---------- --------- -------
As of December 31, 1998:
Total capital to
risk weighted assets:
Consolidated $38,491 11.86% greater than $25,968 8.00% greater than $32,459 10.00%
United Security Bank 16,951 10.21% greater than 13,279 8.00% greater than 16,599 10.00%
Home Security Bank 8,449 10.37% greater than 6,518 8.00% greater than 8,148 10.00%
Bank of Pullman 4,971 10.04% greater than 3,960 8.00% greater than 4,950 10.00%
Grant National Bank 3,408 13.92% greater than 1,959 8.00% greater than 6,537 10.00%
Tier I capital to
risk weighted assets:
Consolidated 35,545 10.95% greater than 12,984 4.00% greater than 19,476 6.00%
United Security Bank 15,320 9.23% greater than 6,640 4.00% greater than 9,959 6.00%
Home Security Bank 7,726 9.48% greater than 3,259 4.00% greater than 4,889 6.00%
Bank of Pullman 4,635 9.36% greater than 1,980 4.00% greater than 2,970 6.00%
Grant National Bank 3,152 12.87% greater than 979 4.00% greater than 1,469 6.00%
Leverage capital, Tier I capital
to average assets:
Consolidated 35,545 8.88% greater than 16,008 4.00% greater than 20,010 5.00%
United Security Bank 15,320 7.83% greater than 7,823 4.00% greater than 9,779 5.00%
Home Security Bank 7,726 7.43% greater than 4,160 4.00% greater than 5,199 5.00%
Bank of Pullman 4,635 7.09% greater than 2,615 4.00% greater than 3,269 5.00%
Grant National Bank 3,152 8.28% greater than 1,523 4.00% greater than 1,904 5.00%
As of December 31, 1997:
Total capital to
risk weighted assets:
Consolidated $32,413 12.00% greater than $21,613 8.00% greater than $27,016 10.00%
United Security Bank 13,740 10.34% greater than 10,632 8.00% greater than 13,290 10.00%
Home Security Bank 7,175 10.16% greater than 5,650 8.00% greater than 7,063 10.00%
Bank of Pullman 4,412 10.97% greater than 3,218 8.00% greater than 4,023 10.00%
Grant National Bank 3,651 16.35% greater than 1,787 8.00% greater than 2,233 10.00%
Tier I capital to
risk weighted assets:
Consolidated 29,548 10.94% greater than 10,806 4.00% greater than 16,210 6.00%
United Security Bank 12,443 9.36% greater than 5,316 4.00% greater than 7,974 6.00%
Home Security Bank 6,661 10.86% greater than 2,825 4.00% greater than 4,238 6.00%
Bank of Pullman 3,906 9.71% greater than 1,609 4.00% greater than 2,414 6.00%
Grant National Bank 3,399 15.22% greater than 893 4.00% greater than 1,340 6.00%
Leverage capital, Tier I
capital to average assets:
Consolidated 29,548 8.27% greater than 14,289 4.00% greater than 17,862 5.00%
United Security Bank 12,443 7.01% greater than 7,100 4.00% greater than 8,875 5.00%
Home Security Bank 6,661 6.68% greater than 3,988 4.00% greater than 4,986 5.00%
Bank of Pullman 3,906 6.63% greater than 2,358 4.00% greater than 2,948 5.00%
Grant National Bank 3,399 10.14% greater than 1,340 4.00% greater than 1,675 5.00%
As of December 31, 1998 USBN, United Security Bank, Home Security Bank, Bank of
Pullman, and Grant National Bank were considered well capitalized based on
regulatory capital standards.
59
UNITED SECURITY BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 21. Earnings Per Share
The following is a reconciliation of the of the numerators and denominators for
basic and diluted per-share computations for net income for 1998, 1997 and 1996:
($ in thousands, except per share) 1998 1997 1996
Numerator:
Net income $5,364 $5,292 $3,454
Denominator:
Weighted-average number of common shares outstanding 4,982,221 4,971,990 4,961,925
Incremental shares assumed for stock options 70,224 47,216 20,375
-----------------------------------
Total 5,052,445 5,019,206 4,982,300
===================================
Basic earnings per common share $1.08 $1.06 $0.70
Diluted earnings per common share $1.06 $1.05 $0.69
Note 22. Insurance Recovery
In 1997, USBN recovered from its insurance provider $796,000 for a defalcation
by a former employee of its bank subsidiary, Home Security Bank. The insurance
proceeds are a full recovery of the reconciled loss except for a $50,000
insurance policy deductible. In 1996, USBN detected and recorded as an
operational loss the estimated loss of $860,000.
Note 23. Subsequent Event
In first quarter 1999 USBN anticipates merging with Bank of the West (BOW),
Walla Walla, Washington per a definitive agreement announced on November 10,
1998. BOW is a wholly-owned subsidiary of Bancwest Financial Corporation (BFC).
BOW will become a subsidiary of USBN, but will continue to operate under its
current name and management and in its current locations. Following the
transaction, BFC stockholders will become stockholders of USBN. The pooling-of-
interests accounting method will be used for the transaction. Based on the
December 31, 1998 Call Report BOW will add approximately $108 million in assets,
$70 million in loans, $94 million in deposits, $12 million in stockholders'
equity, $6 million to net interest and noninterest income, $2 million in net
income, and $1.25 in basic earnings per share to USBN totals. Approximately 1.7
million shares of USBN common stock is expected to be issued to complete the
transaction.
60
UNITED SECURITY BANCORPORATION
QUARTERLY FINANCIAL DATA
CONDENSED CONSOLIDATED STATEMENT OF INCOME-QUARTERLY
($ in thousands, except per share)
UNAUDITED
1998, Quarter Ended 1997, Quarter Ended
Dec. 31 Sept. 30 June 30 Mar. 31 Dec. 31 Sept. 30 June 30 Mar. 31
Interest income $9,075 $8,896 $8,574 $8,189 $8,329 $6,881 $6,129 $5,909
Interest expense 3,412 3,584 3,383 3,339 3,413 2,630 2,353 2,287
-------------------------------------------------------------------------------------------
Net Interest Income 5,663 5,312 5,191 4,850 4,916 4,251 3,776 3,622
Provision for loan losses 334 197 (57) 184 204 227 168 153
-------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 5,329 5,115 5,248 4,666 4,712 4,024 3,608 3,469
Insurance proceeds 796
Other noninterest income 684 979 1,031 1,293 785 875 811 690
Other noninterest expense 4,279 4,217 4,077 3,787 3,703 3,008 2,740 2,563
-------------------------------------------------------------------------------------------
Income before income taxes 1,734 1,877 2,202 2,172 1,794 2,687 1,679 1,596
Income tax 606 612 718 685 498 852 600 514
-------------------------------------------------------------------------------------------
Net income $1,128 $1,265 $1,484 $1,487 $1,296 $1,835 $1,079 $1,082
===========================================================================================
Basic earnings per common share $0.23 $0.25 $0.30 $0.30 $0.26 $0.37 $0.22 $0.22
Diluted earnings per common share $0.22 $0.25 $0.29 $0.29 $0.26 $0.36 $0.22 $0.22
Basic average shares 4,998,677 4,982,675 4,974,538 4,972,703 4,972,885 4,972,885 4,971,688 4,970,465
Diluted average shares 5,049,483 5,048,273 5,066,446 5,051,133 5,045,390 5,028,960 5,013,270 5,018,458
61