<PAGE> 1
FORM 10-KSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1995
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 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-B 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 registrant's revenues for the fiscal year ended December 31, 1995
were $20,821,000.
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 March
15, 1996, was $36,401,000. The number of shares of common stock outstanding at
such date was 3,332,310.
1
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UNITED SECURITY BANCORPORATION
ANNUAL REPORT ON FORM 10-KSB FOR THE FISCAL YEAR
ENDED DECEMBER 31, 1995
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
PART I
Item 1: Description of Business................................. 3
Item 2: Description of Property................................. 16
Item 3: Legal Proceedings....................................... 16
Item 4: Submission of Matters to a Vote of Security Holders..... 16
PART II
Item 5: Market for Common Equity and Related Stockholder Matters 16
Item 6: Management's Discussion and Analysis or Plan of
Operation............................................... 17
Item 7: Financial Statements.................................... 24
Item 8: Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure..................... 24
PART III
Item 9: Directors and Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange
Act..................................................... 25
Item 10: Executive Compensation.................................. 25
Item 11: Security Ownership of Certain Beneficial Owners and
Management.............................................. 25
Item 12: Certain Relationships and Related Transactions.......... 25
Item 13: Exhibits and Reports on Form 8-K........................ 25
SIGNATURES................................................................ 26
</TABLE>
2
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UNITED SECURITY BANCORPORATION
PART I
ITEM 1. DESCRIPTION OF BUSINESS
UNITED SECURITY BANCORPORATION
United Security Bancorporation (Company) is a multi-bank holding company
headquartered in Spokane, Washington. The Company owns two banks, United
Security Bank (USB) and Home Security Bank (HSB) (collectively, Banks), and
also owns USB Insurance (an insurance agency), USB Leasing (a leasing company),
and USB Mortgage (a mortgage company). The Company conducts its banking
business through ten branches located in communities throughout eastern
Washington, including Spokane. The Company focuses its banking and other
services on individuals, professionals, and small to medium sized businesses in
diversified industries throughout its service area. At December 31, 1995, the
Company had total consolidated assets of $191.8 million, net loans of $141.9
million and deposits of $163.8 million. The Company was founded in 1983 and
has been profitable in every year since its inception. In 1995, the Company
completed a public offering selling $8.5 million in stock and is now listed on
NASDAQ under the symbol "USBN".
THE BANKS
USB serves customers in Spokane and northeastern Washington from seven
branches. HSB serves customers in southeastern Washington from three 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,
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, 1995, virtually all of the loans originated by the Banks were
within the Banks' principal service areas.
The Company is committed to the needs of the local communities it serves, and
strives to provide a high level of personal and professional service to its
customers. Management believes the Company's community involvement, its
understanding of its service area and its local decision-making abilities give
it a distinct advantage over larger banking institutions. The Company is well
positioned to provide loans to small and medium sized businesses because of the
Company's direct knowledge of its customers' businesses and the communities it
serves. USB and HSB provide personalized, quality financial service to its
customers, which has enable them to maintain a stable and relatively low-cost
retail deposit base.
USB INSURANCE
USB Insurance began operating in April 1987 and is engaged in selling a full
line of insurance and financial products such as annuities and mutual funds on
an agency basis to individuals, commercial, industrial and agricultural
enterprises from locations in Colville, Chewelah and Kettle Falls, Washington.
Its business was significantly enhanced in 1990 through the acquisition of two
additional agencies in northeastern Washington. Total revenues of USB
Insurance for the year
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UNITED SECURITY BANCORPORATION
ended December 31, 1995 were $1,303,000 as compared to revenues of $1,288,000
for 1994. The insurance operation was profitable for the first time in 1995.
It incurred losses for the past four years primarily because of amortized
expenses associated with noncompetiton agreements entered into in conjunction
with its agency acquisitions.
USB LEASING
USB Leasing began operation in 1986 and is engaged in equipment leasing to
small and medium-sized companies in the markets it serves. The Company has
used a portion of the proceeds from its May, 1995 stock sale to expand its
leasing operations. Leasing assets grew to $1.5 million as of December 31,
1995 from zero as of December 31, 1994. Management of the Company expects to
continue expanding its leasing business over the next several years.
USB MORTGAGE
In 1995 the Company provided USB Mortgage with a portion of the proceeds
received in a public offering of the Company's common stock in 1995.
Management expects to continue expanding its mortgage business over the next
several years. As of December 31, 1995 assets were $545,000.
BUSINESS STRATEGY
The Company's business strategy is to continue to build a growing, profitable
community banking and financial services network by emphasizing high quality
customer service and by focusing on the financial needs of consumers and small
to medium-sized businesses. The Company intends to pursue an aggressive growth
strategy, the key components of which include:
o Increasing market share in existing markets
o Expanding the markets served through new branch openings and acquisitions
o Expanding nonbanking financial services
o Providing superior customer service
Increase Market Share in Existing Markets. Since its formation in 1983, the
Company has focused on commercial banking to small and medium-sized businesses,
professionals and other individuals. Management believes that the Company can
continue to gain market share by targeting products and services. To augment
this strategy, the Banks have recently opened branches in downtown Spokane and
Yakima, Washington.
The Company emphasizes the development of long-term relationships with its
customers, which enables the Banks to develop and offer new products that meet
its customers' needs. The Company is oriented toward the communities it serves
and is actively involved in these communities. The Company believes this
community orientation gives the Company a competitive advantage in attracting
and retaining targeted customers.
The consolidation of the banking industry in recent years has resulted in
centralized loan approval and servicing functions in the larger financial
institutions with whom the company competes. This has resulted in
inconvenience and reduced service to small business and individual customers of
these institutions, and has created opportunities for smaller, locally-focused
institutions, such as Banks, which can approve credit and offer other
customized banking services within each branch. The Company maintains loan
officers in each branch, and branch managers have the authority to approve
loans in amounts up to $100,000. Although loans are monitored and serviced at
the borrower's branch, the Company has centralized all note and collateral
documentation to decrease costs and standardize procedures.
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UNITED SECURITY BANCORPORATION
Expand Markets Served through New Branch Openings and Acquisitions. The
Company intends to expand its presence in eastern and central Washington by
opening new branches and acquiring other financial institutions in markets not
currently served by USB or HSB. Management has recently opened branches in
Spokane and Yakima.
Management considers a variety of criteria in evaluating potential branch
expansion, including the demographics and short and long-term growth prospects
for the location, the management and other resources needed to integrate the
branch into its existing operations, the degree to which the branch would
enhance the geographic diversity of the Company or would enhance the Company's
presence in an existing market, and the estimated cost of opening and operating
the branch as compared to the cost of acquiring an existing office and deposit
base.
In addition to internal growth, there may be attractive opportunities to grow
the Company through carefully selected acquisitions of other financial
institutions or their branches in central and eastern Washington. Management
believes that the continued consolidation of the banking industry will result
in attractive acquisition opportunities. No acquisition negotiations currently
are in progress, nor does the Company have any agreements, either written or
oral, with respect to any acquisition opportunity.
Expand Nonbanking Financial Services. The Company intends to aggressively
expand the nonbanking products and services offered through USB Insurance, USB
Leasing, and USB Mortgage, and expects to develop other products and services,
including real estate-related financial services not currently offered through
the Banks. USB Insurance will seek to expand its emphasis on marketing a full
line of insurance and financial products such as annuities and mutual funds to
individuals and commercial enterprises, and USB Leasing will continue to focus
on providing commercial leases to small and medium-sized businesses that
utilize computers, heavy, non-specialized, industrial equipment, and
agricultural equipment. Management believes the expansion of the Company's
customer base through growth and possible acquisitions should create
significant new opportunities for each of the nonbank subsidiaries to
cross-market their products and services.
Under current federal regulations, the Company is precluded from maintaining
offices for USB Insurance in any Bank branch serving a community of more than
5,000 inhabitants. As a consequence, the products and services offered by
these subsidiaries are necessarily limited to the smaller communities in the
Company's service areas in which the Banks maintain branches. When regulations
limiting these nonbanking activities are relaxed, however, the Company expects
to integrate USB Insurance throughout its community banking network.
Provide Superior Customer Service. The Company attributes it success to its
efforts to offer superior, personal service through professional bankers at all
of its branches. The Company distinguishes itself in its markets by
emphasizing a culture in which customers are the highest priority in all
aspects of the Company's operations. Ongoing employee training is focused on
customer needs, responsiveness and courtesy to customers. The Company's
marketing efforts and operating practices emphasize the Company's ties to the
local communities it serves, and its commitment to providing the highest level
of personalized service.
LENDING ACTIVITIES
The Company's loan portfolio consists primarily of commercial loans,
agricultural loans, real estate mortgage loans, residential real estate and
other construction loans, consumer installment loans and bank card loans. At
December 31, 1995, the Company had total loans and leases outstanding of
approximately $144 million, which equals 87.8% of the Company's total deposits
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UNITED SECURITY BANCORPORATION
and 75.0% of its total assets. $103 million of these loans were originated by
USB and $39 million were originated by HSB. At December 31, 1995, virtually
all of the loans held by the Company were to borrowers within the Banks'
principal market areas.
The following table sets forth the composition of the Company's loan portfolio
at December 31, 1995, 1994, and 1993.
<TABLE>
<CAPTION>
December 31,
1995 1994 1993
($ in thousands) Amount % Amount % Amount %
<S> <C> <C> <C> <C> <C> <C>
Commercial $ 75,011 52% $ 61,968 50% $46,593 52%
Agricultural 19,787 14% 16,721 14% 15,136 17%
Real estate mortgage 25,048 18% 24,883 20% 12,079 14%
Real estate construction 10,169 7% 8,126 7% 6,303 7%
Consumer 9,234 6% 7,781 6% 6,185 7%
Other 4,508 3% 3,286 3% 2,928 3%
------------------------------------------------------------
Total loans 143,757 100% 122,765 100% 89,224 100%
=== === ===
Deferred loan fees, net of deferred costs 505 438 407
Allowance for loan losses 1,391 0.97% 1,246 1.02% 802 0.90%
-------- ==== -------- ==== ------- ====
Loans, net $141,861 $121,081 $88,015
======== ======== =======
</TABLE>
Commercial Loans. Commercial loans primarily consist of loans to businesses
for various purposes, including revolving lines of credit, equipment financing
loans and letters of credit. These loans generally mature within one year,
have adjustable rates and are secured by inventory, accounts receivable,
equipment or real estate. The Company also classifies commercial construction
loans, which may have maturities in excess of one year, as commercial loans.
Agricultural Loans. Agricultural loans primarily consist of farm loans to
finance operating expenses. These loans generally mature within one year, have
adjustable rates and are secured by farm real estate, equipment, crops or
livestock. Since agricultural loans present certain risks not associated with
other types of lending, the policy of the Banks has been to make such loans
generally only to agricultural producers with diverse crops, thereby mitigating
the risk of loss attributable to a crop failure or the deterioration of
commodity prices. The company has also reduced its loan exposure to
timber-related borrowers in northeastern Washington in recent years, due to
consolidation of the timber industry in the area generally and the gradual
elimination of some timber-related businesses attributable to increased
environmental concerns.
Mortgage Loans. Mortgage loans include various types of loans for which the
Banks hold real property as collateral. At December 31, 1995, mortgage loans
included approximately $17.8 million of adjustable and fixed rate first
mortgage loans secured by one to four family residential properties,
approximately $3.9 of second mortgage loans secured by one to four family
residential properties, approximately $4.5 million in mortgage loans secured by
multifamily (five or more) residential properties. Mortgage loans typically
mature in one to five years and require payments on amortization schedules
ranging from one year to twenty years.
Construction Loans. Construction loans are made to individuals and contractors
to construct primarily single-family principal residences. These loans have
maturities of three months to six months. Interest rates are typically
adjustable, although some fixed-rate loans are made. The Company's policy is
to require that a permanent financing commitment be in place before a
construction loan is made to an individual borrower.
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UNITED SECURITY BANCORPORATION
Consumer and Other Loans. Consumer loans are primarily automobile and home
equity loans. Consumer loans generally have maturities of five years or less,
and fixed interest rates. Other loans consist of personal lines of credit and
bank card advances. Personal lines of credit generally have maturities of one
year or less, and fixed interest rates. Bank card advances are generally due
within 30 days and bear interest at rates that vary from time-to-time.
INTEREST RATES. The interest rates charged on loans vary with the degree of
risk and amount of the loan, and are further subject to competitive pressures,
money market rates, the availability of funds and government regulations.
Approximately 45% of the loans in the Company's portfolio have interest rates
that float with the lending 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 and HSB each folllow loan policies, which
have been approved by each Bank's board of directors and are overseen by the
Company. The policies establish levels of loan commitment (by loan type) and
credit review and grading criteria, and other matters such as loan
administration, loans to affiliates, costs, problem loans and loan loss
reserves, and related items. Loans are typically reviewed and graded on a
monthly basis.
All loan applications are processed at the Banks' branch lending offices. All
loan applications are approved by designated officers in accordance with the
respective guidelines and underwriting policies of the Banks. Credit limits
generally vary according to the type of loan and the individual loan officer's
experience. The maximum current loan limits available to any one individual
vary from $25,000 per loan to $300,000 per loan. In addition, five individuals
currently can combine their credit authority, to a maximum of $750,000 for USB
and $500,000 for HSB, with respect to certain loans. Loans in excess of
$750,000 for USB and $500,000 for HSB 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, 1995, the Banks, as a
matter of policy, do not extend credit to any single borrower in excess of
$2,540,000 and $1,000,000 for United Security Bank and Home Security Bank,
respectively.
To accommodate borrowers whose financing needs exceed their lending limits,
both Banks can sell loan participations to each other or to outside
participants. At December 31, 1995, 1994 and 1993, the outstanding balance of
loan participations sold outside the Company were $22,365,000, $23,383,000, and
$19,078,000, respectively.
SECONDARY MORTGAGE SALES. USB Mortgage also sells mortgage loans in the
secondary market to various mortgage underwriters and other financial
institutions. The Mortgage Company sells fixed-rate, single-family residential
loans in order to decrease the amount outstanding of such loans and also sells
adjustable rate residential loans in order to increase the weighted average
yields of the portfolios. In 1995, the Mortgage Company sold $9.6 million
mortgage loans, consisting of $8.4 million of fixed-rate residential loans and
$1.2 million of adjustable rate residential loans. Fees received on such sales
are included in interest and fees earned on loans, and accounted for
approximately .8%, 1.7%, and 4.6% of such interest and fees in each of the
three years ended December 31, 1995, 1994, and 1993, respectively. Such loans
are typically sold on a servicing released basis, meaning the Company does not
retain mortgage servicing responsibilities.
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UNITED SECURITY BANCORPORATION
NONPERFORMING ASSETS. The following table provides information for the
Company's nonperforming assets as of December 31, 1995, 1994, and 1993.
<TABLE>
<CAPTION>
Year Ended December 31,
($ in thousands) 1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Nonperforming loans:
Nonaccrual loans $ 777 $ 775 $ 811
Accrual loans 90 days or more past due 612 228 3
------ ------ ------
Total nonperforming loans 1,389 1,003 814
Other real estate owned 370 231 337
------ ------ ------
Total nonperforming assets $1,759 $1,234 $1,151
====== ====== ======
Allowance for loan losses $1,391 $1,246 $ 802
Ratio of total nonperforming assets to total assets 0.92% 0.75% 0.92%
Ratio of total nonperforming loans to total loans 0.97% 0.82% 0.91%
Ratio of allowance for loan losses to total nonperforming loans 100.1% 124.2% 98.5%
</TABLE>
The Company's nonperforming loans consist of nonaccruing loans, which are loans
that are past due over 90 days, other than loans that are adequately
collateralized and in the process of collection. No interest is taken into
account unless received in cash or until such time as the borrower demonstrates
an ability to resume payments of principal and interest. Interest previously
accrued, but not collected is reversed and charged against income at the time
the loan is placed in nonaccrual status. In 1995 the Company adopted Statement
of Financial Accounting Standards (FASB) No. 114, Accounting by Creditors for
Impairment of a Loan, as amended by FASB No. 118, Accounting by Creditors for
Impairment of a Loan--Income Recognition and Disclosures. These Standards
require that impaired loans be measured to reflect the fair value of collateral.
Nonaccrual loan and accruing loans more than 90 days delinquent are considered
impaired loans. Loans classified impaired are evaluated as part of management's
allowance for loan loss adequacy review. The fair value of the collateral is
evaluated to determine if a specific allowance for loan loss is needed for
impaired loans. See note 5 to the Consolidated Financial Statements.
Other real estate owned (OREO) includes property acquired by the Banks in
foreclosure proceedings or by acceptance of a deed in lieu of foreclosure. When
title is obtained to the property it is classified with OREO. Such property is
carried at the lower of cost or estimated fair market value at the time it is
acquired by the Banks, and loan losses arising from the acquisition are charged
against the allowance for loan loses. The OREO of the Company had a book value
of $370,000 as of December 31, 1995, consisting primarily of commercial
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, holding and disposal costs, and the cost
of funds of the Company. The allowance is increased by provisions charged to
operations and is reduced by loans charged off, net of any recoveries.
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UNITED SECURITY BANCORPORATION
The decline in real estate market values in many parts of the country and the
significant losses experienced by many financial institutions in the late
1980's, have resulted in increased regulatory scrutiny of the loan portfolios
of financial institutions such as the Company and the Banks, particularly with
respect to commercial real estate and multi-family residential real estate
loans. Management of the Banks periodically reviews the status of loans that
are contractually past due and the net realizable value of the collateral
securing such loans, and establishes reserves through the provision of loan
losses where ultimate collection of such loans is questionable. The provision
for loan losses also reflects a general allocation of unanticipated losses
based in part on the size of the Bank's loan portfolio and management's
assessment of economic conditions within the Bank's service area. Management
believes that the asset quality of the Banks' loan portfolios has significantly
improved and that the provision for loan losses and allowance for loan losses
is adequate.
The following table sets forth information regarding changes in the Company's
allowance for loan losses for the years ended December 31, 1995, 1994 and 1993.
<TABLE>
<CAPTION>
Years ended December 31,
($ in thousands) 1995 1994 1993
<S> <C> <C> <C>
Balance of allowance for loan losses at beginning of period $1,246 $ 802 $ 692
Charge-offs
Commercial 114 117 54
Agricultural 1 19
Real estate (mortgage and construction)
Consumer 24 2 3
Other 52 28 14
------ ------ ------
Total charge-offs 190 148 90
Recoveries
Commercial, financial and agricultural 13 6 1
Consumer 5 4
Real estate (mortgage and construction) 4
Other 1
------ ------ ------
Total recoveries 18 7 9
Net charge-offs 172 141 81
Provision for loan losses 317 585 191
------ ------ ------
Balance of allowance for loan losses at end of period $1,391 $1,246 $ 802
====== ====== ======
Ratio of net charge-offs to average loans 0.13% 0.13% 0.10%
Average loans and leases outstanding during the period $131,818 $106,032 $78,580
</TABLE>
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UNITED SECURITY BANCORPORATION
The following table sets forth the allowance for loan losses by loan category,
based on management's assessment of the risk associated with such categories as
of the dates indicated, and summarizes the percentage of gross loans in each
category to total gross loans.
<TABLE>
<CAPTION>
December 31,
1995 1994 1993
Amount of Amount of Amount of
($ in thousands) Allowance % Allowance % Allowance %
<S> <C> <C> <C> <C> <C> <C>
Commercial $ 726 52% $ 623 50% $417 52%
Agricultural 191 14% 175 14% 137 17%
Real estate-mortgage 242 18% 249 20% 104 13%
Real estate-construction 98 7% 87 7% 48 6%
Consumer 89 6% 75 6% 72 9%
Other 45 3% 37 3% 24 3%
------ ---- ------ ---- ---- ----
Total $1,391 100% $1,246 100% $802 100%
====== ==== ====== ==== ==== ====
</TABLE>
INVESTMENTS
Management of the investment portfolio is consolidated into a single investment
committee of the Company, which comprises the Company's president and chief
executive officer and its vice president and chief financial officer, and the
president's and cashier's of USB and HSB. The investment committee of the
Company is responsible for reviewing and approving the investment strategies
and recommendations of each of the Banks, consistent with each Bank's
asset/liability and investment policy.
The following table sets forth the carrying value, by type, of the securities
in the Company's portfolio at December 31, 1995, 1994 and 1993.
<TABLE>
<CAPTION>
December 31,
($ in thousands) 1995 1994 1993
<S> <C> <C> <C>
U.S. government $ 4,051 $12,599 $ 4,043
States and political subivisions 365 106 226
Mortgage-backed securities 13,545 6,460 11,470
Other 4,440 3,970 4,244
------- ------- -------
Total securities $22,401 $23,135 $19,983
======= ======= =======
</TABLE>
As of December 31, 1995 and 1994, the amortized cost of the Company's investment
portfolio exceeded its market value by $133,000 and $831,000, respectively. No
portion of the Company's investment portfolio is invested in derivative
securities (being securities whose value derives from the value of an underlying
security or securities, or market index of underlying securities' values), and
to the Company's knowledge, no portion of any mutual fund held in the Company's
investment portfolio was invested in derivative securities.
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UNITED SECURITY BANCORPORATION
The following table sets forth the book values, maturities and approximate
average aggregate yields of securities in the Company's investment portfolio by
type at December 31, 1995.
<TABLE>
<CAPTION>
Type and Maturity
($ in thousands) Yield Amount
<S> <C> <C>
U.S. Treasury and other U.S. government agencies
and corporations:
1 year or less $ 1,998
Over 1 through 5 years 546
Over 5 through 10 years 1,507
Over 10 years
-------
Total 6.67% 4,051
-------
States and political subdivisions
1 year or less 25
Over 1 through 5 years 115
Over 5 through 10 years 180
Over 10 years 45
-------
Total 4.77% 365
-------
Mortgage-backed securities
1 year or less 310
Over 1 through 5 years 1,312
Over 5 through 10 years 2,329
Over 10 years 9,594
-------
Total 8.48% 13,545
-------
Other securities:
1 year or less 2,761
Over 1 through 5 years 254
Over 5 through 10 years 1,425
Over 10 years
-------
Total 4.84% 4,440
-------
Total investment securities:
1 year or less 5,094
Over 1 through 5 years 2,227
Over 5 through 10 years 5,441
Over 10 years 9,639
-------
Total 7.35% $22,401
=======
</TABLE>
Yields were determined by dividing aggregate annual interest income for 1995 by
aggregate book value at December 31, 1995. The yields for tax-exempt
securities have been computed on a full tax equivalent basis using an assumed
tax rate of 34%. Maturities of mortgage-backed securities are estimated and
are based on the average lives of the underlying mortgage loans, as adjusted to
incorporate prepayment assumptions.
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UNITED SECURITY BANCORPORATION
DEPOSITS
The Company's primary source of funds has historically been customer deposits.
The Banks strive to maintain a high percentage of noninterest-bearing deposits,
which are low cost funds and result in higher interest margins. At December
31, 1995, 1994, and 1993, the Company's ratios of noninterest-bearing deposits
to total deposits were 15.7%, 15.6%, and 18.6%, respectively.
The Company offers a variety of accounts designed to attract both short-term
and long-term deposits from its customers. These accounts include negotiable
order of withdrawal ("NOW") accounts, money market investment accounts, savings
accounts, and certificates of deposit and other time deposits.
Interest-bearing accounts earn interest at rates established by management of
the Banks, based on competitive market factors and management's desire to
increase or decrease certain types or maturities of deposits consistent with
the Banks policies. The Company traditionally has not sought brokered deposits
and does not intend to do so in the future.
The following table sets forth the average balances for each major category of
deposit and the weighted-average interest rate paid for deposits in 1995, 1994
and 1993.
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1994 1993
Average Interest Average Interest Average Interest
($ in thousands) Balance Rate Balance Rate Balance Rate
<S> <C> <C>
Interest-bearing demand deposits $ 43,558 4.28% $ 37,089 3.75% $ 29,362 3.46%
Savings deposits 15,411 3.18% 16,361 3.20% 14,790 3.47%
Time deposits 75,340 6.03% 54,871 4.58% 40,651 4.58%
Noninterest-bearing demand deposits 21,598 22,508 19,767
-------- -------- --------
Total $155,907 $130,829 $104,570
======== ======== ========
</TABLE>
The following table shows the amounts and maturities of certificates of deposit
that had balances of more than $100,000 at December 31, 1995, 1994 and 1993.
<TABLE>
<CAPTION>
December 31,
($ in thousands) 1995 1994 1993
<S> <C> <C> <C>
Less than three months $ 8,541 $ 6,576 $ 3,658
Three to six months 5,106 1,098 1,775
Over six months to one year 5,994 2,521 4,513
Over one year 2,052 5,711 1,327
------- ------- -------
Total $21,693 $15,906 $11,273
======= ======= =======
</TABLE>
12
<PAGE> 13
UNITED SECURITY BANCORPORATION
COMPETITION
The Company faces strong competition, in attracting deposits and in originating
loans from other commercial banks, savings and loan associations, mutual
savings banks and credit unions, all of which exist in the Banks' service areas
and many of which have greater financial resources than the Company. The
Company aggressively competes in its market areas with these other institutions
and financial intermediaries in all phases of its operations.
USB competes for deposits and banking business in northeastern Washington from
seven locations in Chewelah, Colville, Kettle Falls, Ione, and Spokane. The
bank's market area encompasses Stevens, Ferry, 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 and two commercial banks and one
credit union in Pend Oreille County. In Spokane County, USB competes against
approximately seven commercial banks, one mutual savings bank, several credit
unions and savings and loans.
HSB serves customers in southeastern and southcentral Washington from locations
in Sunnyside, Prosser, and Yakima. The bank's market area encompasses portions
of Benton and Yakima Counties. HSB competes against commercial banks, savings
and loans, and credit unions in its market area.
LEGAL PROCEEDINGS
Periodically and in the ordinary course of business, various claims and
lawsuits are brought against the Company or the Banks, such as claims to
enforce lines, condemnation proceedings on properties in which the Banks hold
security interests, claims involving the making and servicing of real property
loans and other issues incident to the business of the Company and the Banks.
In the opinion of management, the ultimate liability, if any, resulting from
such claims or lawsuits will not have a material adverse effect on the
financial position or results of operations of the company.
EMPLOYEES
As of December 31, 1995, the Company had 146 employees, of which 63 were
employed by USB, 39 were employed by HSB, 18 were employed by USB Insurance, 3
were employed by USB Leasing, 17 were employed by USB Mortgage, and 6 were
employed by the Parent Company, United Security Bancorporation. None of the
Company's employees are covered by a collective bargaining agreement.
Management believes relations with the Company's employees are good. United
Security Bancorporation is located at 9506 N. Newport Hwy., Spokane, WA 99218
and the telephone number is 509-467-6949.
13
<PAGE> 14
UNITED SECURITY BANCORPORATION
SUPERVISION AND REGULATION
The Company and its banking and nonbanking subsidiaries are extensively
regulated under federal and Washington law by the Board of Governors of the
Federal Reserve System (the "Federal Reserve Board"), the Federal deposit
Insurance Corporation, and the Comptroller of the Currency, the banking and
securities divisions of the Washington Department of Financial institutions and
the Washington Insurance Commissioner. The laws and regulations administered
by these regulatory authorities are primarily intended to protect depositors
and other customers of the Company and its subsidiaries, and not security
holders of the Company. Any change in applicable laws, regulations or
regulatory policies may have a material effect on the business operations and
prospects of the Company and its subsidiaries.
The Company is a bank holding company registered under Washington law and the
Bank Holding Company Act of 1956, as amended, and is subject to regulation,
supervision and examination by the Federal Reserve Board and the Washington
Supervisor. The Company is required to file an annual report of its operations
at the end of each fiscal year, and such other reports as the Federal Reserve
may require. See Note 19 in the Consolidated Financial Statements for further
information.
14
<PAGE> 15
UNITED SECURITY BANCORPORATION
FACILITIES
At December 31, 1995, the Company owned or leased facilities in seven locations
in northeastern Washington and three locations in southeastern Washington. The
following table shows the size and age of each of the facilities owned or
leased by the company at such date, and the rental rate of each facility.
Leased facilities have terms of twenty years, and may be extended on a
month-to-month basis.
<TABLE>
<CAPTION>
Approximate square Year
Approximate footage building constructed
Approximate square footage area now utilized for or last
land area (s.f.) building area (s.f.) banking services (s.f.) renovated
<S> <C> <C> <C> <C>
Leased facilities:
Chewelah Branch(1) 12,000 9,600 8,864 1983
Ione Branch(2) 5,000 3,000 3,000 1983
Spokane Downtown(3) 5,601 8,700 8,700 1995
Owned facilities:
Colville Branch(4) 10,800 6,500 3,436 1991
Kettle Falls Branch(5) 10,000 3,300 2,825 1982
Spokane Northpointe Branch(6) 50,000 11,500 10,400 1993
Spokane Valley Branch(7) 22,500 8,800 3,975 1994
Sunnyside Branch 12,000 5,000 5,000 1992
Prosser Branch 10,000 5,000 5,000 1989
Yakima Branch(8) 12,000 9,986 7,686 1995
</TABLE>
(1) USB leased this facility at an annual rental of $7.44 per square foot or
$71,400 per year. Approximately 720 square feet is subleased by USB to USB
insurance at an annual rental of $11.68 per square foot, and an additional
196 square feet is subleased to a travel agency at an annual rental of
$9.18 per square foot. USB's lease agreement for the facility expires in
2010. See Note 11 to the Consolidated Financial Statements.
(2) USB leased this facility at an annual rental of $4.27 per square foot or
$12,810 per year. USB's lease agreement for the facility expires in 2010.
See Notes 11 in the Consolidated Financial Statements.
(3) USB leased this facility at an annual rental of $8.76 per square foot or
$60,000 per year. USB's lease agreements for the facility expires in 2005.
The facility is leased from a Company partially owned by Directors of the
Company. USB Mortgage and USB Leasing lease approximately 1,850 square
feet of shared office space at an annual rate of $10 per square foot or
$18,600 per year. Their leases expire in 2000.
(4) USB leased approximately 3,064 square feet of this facility to USB
Insurance at an annual rental of $12 per square foot, or $36,768 per year.
(5) USB leased approximately 475 square feet of this facility to USB Insurance
at an annual rental of $10.91 per square foot, or $5,183 per year.
(6) USB leased approximately 1,100 square feet of this facility to the Company
at an annual rental $10 per square foot, or $11,000 per year.
(7) USB leased approximately 2,057 square feet of this facility to a
nonaffiliated financial at an annual rental of $10.46 per square foot, or
$21,516 per year. USB also leased an additional 768 square feet of this
facility to a securities brokerage firm at an annual rental of $12.05 per
square foot, or $9,256 per year.
(8) The Yakima Branch is owned by the Company and is leased to Home Security
Bank at an annual rental of $9.80 per square foot or $97,800 per year.
Home Security Bank subleased approximately 2,300 square feet of space to a
law firm at an annual rental of $15 per square foot or $34,500 per year.
15
<PAGE> 16
UNITED SECURITY BANCORPORATION
In January and February, 1996 the Company purchased from the Banks at appraised
value the owned facilities described on the previous page. The Yakima Branch
had been purchased by the Company in 1994. Five year lease agreements were
completed between the Company and the Banks. See Note 20 to the Consolidated
Financial Statements.
ITEM 2. DESCRIPTION OF PROPERTY.
Reference is made to Item 1 of this report, in the section entitled
"Facilities," for a complete description of the Company's properties.
ITEM 3. LEGAL PROCEEDINGS.
Reference is made to Item 1 of this report, in the section entitled "Legal
Proceedings," for a complete description of legal matters affecting the
Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the Company's shareholders during the
fourth quarter of 1995.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
MARKET INFORMATION. Effective in May, 1995 the Common Stock was approved for
quotation on the Nasdaq National Market System (NASDAQ) under the symbol
"USBN". Prior to NASDAQ quotation, the Common Stock was traded on a limited
basis in the over-the-counter market. The following table sets out the high
and low bid prices per share for the Common Stock for the first quarter of
1996, and for 1995 and 1994 as reported by NASDAQ and prior to May of 1995
reported by the primary broker.
<TABLE>
<CAPTION>
1996 1995 1994
High Low High Low High Low
<S> <C> <C> <C> <C> <C> <C>
First Quarter(1) $13.50 $11.88 $ 6.81 $6.03 $5.26 $5.26
Second Quarter $ 7.64 $7.03 $5.69 $5.69
Third Quarter $ 9.54 $7.13 $5.69 $5.69
Fourth Quarter $12.72 $8.86 $5.73 $5.69
</TABLE>
(1) Through March 15, 1996
HOLDERS. The number of holders of common stock of record on March 15, 1996 was
approximately 1,200.
DIVIDENDS. The Company has declared and paid the following dividends subsequent
to January 1, 1993: On January 5, 1993, the Company paid a $.09 cash dividend
and a 15% stock dividend; on July 27, 1993, the Company paid a $.09 cash
dividend; on January 28, 1994, the Company paid a 15% stock dividend; on July
31, 1994, the Company paid a $.08 cash dividend; on February 14, 1995, the
Company paid a 10% stock dividend; on August 23, 1995, the Company paid a 10%
stock dividend; and on February 5, 1996 the Company issued a 10% stock
split-up. On July 15, 1994, the Company also effected a two-for-one stock
split. Cash dividend amounts have been adjusted to give retroactive effect to
the reported stock dividends, stock split-ups, and to the two-for-one stock
split. See Notes 12 and 20 to the Consolidated Financial Statements.
16
<PAGE> 17
UNITED SECURITY BANCORPORATION
The Company has adopted a dividend policy which is periodically reviewed and
revised by the Board of Directors. Historically, the goal of such policy was to
pay dividends at levels established during past years, provided funds were
available and the payment of such dividends did not violate the capital
requirements of the Company or the Banks. The primary source of funding
dividend payments has been the Banks, which currently pay the Company, in the
form of dividends, approximately 15% of their net annual profits after
establishment of loan loss allowances and payment of taxes. Funding of
dividends from the Company's other subsidiaries, USB Insurance, USB Leasing, and
USB Mortgage, has been minimal. The Company expects that future dividends, if
declared, will be paid in the form of stock dividends.
Payment of dividends, including stock dividends, is subject to regulatory
limitations. Under federal banking law, the payment of dividends by the Company
and the Banks is subject to capital adequacy requirements established by the
Federal Reserve Board and the FDIC. Under Washington general corporate law as
it applies to the Company, no cash dividend may be declared or paid, if, after
effect to the dividend, the Company is insolvent or the liabilities of the
Company exceed the Company's assets. Payment of dividends, including stock
dividends, on the Common Stock is also affected by statutory limitations, which
restrict the ability of the Banks to pay upstream dividends to the Company.
Under Washington banking law as it applies to the Banks, no dividend may be
declared or paid in an amount greater than net profits then available, and after
a portion of such net profits have been added to the surplus funds of the Bank.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
OVERVIEW
The Company's net income is derived primarily from net interest income of the
Banks, which is the difference between interest earned on their loan and
investment portfolios and their cost of funds, primarily interest paid on
deposits and borrowings. The Banks have historically enjoyed above average net
interest margins (net interest income divided by average interest-earning
assets), primarily because of loan pricing and because a high percentage of the
Banks' deposits are noninterest-bearing demand deposits, which involve no
interest cost to the Banks. At December 31, 1995, 15.7% of the Company's total
deposits were noninterest-bearing. For the years ended December 31, 1995, 1994,
and 1993, the Company's average net interest margins were 6.1%, 6.0%, and 5.8%,
respectively. See Liquidity and Capital Resources.
Net income is also affected by levels of provisions for loan losses, noninterest
income (primarily service changes on deposits, securities gains or losses and
other operating income) and noninterest expenses (primarily salaries and
benefits, occupancy expenses, data processing costs, FDIC insurance, and other
operating expenses). For each of the three years ended December 31, 1995, 1994,
and 1993, the provision for loan losses were $317,000, $585,000, and $191,000,
respectively. Net charge-offs during the year ended December 31, 1995 were
$172,000 as compared to $141,000 and $81,000 during 1994 and 1993, respectively.
For the three years ended December 31, 1995, 1994, and 1993 noninterest income
as a percentage of personnel expenses was 76%, 58%, and 65%, respectively.
17
<PAGE> 18
UNITED SECURITY BANCORPORATION
NET INTEREST INCOME
The following table sets forth information with regard to average balances of
assets and liabilities for the Company, as well as the total dollar amounts of
interest income from interest-earning assets and interest expense on
interest-bearing liabilities, resultant yields or costs, net interest income,
net interest spread (the difference between the average yield on
interest-earning assets and the average cost of interest-bearing liabilities),
net interest margin and the ratio of average interest-earning assets
to average interest-bearing liabilities.
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1994 1993
Average Average Average
($ in thousands) Balance Interest % Balance Interest % Balance Interest %
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Loans $131,558 $14,930 11.35% $106,003 $11,223 10.59% $ 78,518 $8,205 10.45%
Lease financing 260 46 17.89% 28 8 27.69% 62 13 20.97%
Taxable securities 24,030 1,634 6.80% 16,601 902 5.43% 18,885 1,175 8.22%
Nontaxable securities 228 13 5.70% 128 3 2.34% 231 5 2.16%
Federal Funds Sold 3,788 205 5.41% 5,899 216 3.66% 8,282 205 3.26%
Time Deposits With Other Banks 3,746 228 6.09% 1,091 35 3.21% 781 28 3.59%
-------- ------- ------ -------- ------- ------ -------- ------ ------
Interest earning assets 163,610 $17,058 10.42% 129,751 $12,387 9.55% 104,759 $9,831 9.19%
======= ====== ======= ====== ====== ======
Other assets 14,804 15,244 12,082
-------- -------- --------
Total assets $178,414 $144,995 $116,841
======== ======== ========
Liabilities
Interest-bearing demand deposits $ 43,558 $ 1,885 4.28% $ 37,089 $ 1,389 3.75% $ 29,362 $1,017 3.46%
Savings deposits 15,411 490 3.18% 18,381 523 3.20% 14,790 513 3.47%
Time deposits 75,340 4,548 6.03% 54,971 2,515 4.58% 40,851 1,882 4.58%
-------- ------- ------ -------- ------- ------ -------- ------ ------
Total interest-bearing deposits 134,308 8,901 5.14% 108,321 4,427 4.09% 84,803 3,392 4.00%
Short-term debt 1,084 35 3.23% 1,447 111 7.67% 2,240 131 5.85%
Long-term debt 779 78 10.01% 814 81 9.95% 866 87 10.08%
-------- ------- ------ -------- ------- ------ -------- ------ ------
Total interest-bearing liabilities 136,172 $ 7,014 5.15% 110,582 $ 4,619 4.18% 87,908 $3,610 4.11%
======= ====== ======= ====== ====== ======
Noninterest bearing demand deposits 21,598 22,508 19,797
Other liabilities 1,303 1,444 1,228
-------- -------- --------
Total liabilities 159,073 134,534 108,903
Stockholders' Equity 19,341 10,461 7,938
-------- -------- --------
Total liabilities and stockholders' equity $178,414 $144,995 $116,641
======== ======== ========
Net interest income $10,042 5.27% $ 7,768 5.37% $6,021 4.93%
======= ====== ======= ====== ====== ======
Net interest margin to average
earning assets 6.14% 5.99% 5.75%
====== ====== ======
</TABLE>
Nonaccrual loans are included with loan balances. Average balances are based
on quarterly balances for 1994 and 1993. Average balances and related interest
amounts have been reclassified for 1994 and 1993 to conform with the 1995
presentation. The impact on the net interest income percentage and net
interest margin was immaterial.
18
<PAGE> 19
UNITED SECURITY BANCORPORATION
The following table illustrates the changes in the Company's net interest
income due to changes in volumes and interest rates.
<TABLE>
<CAPTION>
1995 vs 1994 1994 vs 1993
Increase (decrease) in net interest income due to changes in
($ in thousands) Volume Rate Total Volume Rate Total
<S> <C> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS
Loans $2,371 $1,014 $3,745 $2,871 $142 $3,013
Securities 407 335 742 (147) (128) (275)
Federal funds sold (77) 66 (11) (12) 23 11
Interest-bearing deposits in other banks 85 108 193 11 (4) 7
------ ------ ------ ------ ---- ------
Total interest earning assets $3,146 $1,523 $4,669 $2,723 $ 33 $2,756
------ ------ ------ ------ ---- ------
INTEREST BEARING LIABILITIES
Interest-bearing demand deposits 242 234 476 268 106 374
Savings deposits (30) (3) (33) 54 (44) 10
Time deposits 938 1,093 2,031 651 0 651
------ ------ ------ ------ ---- ------
Total interest bearing deposits 1,150 1,324 2,474 973 62 1,035
Short-term debt (28) (48) (76) (46) (26) (20)
Long-term debt (3) (3) (5) (1) (6)
------ ------ ------ ------ ---- ------
Total interest bearing liabilities 1,119 1,276 2,395 922 87 1,009
------ ------ ------ ------ ---- ------
Total increase (decrease) in net interest income $2,027 $ 247 $2,274 $1,801 $(54) $1,747
====== ====== ====== ====== ==== ======
</TABLE>
The change in interest income and interest expense due to changes in both volume
and rate, which cannot be segregated, has been allocated proportionately to the
change due to volume and the change due to rate.
ASSET/LIABILITY MANAGEMENT
The Company's results of operations depend substantially on its net interest
income. Interest income and cost of funds are affected by general economic
conditions, regulatory policy and competition in the marketplace. See
"Liquidity and Capital Resources."
the Banks' operating strategies focus on asset/liability management. The
purpose of asset/liability management ("ALM") is to provide stable net interest
income growth by protecting the Banks' and the Company's earnings from undue
interest rate risk. Each of the Banks follows an ALM policy for controlling
exposure to interest rate risk. The ALM policy is established by a committee
in each Bank and is reviewed, approved and administered by the investment
committee of the Company. In order to control risk in a rising interest rate
environment, management's philosophy has been to shorten the average maturity
of the investment portfolio in order to achieve a more asset sensitive
position, therefore allowing quicker asset repricing. Conversely, in a
declining interest rate environment, the philosophy is to lengthen the average
maturity of the investment portfolio, thereby becoming more liability sensitive.
The ALM policy is also designed to maintain an appropriate balance between
rate-sensitive assets and liabilities in order to maximize interest rate
spreads. The Banks monitor the sensitivity of their assets and liabilities
with respect to changes in interest rates and maturities, and direct the
allocation of their funds accordingly. The strategy of each Bank has been to
maintain, to the extent possible, a balanced position between assets and
liabilities, and to place emphasis on the sensitivity of its assets.
Generally, the Banks attempt to maintain liquid assets, in order to meet
funding requirements in the current period, and a ratio of interest income to
average earning assets of 4% to 6%. At December 31, 1995, the net interest
margins of USB and HSB, respectively, were 5.32% and 4.78%. Should interest
rates trend upward in the near future, the Company could become more asset
sensitive through the sale of investment securities, although the amount
realized on the sale would be adversely affected by the increased rates.
Management believes there will be less movement in rates on short-term
liabilities such as
19
<PAGE> 20
UNITED SECURITY BANCORPORATION
savings, negotiable order of withdrawal ("NOW") accounts and money market
accounts in an increasing interest rate environment than in rates on the Banks'
interest-earning assets.
The following table sets forth the contractual payment, maturity or repricing
information, and the resulting interest rate gap, of the Banks'
interest-earning assets and interest-bearing liabilities at December 31, 1995
and the cumulative interest sensitivity gap at December 31, 1995. The amounts
in the table are derived from internal data from the Company and could be
significantly affected by factors such as changes in prepayment experience,
early withdrawals of deposits and competition. Mortgage-backed securities are
estimated and are based on the average lives of the underlying mortgage loans,
as adjusted to incorporate prepayment assumptions.
<TABLE>
<CAPTION>
Estimated maturity or repricing
Three months
Less than to less than One to Over five
($ in thousands) three months one year five years years Total
<S> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Fixed-rate loans $12,923 $ 21,309 $37,723 $ 7,478 $ 79,433
Floating-rate loans 55,147 1,768 3,633 3,876 64,324
Investment securities 4,784 915 3,157 8,856
Mortgage-backed securities 310 1,312 11,923 13,545
Other interest-earning assets 7,692 7,692
------- -------- ------- ------- --------
Total interest-earning assets $75,762 $ 28,171 $43,483 $26,434 $173,850
======= ======== ======= ======= ========
INTEREST-BEARING LIABILITIES:
Savings and NOW accounts $59,044 $ 59,044
Certificates of deposit over $100,000 8,542 11,100 2,051 21,693
Other time deposits 6,047 46,519 4,832 13 57,411
Long-term debt 4 12 122 629 767
------- -------- ------- ------- --------
Total interest-bearing liabilities $73,637 $ 57,631 $ 7,005 $ 642 $138,915
======= ======== ======= ======= ========
Interest sensitivity gap $ 2,125 $(29,460) $36,478 $25,792
Cumulative interest sensitive gap 2,125 (27,335) 9,143 34,935
As a percentage of total assets 1.11% -14.25% 4.77% 18.21%
</TABLE>
Certain shortcomings are inherent in the method of analysis presented in the
foregoing table. For example, although certain assets and liabilities may have
similar maturities and periods to repricing, they may react differently to
changes in market interest rates. Also, interest rates on assets and
liabilities may fluctuate in advance of changes in market interest rates, while
interest rates on other assets and liabilities may follow changes in market
interest rates. Additionally, certain assets have features that restrict
changes in the interest rates of such assets, both on a short-term basis and
over the lives of such assets. In the event of a change in market interest
rates, prepayments and early withdrawals could cause significant deviation from
the stated payments, maturities and repricings.
20
<PAGE> 21
UNITED SECURITY BANCORPORATION
The following table presents the aggregate maturities of loans in each major
category of the Banks' loan portfolios at December 31, 1995. Actual maturities
may differ from the contractual maturities shown below as a result of renewals
and prepayments.
<TABLE>
<CAPTION>
Aggregate maturities at December 31, 1995
Less than One to Over five
($ in thousands) one year five years years Total
<S> <C> <C> <C> <C>
Commercial, financial and agricultural $29,413 $41,683 $23,702 $ 94,798
Real estate-mortgage 4,127 13,882 7,039 25,048
Real estate-construction 6,673 3,412 84 10,169
Consumer 2,345 6,526 363 9,234
Other 4,508 4,508
------- ------- ------- --------
Total $47,066 $65,503 $31,188 $143,757
======= ======= ======= ========
</TABLE>
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995 AND 1994
GENERAL. The Company's net income increased 90% to $3,751,000 for the year
ended December 31, 1995, from $1,978,000 for the year ended December 31, 1994,
primarily as a result of an increase in net interest income attributed to strong
loan demand. Earnings increased 17% or $651,000 from life insurance proceeds
net of death benefit expense from the death of a key employee.
Return on average assets and equity were 2.10% and 19.39%, respectively, for
fiscal 1995, as compared to 1.36% and 18.91%, respectively, for fiscal 1994.
Total assets increased 17% to $191,813,000 for the year ended December 31, 1995
from $163,911,000 as of December 31, 1994. Total loans increased 17% to
$143,757,000 from $122,765,000 the previous year-end. The increase in loans
resulted from an increase in loan demand throughout the two Banks service areas.
Return on assets and equity in 1995 were 1.67% and 15.36%, respectively before
the life insurance proceeds described above. Equity was increased
$8.5 million in 1995 from the public offering completed in June. See Liquidity
and Capital Resources for further information.
Deposits increased 12% to $163,791,000 as of December 31, 1995 from $146,629,000
the previous year. Noninterest bearing demand deposits increased 12% to
$25,643,000 as of December 31, 1995.
NET INTEREST INCOME. The Company's net interest spread was 5.27% in 1995
compared to 5.37% and 4.93% in 1994 and 1993, respectively. The net interest
margin to average earning assets was 6.14%, 5.99%, and 5.75% for 1995, 1994, and
1993, respectively. Net interest income increased 29% to $10,042,000 for 1995
from $7,768,000 the previous year.
21
<PAGE> 22
UNITED SECURITY BANCORPORATION
NONINTEREST INCOME AND EXPENSE. Noninterest income, which consists of service
charges, commissions, life insurance proceeds, and other fees, increased 67% to
$3,765,000 in 1995 compared to $2,258,000 the previous year. All categories
were higher in 1995 with life insurance proceeds of $1,030,000 being a
significant portion of the increase. Noninterest expense increased 31% to
$8,414,000 during 1995 compared to $6,446,000 in 1994. The Banks opened
branches in downtown Spokane and in Yakima during 1995, also the mortgage and
leasing subsidiaries significantly increased activity during the year.
Noninterest expense increased $379,000 due to death benefit expense.
YEARS ENDED DECEMBER 31, 1994 AND 1993
GENERAL. The Company's net income increased 45% to $1,978,000 for the year
ended December 31, 1994, from $1,365,000 for the year ended December 31, 1993,
primarily as a result of an increase in net interest income attributed to
strong loan demand.
Return on average assets and equity were 1.36% and 18.91%, respectively, for
fiscal 1994, as compared to 1.17% and 17.20%, respectively, for fiscal 1993.
Total assets increased 30% to $163,911,000 for the year ended December 31, 1994
from $125,737,000 as of December 31, 1993. Total loans increased $33,541,000
during the year, while federal funds sold decreased $1,650,000. The increase
in loans resulted from an increase in loan demand throughout the two Banks
service areas, and in particular, the Spokane service area. The decrease in
federal funds sold reflects the utilization of these excess funds throughout
the Banks' service areas to meet increased loan demand.
Deposits increased $32,490,000 to $146,629,000, during the year ended December
31, 1994. Noninterest bearing demand deposits increased 8% to $22,917,000
during the year.
NET INTEREST INCOME. The Company's net interest margin was 5.37% in 1994
compared to 4.93% in 1993. The net interest margin to average earning assets
was 5.99% and 5.75% for 1995 and 1994, respectively. Net interest income
increased 29% to $7,768,000 for 1994 from $6,021,000 the previous year.
NONINTEREST INCOME AND EXPENSE. Noninterest income, which consists of service
charges, commissions, life insurance proceeds, and other fees, increased 5% to
$2,258,000 in 1994 compared to $2,149,000 the previous year. Noninterest
expense increased 9% to $6,446,000 during 1994 compared to $5,918,000 in 1993.
The increase in noninterest expense was the result of normal inflationary
increases in personnel and occupancy expenses, and start-up costs incurred in
connection with the Spokane Valley branch of USB, which opened in September,
1994.
22
<PAGE> 23
UNITED SECURITY BANCORPORATION
LIQUIDITY AND CAPITAL RESOURCES
Management believes that the Company's cash flow will be sufficient to support
its existing operations for the foreseeable future. If the Company needs
additional liquidity, it would be required to borrow or issue additional
securities. The Company's ability to incur indebtedness is limited by
government regulations and its ability to service borrowings is dependent upon
the availability of dividends from the Banks and nonbank subsidiaries. The
payment of dividends by the Banks is subject to limitations imposed by law and
governmental regulations.
The Banks may borrow on a short-term basis to compensate for reductions in
other sources of funds. Bank borrowings may also be used on a longer-term
basis to support expanded lending activities and to match the maturity of
repricing intervals of assets.
The Company's total stockholders' equity increased to $24,863,000 at December
31, 1995, from $12,186,000 at December 31, 1994 and $8,643,000 at December 31,
1993. At December 31, 1995, stockholders' equity was 12.96% of total assets,
compared to 7.43% at December 31, 1994. At December 31, 1995, the Company held
cash and cash-equivalent assets of $15.6 million. At such date, virtually all
of the Company's investment securities ($22 million in aggregate amount) were
available-for-sale.
The capital levels of the Company and each of the banks currently exceeded
applicable regulatory capital guidelines at December 31, 1995. During 1995,
the Company issued and sold 1,150,000 million shares of common stock in an
underwritten public offering, which yielded net proceeds to the Company after
deduction of commissions, selling expenses and related offering costs of $8.5
million. Proceeds from the sale have been allocated among the Company's
subsidiaries and is being used to support the growth of the Company and its
subsidiaries. Two additional branches were opened in downtown Spokane for
United Security Bank and in Yakima, Washington for Home Security Bank. The
Company has also expanded its financial services with two of its subsidiaries,
USB Leasing and USB Mortgage.
EFFECTS OF INFLATION AND CHANGING PRICES. The primary impact of inflation on
the Company's operations is increased asset yields, deposit costs and operating
overhead. Unlike most industrial companies, virtually all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates generally have a more significant impact on a financial
institution's performance than the effects of general levels of inflation.
Although interest rates do not necessarily move in the same direction or to the
same extent as the prices of goods and services, increases in inflation
generally have resulted in increased interest rates. The effects of inflation
can magnify the growth of assets, and if significant, would require that equity
capital increase at a faster rate than would otherwise be necessary.
23
<PAGE> 24
UNITED SECURITY BANCORPORATION
ITEM 7. FINANCIAL STATEMENTS
The consolidated financial statements of the Company and its subsidiaries for
the years ended December 31, 1995, 1994, and 1993, which have been audited by
McFarland and Alton, P.S., are included elsewhere in this report, beginning on
page 28. An index to such financial statements appears on page 27.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
During the years ended December 31, 1995, 1994, and 1993, there were no
disagreements with McFarland & Alton, P.S. on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure which, if not resolved to the satisfaction of such firm, would have
caused them to make reference to the subject matter of such disagreement in
their reports on such financial statements.
24
<PAGE> 25
UNITED SECURITY BANCORPORATION
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
The information requested by this item is contained in the
registrant's 1996 proxy statement, and is incorporated by reference
herein.
ITEM 10. EXECUTIVE COMPENSATION.
The information requested by this item is contained in the
registrant's 1996 proxy statement, and is incorporated by reference
herein.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information requested by this item is contained in the
registrant's 1996 proxy statement, and is incorporated by reference
herein.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information requested by this item is contained in the
registrant's 1996 proxy statement, and is incorporated by reference
herein.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
Exhibits.
21 Subsidiaries of Registrant. Filed herewith. See Page 57.
Reports on Form 8-K. No reports on Form 8-K were filed during the
last quarter of the period covered by this report.
25
<PAGE> 26
UNITED SECURITY BANCORPORATION
SIGNATURES
in accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
UNITED SECURITY CORPORATION
By: /s/ WILLIAM C. DASHIELL
-------------------------------------------
William C. Dashiell, its
President and Chief Executive Officer
Date: March 22, 1996
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
<S> <C>
By: /s/ DAVID C. BLANKENSHIP By: /s/ CHAD GALLOWAY
---------------------------------------- ----------------------------------------
David C. Blankenship, Director Chad Galloway, Vice President and
Date: March 22, 1996 Chief Financial Officer
Date: March 22, 1996
By: /s/ ROBERT J. GARDNER By: /s/ KEITH P. SATTLER
---------------------------------------- ----------------------------------------
Robert J. Gardner, Director Keith P. Sattler, Director
Date: March 22, 1996 Date: March 22, 1996
By: /s/ ROBERT J. GOLOB By: /s/ DANN SIMPSON
---------------------------------------- ----------------------------------------
Robert J. Golob, Director Dann Simpson, Director
Date: March 22, 1996 Date: March 22, 1996
By: /s/ STANLEY W. HORTON By: /s/ NORMAN J. TRAAEN
---------------------------------------- ----------------------------------------
Stanely W. Horton, Director Norman J. Traaen, Director
Date: March 22, 1996 Date: March 22, 1996
By: /s/ JAMES L. MOE
----------------------------------------
James L. Moe, Director
Date: March 22, 1996
</TABLE>
26
<PAGE> 27
UNITED SECURITY BANCORPORATION
TABLE OF CONTENTS
ACCOUNTANT'S REPORT ON CONSOLIDATED FINANCIAL STATEMENTS . . . . . . . 28
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF CONDITION . . . . . . . . . . . . . . 29
CONSOLIDATED STATEMENTS OF INCOME . . . . . . . . . . . . . . . . 30
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY . . . 31
CONSOLIDATED STATEMENTS OF CASH FLOWS . . . . . . . . . . . . . . 32 - 33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS . . . . . . . . . . . 34 - 56
27
<PAGE> 28
[LOGO] & [LETTERHEAD]
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Stockholders
United Security Bancorporation
Spokane, Washington
We have audited the accompanying consolidated statements of financial condition
of United Security Bancorporation and subsidiaries as of December 31, 1995 and
1994, and the related consolidated statements of income, changes in
stockholders' equity, and cash flows for the years ended December 31, 1995,
1994, and 1993. These consolidated financial statements are the responsibility
of the Corporation's management. Our responsibility is to express an opinion
on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of United Security
Bancorporation and subsidiaries as of December 31, 1995 and 1994, and the
results of its operations, changes in stockholders' equity, and its cash flows
for the years ended December 31, 1995, 1994, and 1993, in conformity with
generally accepted accounting principles.
As discussed in Note 2 to the consolidated financial statements, the
Corporation changed its method of accounting for certain investments in debt
and marketable equity securities effective January 1, 1994, to adopt Statement
of Financial Accounting Standards No. 115, and its method of accounting for
impaired loans effective January 1, 1995, to conform with Statement of
Financial Accounting Standards Nos. 114 and 118.
February 17, 1996
28
<PAGE> 29
UNITED SECURITY BANCORPORATION
CONSOLIDATED STATEMENTS OF CONDITION
DECEMBER 31, 1995 AND 1994
($ in thousands)
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
ASSETS
Cash and due from banks $ 7,889 $ 7,983
Overnight interest bearing deposits with other banks 4,337
Federal funds sold 3,355 1,478
-------- --------
Cash and cash equivalents (Note 3) 15,581 9,461
Securities available-for-sale (Notes 2 and 4) 22,036 23,100
Securities held-to-maturity (Notes 2 and 4) 365 35
Loans, net of allowance for loan losses of $1,391 in 1995
and $1,246 in 1994 (Notes 2, 5, 13 and 17) 141,861 121,081
Accrued interest receivable 1,635 1,479
Premises and equipment, net (Notes 6 and 11) 6,383 5,097
Foreclosed real estate 370 231
Life insurance and salary continuation assets (Note 7) 2,315 1,913
Other assets (Note 8) 1,267 1,514
-------- --------
TOTAL ASSETS $191,813 $163,911
======== ========
LIABILITIES
Noninterest bearing--demand deposits $ 25,643 $ 22,917
Interest bearing deposits:
NOW and savings accounts 59,044 54,856
Time, $100,000 and over (Note 9) 21,693 15,906
Other time 57,411 52,950
-------- --------
TOTAL DEPOSITS (Note 17) 163,791 146,629
Federal funds purchased 2,725
Accrued interest payable 580 354
Notes payable (Note 10) 505
Capital lease obligations (Note 11) 767 805
Other liabilities (Note 7) 1,812 707
-------- --------
TOTAL LIABILITIES 166,950 151,725
Commitments and contingencies (Note 11)
STOCKHOLDERS' EQUITY (Notes 12, 13 and 20)
Common stock, no par, 5,000,000 shares authorized;
issued and outstanding 1995, 3,332,310
1994, 1,604,880 20,837 10,202
Retained earnings 4,114 2,552
Net unrealized loss on securities available-for-sale,
net of tax of $45 in 1995 and $283 in 1994 (88) (548)
Less guaranteed bank loan to Employee Stock
Ownership Plan (Note 14) (20)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 24,863 12,186
-------- --------
TOTAL LIABILITIES and STOCKHOLDERS' EQUITY $191,813 $163,911
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
29
<PAGE> 30
UNITED SECURITY BANCORPORATION
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
($ in thousands, except per share)
<TABLE>
<CAPTION>
1996 1994 1993
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $14,976 $11,231 $8,218
Interest on securities 1,647 905 1,180
Other interest income 433 251 233
------- ------- ------
TOTAL INTEREST INCOME 17,056 12,387 9,631
------- ------- ------
INTEREST EXPENSE
Interest on deposits 6,901 4,427 3,392
Interest on notes and capital leases 113 192 218
------- ------- ------
TOTAL INTEREST EXPENSE 7,014 4,619 3,610
------- ------- ------
NET INTEREST INCOME 10,042 7,768 6,021
Provision for loan losses (Note 5) 317 585 191
------- ------- ------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 9,725 7,183 5,830
------- ------- ------
NONINTEREST INCOME
Fees and service charges 887 758 678
Insurance commissions 1,255 1,160 1,085
Securities gains/losses 53 4 15
Life insurance proceeds (Note 7) 1,030
Other 540 336 371
------- ------- ------
TOTAL NONINTEREST INCOME 3,765 2,258 2,149
------- ------- ------
NONINTEREST EXPENSE
Salaries and employee benefits 4,980 3,875 3,327
Occupancy expense, net 488 268 367
Equipment expense 579 657 517
Death benefit expense (Note 7) 379
Amortization on noncompete agreements 75 172 172
FDIC assessments 209 291 234
State business and occupation tax 251 189 142
Other operating expense 1,453 994 1,159
------- ------- ------
TOTAL NONINTEREST EXPENSE 8,414 6,446 5,918
------- ------- ------
INCOME BEFORE INCOME TAX EXPENSE 5,076 2,995 2,060
FEDERAL INCOME TAX EXPENSE (Note 8) 1,325 1,017 695
------- ------- ------
NET INCOME $ 3,751 $ 1,978 $1,365
======= ======= ======
Earnings per common share $1.32 $1.11 $0.87
Weighted average shares outstanding (Notes 12 and 20) 2,844,663 1,776,521 1,577,962
</TABLE>
The accompanying notes are an integral part of these statements.
30
<PAGE> 31
UNITED SECURITY BANCORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
($ in thousands)
<TABLE>
<CAPTION>
Net
Unrealized
Common Stock Retained Gains ESOP
Shares Amount Earnings (Losses) Guarantee Total
<S> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1993 449,564 $ 4,412 $ 3,126 $(125) $ 7,413
15% stock dividend
on January 5, 1993 (Note 12) 66,987 1,105 (1,105)
Redemption of fractional shares (8) (8)
Cash dividends (148) (148)
ESOP guarantee activity 50 50
Net unrealized loss on noncurrent
marketable equity securities (Note 4) (29) (29)
Net income for 1993 1,365 1,365
---------- ------- ------- ----- ----- -------
Balances, December 31, 1993 516,551 5,509 3,238 (29) (75) 8,643
January 1, 1994 adoption of SFAS No. 115
net of taxes of $15 (Note 2) 29 29
15% stock dividend
on January 28, 1994 (Note 12) 76,897 1,309 (1,309)
Issuance of common stock (Note 12) 136,306 2,180 2,180
Stock split (2 for 1) issued July 15, 1994 (Note 12) 729,754
Redemption of fractional shares (10) (10)
Cash dividends (141) (141)
ESOP guarantee activity 55 55
Net change in unrealized loss on available for sale
securities, net of taxes (Note 4) (548) (548)
Net income for 1994 1,978 1,978
10% stock dividend on February 14, 1995 (Note 12) 145,372 1,214 (1,214)
---------- ------- ------- ----- ----- -------
Balances, December 31, 1994 1,604,880 10,202 2,552 (548) (20) 12,186
Initial public offering of common stock
on May 5 and June 4, 1995 (Note 12) 1,159,000 8,455 8,455
10% stock dividend on August 23, 1995 (Note 12) 274,974 2,189 (2,189)
Redemption of fractional shares (9) (9)
ESOP guarantee activity 20 20
Net change in unrealized loss on available for sale
securities, net of taxes (Note 4) 460 460
Net income for 1995 3,751 3,751
10% stock split-up on February 5, 1996 (Note 20) 302,456
---------- ------- ------- ----- ----- -------
Balances, December 31, 1995 3,332,310 $20,837 $ 4,114 $ (88) $24,863
========== ======= ======= ===== ===== =======
</TABLE>
The accompanying notes are an integral part of these statements
31
<PAGE> 32
UNITED SECURITY BANCORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
($ in thousands)
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Interest and fees on loans, leases and investments $ 16,950 $ 11,982 $ 9,818
Other fees and commissions received 2,735 2,258 2,149
Life insurance proceeds 1,030
Interest paid (6,788) (4,469) (3,686)
Cash paid to suppliers and employees (7,032) (6,092) (5,284)
Income taxes paid (1,168) (1,441) (515)
-------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 5,727 2,238 2,482
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Life insurance and deferred compensation program (402) (1,913)
Securities available-for-sale:
Maturities 3,535 6,572
Sales 11,745 2,240
Purchases (13,570) (13,075)
Securities held-to-maturity:
Purchases (340) (14,628)
Maturities 10 170 11,357
Net increase in loans and leases (21,391) (33,879) (21,424)
Purchases of premises and equipment (1,777) (1,825) (689)
Proceeds from sale of premises and equipment 32 5 2
Foreclosed real estate activity 191 333 266
-------- -------- --------
NET CASH USED IN INVESTING ACTIVITIES (21,967) (41,372) (25,116)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 17,162 32,491 17,018
Federal funds purchased (2,725) 2,725
Proceeds from notes payable 898
Principal payments on notes payable (485) (236) (871)
Principal payments on capital lease obligations (38) (57) (76)
Proceeds from issuance of capital stock 8,455 2,180
Cash paid for redemption of fractional shares (9) (10) (8)
Cash dividends paid (141) (148)
-------- -------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 22,360 36,952 16,813
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 6,120 (2,182) (5,821)
Cash and cash equivalents at January 1 9,461 11,643 17,464
-------- -------- --------
Cash and cash equivalents at December 31 $ 15,581 $ 9,461 $ 11,643
======== ======== ========
</TABLE>
32
<PAGE> 33
UNITED SECURITY BANCORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
($ in thousands)
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES
Net Income $ 3,751 $ 1,978 $ 1,365
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 317 585 191
Depreciation and amortization 462 433 422
Amortization of securities premiums 56 153 281
Accretion of securities discounts (5) (14) (30)
(Gain) loss on sale of premises and equipment (4) (1) 2
Deferred income taxes 34 (132) (110)
(Gain) loss on sale of other real estate (35) 9
(Increase) decrease in assets:
Accrued interest receivable (156) (544) (64)
Other assets (24) 16 147
Increase (decrease) in liabilities:
Accrued interest payable 226 150 (77)
Other liabilities 1,105 (386) 346
-------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 5,727 $ 2,238 $ 2,482
======== ======== ========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES
Foreclosed real estate acquired in settlement of loans $326 $66 $146
Capital lease obligation forgiven in exchange
for equipment 10
</TABLE>
The accompanying notes are an integral part of these statements.
33
<PAGE> 34
UNITED SECURITY BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION:
The consolidated financial statements include the accounts of United Security
Bancorporation (the Corporation) and its wholly-owned subsidiaries, United
Security Bank, USB Leasing, Inc., USB Insurance Agencies, Inc., USB Mortgage
Company and Home Security Bank, after eliminating all significant intercompany
balances and transactions.
NATURE OF BUSINESS:
United Security Bank and Home Security Bank, wholly owned subsidiaries of United
Security Bancorporation, are state chartered commercial banks under the laws of
the State of Washington, and provide banking services primarily throughout
eastern and central Washington. The Corporation and its subsidiaries are
subject to competition from other financial institutions, as well as
non-financial intermediaries. The Corporation and its subsidiaries are also
subject to the regulations of certain federal and state agencies and undergo
periodic examinations by those regulatory agencies.
BASIS OF FINANCIAL STATEMENT PRESENTATION:
The financial statements have been prepared in accordance with generally
accepted accounting policies. 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. Actual results
could differ, either positively or negatively, from those estimates.
Material estimates that are particularly susceptible to significant change in
the near-term relate to the determination of the allowance for loan losses and
the valuation of real estate acquired in connection with foreclosures or in the
satisfaction of loans. In connection with the determination of the allowance
for loan losses and other real estate owned, management obtains independent
appraisals for significant properties.
Management believes that the allowances for loan losses and other real estate
owned are adequate. While management uses currently available information to
recognize losses on loans and other real estate owned, future additions to the
allowances may be necessary based on changes in economic conditions. In
addition, various regulatory agencies, as an integral part of their examination
process, periodically review the Corporation's allowance for loan losses and
other real estate owned. Such agencies may require the Corporation to recognize
additions to the allowances based on their judgments of information available to
them at the time of their examination.
SECURITIES AVAILABLE-FOR-SALE
Securities available-for-sale consist of debt and marketable equity securities.
Debt securities primarily of obligations of the U.S. government, state
governments and domestic corporations. Marketable equity securities consist
primarily of mutual funds whose portfolios consist primarily of U.S. Government
backed debt securities.
34
<PAGE> 35
UNITED SECURITY BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Unrealized holding gains and losses, net of tax, on available-for-sale
securities are excluded from earnings and reported as a net amount in a
separate component of stockholders' equity until realized. Gains and loses 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.
SECURITIES HELD-TO-MATURITY:
Securities for which the Bank has the positive intent and ability to hold to
maturity are reported at cost, adjusted for premiums and discounts that are
recognized in interest income using the effective interest method.
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.
Loans are placed in a nonaccrual status when, in the opinion of management, the
collection of additional interest is questionable. Thereafter, no interest is
taken into income unless received in cash or until such time as the borrower
demonstrates the ability to resume payments to principal and interest.
Interest previously accrued but not collected is generally reversed and charged
against income at the time the loan is placed on nonaccrual status.
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, and
evaluation of current economic conditions. Loan losses are recognized through
charges to the allowance.
OTHER REAL ESTATE:
Other real estate comprises properties acquired through a foreclosure
proceeding or acceptance of a deed in lieu of foreclosure, 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 cost or fair value minus
estimated costs to sell. Loan losses arising from the acquisition of such
property are charged against the allowance for loan losses. An allowance for
losses on other real estate is maintained, when necessary, for subsequent
valuation adjustments on a specific property basis.
35
<PAGE> 36
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 25
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 are being amortized using the straight-line method
over five to eight years.
INCOME TAX:
The Corporation and its subsidiaries file a consolidated federal income tax
return. The income tax related to the individual entities is generally
computed as if each one had filed a separate tax return and is based on amounts
reported in the statements of income (after exclusion of non-taxable permanent
differences such as interest on state and municipal securities) and include
deferred taxes on temporary differences in the recognition of income and
expense for tax and financial statement purposes. Deferred taxes are computed
using the asset and liability approach as prescribed in Statement No. 109,
Accounting for Income Taxes.
PER SHARE AMOUNTS:
All per share amounts have been calculated on the basis of weighted average
number of shares outstanding during each year. All share and per share amounts
have been adjusted giving retroactive effect to stock dividends and stock
splits.
CASH FLOWS:
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.
RECLASSIFICATIONS:
Certain reclassifications of December 31, 1994 and 1993 balances have been made
to conform with the December 31, 1995 presentation; there were no impact on net
income, earnings per share of stockholders' equity.
RECENT ACCOUNTING PRONOUNCEMENTS:
In 1995, the Financial Accounting Standards Board issued Statement No. 123,
Accounting for Stock-Based Compensation (FASB #123), which established
financial accounting and reporting standards for stock-based employee
compensation plans. FASB #123 specifies a fair value based method of
accounting for stock-based compensation plans and encourages (but does not
require) entitles to adopt that method
36
<PAGE> 37
UNITED SECURITY BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
in place of the provisions of APB Opinion 25, Accounting for Stock Issue to
Employees. The new standard is effective for the Corporation starting in 1996.
NOTE 2. ACCOUNTING CHANGES
The Corporation adopted the provisions of Statement of Financial Accounting
Standards No. 115, Accounting for Certain Investments in Debt and Equity
Securities, as of January 1, 1994. Statement No. 115 requires that management
determine the appropriate classification of securities at the date of adoption,
and thereafter at the date individual investment securities are acquired, and
that the appropriateness of such classification be reassessed at each balance
sheet date. Since the Corporation does not buy investment securities in
anticipation of short-term fluctuations in market prices, the investment of
debt and marketable equity securities have been classified as either securities
held-to-maturity or securities available-for-sale in accordance with Statement
No. 115. The January 1, 1994 balance of stockholders' equity was increased by
$29,000 net of the $15,000 related deferred tax effect, to recognize the net
unrealized holding gain on securities on that date.
In 1995, the Corporation adopted Statement of Financial Accounting Standards
(FASB No. 114, Accounting by Creditors for Impairment of a Loan, as amended by
FASB No. 118, Accounting by Creditors for Impairment of a Loan - Income
Recognition and Disclosures. These Standards require that impaired loans be
measured to reflect the time value of money or the fair value of collateral.
Nonaccrual loans are considered impaired loans and the income recognition for
these loans has been previously described in Note 1 of these financial
statements. Accruing loans more than 90 days delinquent are also considered
impaired loans. Loans classified impaired are evaluated as part of
management's allowance for loan loss adequacy review. The fair value of the
collateral is evaluated to determine if a specific allowance for loan loss is
needed for impaired loans. Note 5 to the consolidated financial statements
provides further information regarding impaired loans.
NOTE 3. 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, 1995 and
1994 were approximately $274,000 and $290,000, respectively. The average
amounts of federal funds sold and overnight interest bearing deposits with
other banks for the years ended December 31, 1995 and 1994, were $4,390,000 and
$5,158,000, respectively. Similarly, averages of federal funds purchased were
$59,000 and $961,000, for 1995 and 1994, respectively.
37
<PAGE> 38
UNITED SECURITY BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. DEBT AND EQUITY SECURITIES
Debt and equity securities have been classified in the consolidated statements
of financial condition according to management's intent. The amortized cost of
securities and their fair values at December 31 were as follows:
<TABLE>
<CAPTION>
Gross Gross
December 31, 1995 Amortized Unrealized Unrealized Fair Financial
($ in thousands) Cost Gains Losses Value Statements
<S> <C> <C> <C> <C> <C>
SECURITIES AVAILABLE-FOR-SALE:
U.S. Treasury securities $ 1,251 $ 1 $ (1) $ 1,251 $ 1,251
Obligations of federal government
agencies 2,814 1 (15) 2,800 2,800
Mortgage backed securities 13,550 73 (78) 13,545 13,545
Other securities 4,554 47 (161) 4,440 4,440
------- ---- ----- ------- -------
Total $22,169 $122 $(255) $22,036 $22,036
======= ==== ===== ======= =======
SECURITIES HELD-TO-MATURITY:
Obligations of states, municipalities
and political subsidivisions $ 365 $ 9 $ 374 $ 365
======= ==== ===== ======= =======
<CAPTION> Gross Gross
December 31, 1994 Amortized Unrealized Unrealized Fair
Cost Gains Losses Value Total
<S> <C> <C> <C> <C> <C>
SECURITIES AVAILABLE-FOR-SALE:
U.S. Treasury securities $ 2,267 $ 6 $ (28) $ 2,246 $ 2,246
Obligations of federal government
agencies 10,496 (143) 10,353 10,353
Obligations of states, municipalities
and political subdivisions 22 50 71 71
Mortgage backed securities 6,861 (401) 6,460 6,460
Other securities 4,286 4 (319) 3,970 3,970
------- ---- ----- ------- -------
Total $23,932 $ 60 $(891) $23,100 $23,100
======= ==== ===== ======= =======
SECURITIES HELD-TO-MATURITY:
Obligations of states, municipalities
and political subdivisions $ 35 $ 1 $ 36 $ 35
======= ==== ===== ======= =======
</TABLE>
Securities taxable interest income was $1,567,000, $902,000, and $1,175,000 for
1995, 1994 and 1993, respectively. Securities nontaxable interest income was
$13,000, $3,000 and $5,000 for 1995, 1994, and 1993, respectively. Dividend
income was $67,000, $60,000, and $95,000 for 1995, 1994, and 1993, respectively.
38
<PAGE> 39
UNITED SECURITY BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. DEBT AND EQUITY SECURITIES (CONTINUED)
Securities with an amortized cost of $3,574,000 and $3,068,000 at December 31,
1995 and 1994, respectively, were pledged to secure public deposits for
purposes required or permitted by law. Market value of these securities was
$3,595,000 and $2,899,000 at December 31, 1995 and 1994, respectively.
Included in other securities are marketable equity securities with amortized
costs totaling $2,142,000 and $2,912,000, and market values of $1,982,000 and
$2,612,000 at December 31, 1995 and 1994, respectively. Also included in other
securities is $1,054,000 in 1995 and $915,000 in 1994 of Federal Home Loan Bank
(FHLB) Stock, which can be sold back to the Federal Home Loan Bank at cost, but
is restricted as to purchase and sale based on the level of business activity
the Corporation is doing with the FHLB.
Gross realized gains on securities available for sale were $93,000, $24,000,
and $27,000 for 1995, 1994, and 1993, respectively. Gross realized losses were
$40,000, $20,000, and $12,000 for 1995, 1994, and 1993, respectively.
The contractual scheduled maturity of securities held-to-maturity and
securities available-for-sale at December 31, 1995 were as follows:
<TABLE>
<CAPTION>
Held-to-Maturity Available-for-Sale
Amortized Fair Amortized Fair
($ in thousands) Cost Value Cost Value
<S> <C> <C> <C> <C>
Due in one year or less $ 25 $ 25 $ 5,601 $ 5,434
Due from one year to five years 115 118 803 801
Due from five to ten years 180 185 2,013 2,051
Due after ten years 45 46 202 205
Mortgage backed securities 13,550 13,545
---- ---- ------- -------
$365 $374 $22,169 $22,036
==== ==== ======= =======
</TABLE>
Expected maturities will differ from contractual maturities because the issues
of certain debt securities do have the right to call or prepay their
obligations without any penalties.
39
<PAGE> 40
UNITED SECURITY BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. LOANS AND ALLOWANCE FOR LOAN LOSSES
Loan categories as of December 31, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
($ in thousands) 1995 1994
<S> <C> <C>
Commercial and industrial $ 75,011 $ 61,968
Agricultural 19,787 16,721
Real estate mortgage 25,048 24,883
Real estate construction 10,169 8,126
Installment 9,234 7,781
Lease financing 1,336
Bank cards and other 3,172 3,286
-------- --------
Total loans 143,757 122,765
Allowance for loan losses (1,391) (1,246)
Deferred loan fees, net of deferred costs (505) (438)
-------- --------
Net loans $141,861 $121,081
======== ========
</TABLE>
Variable rate loans were $64,324,000 and $58,138,000 as of December 31, 1995 and
1994, respectively. Remaining loans were fixed rate loans. Loans on which the
accrual of interest has been discontinued amounted to $777,000 and $775,000 as
of December 31, 1995 and 1994, respectively. If interest on nonaccrual loans
had been accrued, such income would have been $55,000, $81,000, and $35,000 for
1995, 1994, and 1993, respectively. Interest income on those loans, which is
recorded only when received, amounted to $11,000, $52,000, and $56,000 for
1995, 1994, and 1993, respectively.
Changes in the allowance for loan losses are as follows:
<TABLE>
<CAPTION>
($ thousands) 1995 1994 1993
<S> <C> <C> <C>
Balance, beginning of year $1,246 $ 802 $692
Provision charged to operations 317 585 191
Loans charged-off (190) (148) (90)
Recoveries 18 7 9
------ ------ ----
Balance, end of year $1,391 $1,246 $802
====== ====== ====
</TABLE>
40
<PAGE> 41
UNITED SECURITY BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
A summary of loans by contractual maturity as of December 31, 1995 and 1994 is
as follows:
<TABLE>
<CAPTION>
($ in thousands) 1995 1994
<S> <C> <C>
Maturity within one year $ 47,066 $ 43,556
One to five years 65,503 54,932
Over five years 31,188 24,277
-------- --------
$143,757 $122,765
======== ========
</TABLE>
Impaired loan information as of December 31, 1995:
<TABLE>
<CAPTION>
($ in thousands)
<S> <C>
Impaired loans with specific allowance for loan losses $ 176
Impaired loans without a specific allowance for loan losses 1,178
------
Total impaired loans $1,354
======
Impaired loans allowance for loan losses $ 104
Average impaired loans 956
Interest income on impaired loans 31
</TABLE>
41
<PAGE> 42
UNITED SECURITY BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. PREMISES AND EQUIPMENT
Major classifications of premises and equipment are summarized as of December
31, 1995 and 1994 as follows:
<TABLE>
<CAPTION>
($ in thousands) 1995 1994
<S> <C> <C>
Premises, including premises under capital lease
1995 and 1994 $802 (Note 11) $ 4,447 $ 3,287
Equipment, including equipment under capital lease,
1995 $0; 1994 $252 (Note 11) 2,391 1,762
------- -------
6,838 5,049
Less accumulated depreciation, including accumulated
amortization on assets under capital lease,
1995 $201; 1994 $379 (2,521) (2,103)
------- -------
4,317 2,946
Construction in progress (Note 11) 355
Land 2,027 1,789
Leasehold improvements 39 7
------- -------
Premises and Equipment, net $ 6,383 $ 5,097
======= =======
</TABLE>
NOTE 7. LIFE INSURANCE AND SALARY CONTINUATION PLAN
United Security Bank and Home Security Bank maintain salary continuation plans
for the benefit of certain of their directors, executive officers and other key
employees. The plans become effective in early 1994 at an initial cost of
$1,913,000 and provided for monthly payments to such persons, or their
designated beneficiaries, for a period of ten years following retirement at age
65, or death prior to retirement. Amounts payable to eligible participants are
determined by reference to such person's salary or directors' fee as of the
date of each such person's agreement under the plans.
The plans are generally available to most directors, executive officers and
other key employees of the Banks, and vest according to years of service.
Persons employed by the Banks for at least six continuous years prior to the
effective date of the plans are deemed vested with respect to 20% of the salary
continuation benefits available to them, and become vested in an additional 20%
of such benefits for each succeeding year of employment thereafter until the
employee becomes fully vested. Eligible persons employed by the banks for at
least ten continuous years prior to the effective date of the plans are deemed
fully vested. The Banks' obligations under the salary continuation plans are
funded by prepaid policies of universal life insurance covering the lives of
the plan participants. The Banks are the beneficiaries of the life insurance
plans.
42
<PAGE> 43
UNITED SECURITY BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. LIFE INSURANCE AND SALARY CONTINUATION PLAN (CONTINUED)
Cash surrender values, salary continuance benefit obligations at age 65, and
the recorded liability were as follows:
<TABLE>
<CAPTION>
As of December 31,
($ in thousands) 1995 1994
<S> <C> <C>
Cash surrender value $2,315 $1,994
Present value at age 65 of all participants after full vesting is obtained 2,294 1,948
Present value at age 65 of the current fully vested participants 597 810
Recorded liability for future benefit obligation 144
</TABLE>
Vested participants are eligible to receive benefits at age 65.
Included in 1995 noninterest income is $1,030,000 of life insurance proceeds
received as part of the salary continuation program following the untimely
death of an executive officer. Also in 1995, noninterest expense includes
$379,000 of death benefit expense, which is payable over a ten year period to
the former officers beneficiary as part of the salary continuation program. At
December 31, 1995 the unpaid portion of $278,000 and the recorded liability of
$144,000 for the future benefit obligation disclosed above have been accrued
and are included with other liabilities.
43
<PAGE> 44
UNITED SECURITY BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. FEDERAL INCOME TAXES
The components of federal income tax expense for the years presented are as
follows:
<TABLE>
<CAPTION>
($ in thousands) 1995 1994 1993
<S> <C> <C> <C>
Current expense $1,291 $1,150 $ 805
Deferred tax expense (credit) 34 (132) (110)
------ ------ -----
Federal income tax expense $1,325 $1,018 $ 695
====== ====== =====
</TABLE>
The effective tax rate differs from the statutory federal tax rate as follows:
<TABLE>
<CAPTION>
($ in thousands) 1995 1994 1993
<S> <C> <C> <C>
Federal income tax at statutory rates $1,726 $1,009 $701
Effect of tax-exempt life insurance proceeds (357)
Effect of tax-exempt interest income (13) (9) (8)
Effect of nondeductible expenses and other (31) 17 2
------ ------ ----
Federal income tax expense $1,325 $1,017 $695
====== ====== ====
</TABLE>
Significant components of deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
($ in thousands) 1995 1994
<S> <C> <C>
Allowance for loan losses $238 $188
Unrealized losses on available-for-sale securities 45 283
Deferred compensation expense 94
Deferred loan fees (153) 149
Lease financing (71)
Other 7
---- ----
Total $160 $608
==== ====
</TABLE>
The applicable taxes for securities gains and losses was $18,000, $1,000, and
$5,000 for 1995, 1994, and 1993, respectively.
44
<PAGE> 45
UNITED SECURITY BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. TIME DEPOSIT MATURITIES, $100,000 AND OVER
Maturities for time deposits $100,000 and over are summarized as follows:
<TABLE>
<CAPTION>
($ in thousands) 1995 1994
<S> <C> <C>
Maturing one year or less $19,641 $10,195
Maturing one year to five years 2,052 5,711
------- -------
Total $21,693 $15,906
======= =======
</TABLE>
NOTE 10. NOTES PAYABLE
Notes payable consist of the following at December 31, 1995 and 1994:
<TABLE>
<CAPTION>
($ in thousands) 1995 1994
<S> <C> <C>
Notes payable collateralized by insurance agency subsidiary
assets:
Notes payable to an individual, payable $2,029 monthly
including interest at 9.0%, matures May 2002; guaranteed
by the Bancorporation. $132
Note payable to Bank, payable $6,510 monthly including
interest at Bank's prime plus 1.0% with a floor of 9.5%
(10.0% at December 31, 1994), matures January 1998;
guaranteed by the Bancorporation. 353
Note payable from United Security Bank ESOP to Bank,
50% guaranteed by the Bancorporation, payable $100,000
annually plus interest at Bank's prime (9.5% at
December 31, 1994) due in full December 1995 (Note 14). 20
------- -------
Total $0 $505
======= =======
</TABLE>
Notes payable as of December 31, 1994 were settled and paid-off during 1995.
NOTE 11. COMMITMENTS AND CONTINGENTS LIABILITIES
Lease commitments:
During 1990, United Security Bank sold the land and buildings occupied by two of
its branches. The Bank has leased the real estate back for a term of 20 years
and continues to operate the branches at these same sites. The leases have been
treated
45
<PAGE> 46
UNITED SECURITY BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11. COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
as capital leases (Note 6). The associated gain created by this transaction,
amount to $358,000, has been deferred and is being amortized using the
straight-line method over the term of the lease. This deferred gain is
included in other liabilities. At December 31, 1995 and 1994, the deferred
gain net of amortization was $279,000 and $298,000, respectively. Amortization
of capital leases is included in depreciation expense.
The minimum annual rental commitments on capital and operating leases at
December 31, 1995, exclusive of taxes and other charges, are summarized as
follows:
<TABLE>
<CAPTION>
($ in thousands)
<S> <C>
1996 $ 171
1997 171
1998 171
1999 171
2000 161
Later years 1,370
------
Total minimum payments due 2,215
Less: Amount representing interest (761)
------
Present value of net minimum lease payments $1,454
======
</TABLE>
One of the Banks leases a branch facility under a ten year operating lease with
an additional ten year option from a Director. Total rental expense on
operating leases amounted to $32,000 for 1995 (Note 17).
Other commitments and contingent liabilities:
The Corporation is a party to financial instruments with off-statement of
condition risk in the normal course of business to meet the financing needs of
its customers and to reduce its own exposure to fluctuations in interest rates.
These financial instruments include commitments to extend credit, standby
letters of credit and financial guarantees. Those instruments involve, to
varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the statement of condition. The contract or notional
amounts of those instruments reflect the extent of involvement the Corporation
has in particular classes of financial instruments.
The Corporation's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit and financial guarantees written is represented by the
contractual notional amount of those instruments. The Corporation uses the same
credit policies in making commitments and conditional obligations as it does for
statement of condition instruments. Unless noted otherwise, the Corporation
does not require collateral or other security to support financial instruments
with credit risk.
46
<PAGE> 47
UNITED SECURITY BANCORPORATION
NOTE 11. COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
<TABLE>
<CAPTION>
Contract or
Notional Amount
($ in thousands) 1995 1994
<S> <C> <C>
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit $26,936 $14,737
Standby letters of credit and financial guarantees written 1,441 1,508
Unused commitments on bankcards 4,355 4,106
------- -------
TOTAL $32,732 $20,351
======= =======
</TABLE>
The Corporation does not anticipate any material losses as a result of the
commitments of 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 expect to
expire without being drawn upon, the total commitment amount do not necessarily
represent future cash requirements. The Corporation evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained
if deemed necessary by the Corporation upon extension of credit is based on
management's credit evaluation of the counterparty. Collateral held varies but
may include accounts receivable, inventory, property, plant and equipment and
income producing commercial properties.
Standby letters of credit and financial guarantees written are conditional
commitments issued by the Corporation to guarantee the performance of a
customer of a third party. Those guarantees are primarily issued to support
public and private borrowing arrangements, including commercial paper, bond
financing and similar transactions. The credit risk involved in issuing
letters of credit is essentially the same as that involved in extending loan
facilities to customers.
All the Banks' loans, commitments, and commercial and standby letters of credit
have been granted to customers in the Banks' market area. As such, significant
changes in economic conditions in the State of Washington or within its primary
industries could adversely effect the Company's ability to collect loans.
Substantially all such customers are depositors of the Bank. The
concentrations of credit by type of loan are set forth in Note 5. The
Corporation's related party loans and deposits are disclosed in Note 17. The
Banks, as a matter of policy, do not extend credit to any single borrower in
excess of $2,540,000 and $1,000,000 for United Security Bank and Home Security
Bank, respectively.
As of December 31, 1995 the Banks had unused lines of credit of $27,697,000.
The lines were available for short-term and long-term borrowings.
47
<PAGE> 48
UNITED SECURITY BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12. CAPITAL STOCK
STOCK SALES:
In 1995 the Corporation completed its initial public offering and sold
1,150,000 shares of common stock with proceeds of $8.5 million. The Common
Stock has been approved for quotation on the Nasdaq National Market System
under the symbol "USBN". In 1994, the Corporation sold 136,306 shares with
proceeds of $2.2 million through a Board of Directors approved private issue.
STOCK SPLITS AND STOCK DIVIDENDS:
In July, 1995; January, 1995; January, 1994; and January, 1993, the Board of
Directors declared stock dividends of 10%, 10%, 15%, and 15%, respectively. The
Corporation recorded a transfer from retained earnings to common stock for the
value of the additional shares issues. Prior to the public offering book value
was used to record the transfer. Following the public offering market value on
the Board of Directors declaration date was used to determine the amount
transferred from retained earnings to common stock. In July, 1994, the Board of
Directors approved a 2-for-1 stock split. Accordingly, 729,754 shares of stock
were issued. Per share amounts and weighted average shares outstanding have
been retroactively adjusted to reflect stock dividends and the stock split
(Note 20).
NOTE 13. RESTRICTIONS ON DIVIDENDS AND LOANS
The Banks are subject to state banking regulations relating to the payment of
dividends and the amount of loans that it may extend. Dividends may be paid out
of retained earnings provided that it will not bring the total capital below
the original capital contribution and that the amount in surplus is equal to or
greater than twenty-five percent of the common stock of the Bank. At December
31, 1995 and 1994, the amount of retained earnings of United Security Bank,
available for dividends, amounted to $3,201,000 and $1,465,000, respectively.
Home Security Bank had $882,000 and $694,000 available for dividends at
December 31, 1995 and 1994, respectively.
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.
United Security Bancorporation has the full amount of retained earnings
available for dividends.
48
<PAGE> 49
UNITED SECURITY BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14. EMPLOYEE STOCK OWNERSHIP PLAN (ESOP) AND PROFIT SHARING 401(K) PLAN
In 1989 United Security Bancorporation adopted an ESOP. An ESOP plan is a form
of retirement plan whereby the Corporation receives a deduction for
contributions to the Plan and the Plan invests all or a portion of the employer
Trust contributions and Trust earnings in stock of the Corporation. The Plan is
qualified under Section 401(a) of the Internal Revenue Code as a stock bonus
plan. Employees 21 years or older become eligible for participation after 1,000
hours or more of service in a plan year, and benefits fully vest after five
years of service. Contributions to the ESOP plan totaled $146,000 and $122,000
for 1995 and 1994, respectively and are based on a percentage of Corporation
earnings. Contributions are allocated pro rata based on eligible annual
compensation on December 31.
Effective July 1, 1993, the Corporation voted to reinstate the United Security
Bancorporation Profit Sharing 401(k) Plan. There were no employer contributions
in 1995, 1994 and 1993.
NOTE 15. STOCK OPTION PLAN
In 1995, the Corporation's Board of Directors adopted a stock option
plan, known as the 1995 Incentive Stock Option Plan. The plan provides for the
issuance of incentive stock options to key individuals of the Corporation and
its subsidiaries, including directors and executive officers. Up to 200,000
shares or 8% of the common stock from time-to-time outstanding, whichever is
more, are available for issuance in the form of options under the Plan. The
exercise price of an incentive stock option granted under the Plan may not be
less than 100% of the fair value of the Corporation's common stock on the date
the option is granted, as reported by the NASDAQ Stock Market. A Board of
Directors Compensation Committee and an Executive Remuneration Committee were
formed to direct the granting of the options.
In November, 1995 100,000 common stock options were granted to identified
directors and executive officers at an option price of $12.12 per share. The
options were granted for a five year term from the date of option and may be
exercised anytime prior to that date, subject to conditions prescribed in the
Proxy Statement of the May 24, 1995 Annual Meeting of United Security
Bancorportion. The options were granted at the average price between the high
and low on the NASDAQ Exchange on the last day of the preceding month, before
the date of option. An additional 100,000 shares were maintained for future
distribution. No options have been exercised through December 31, 1995.
49
<PAGE> 50
UNITED SECURITY BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16. PARENT COMPANY ONLY STATEMENTS
The following are the condensed statements of condition, income, and cash flows
for the parent company only, United Security Bancorporation. These statements
are presented using the equity method of accounting; therefore, accounts of the
subsidiaries have not been included. Intercompany transactions and balances
have not been eliminated. The following information should be read in
conjunction with the other notes to the consolidated financial statements.
Condensed Statements of Condition
($ in thousands)
<TABLE>
<CAPTION>
December 31,
1995 1994
<S> <C> <C>
Cash $ 3,375 $ 160
Investment securities 803
Receivables:
Bank subsidiaries 23
Nonbank subsidiaries 2
Investment in and advances to:
Bank subsidiaries 17,748 11,843
Nonbank subsidiaries 1,998 96
Premises and equipment 905 181
Other assets 113 130
------- -------
TOTAL ASSETS $24,942 $12,435
======= =======
Accounts payable:
Bank subsidiaries
Nonbank subsidiaries 115
Income taxes payable 58
Other liabilities 79 56
Notes payable 20
Stockholders' equity 24,863 12,186
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $24,942 $12,435
======= =======
</TABLE>
50
<PAGE> 51
UNITED SECURITY BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16. PARENT COMPANY ONLY STATEMENTS (CONTINUED)
Condensed Statements of Income
($ in thousands, except per share)
<TABLE>
<CAPTION>
Years Ended December 31,
1995 1994 1995
<S> <C> <C> <C>
Income:
Dividends:
Bank subsidiaries $667 $556 $349
Nonbank subsidiaries 23 5
Other income 199 21 18
Allocation of expenses:
Bank subsidiaries 9
Nonbank subsidiaries
------ ------ ------
866 600 381
------ ------ ------
Expenses:
Salaries and benefits 513 338 199
Other operating expenses 151 111 56
Depreciation 12 3 2
------ ------ ------
676 452 257
------ ------ ------
Income before tax benefit and equity in
undistributed net income of subsidiaries 190 148 124
Income tax benefit 155 151 88
Income before equity in undistributed net
income of subsidiaries 345 299 212
------ ------ ------
Equity in undistributed net income (loss) of:
Bank subsidiaries 3,446 1,758 1,296
Nonbank subsidiaries (40) (79) (143)
------ ------ ------
NET INCOME $3,751 $1,978 $1,365
====== ====== ======
Net income per common share $1.32 $1.11 $0.87
====== ====== ======
</TABLE>
51
<PAGE> 52
UNITED SECURITY BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16. PARENT COMPANY ONLY STATEMENTS (CONTINUED)
Condensed Statements of Cash Flows
($ in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
1995 1994 1993
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Dividends received from bank and nonbank subsidiaries $667 $579 $353
Interest received 168 9 6
Cash paid to suppliers and employees (707) (116) (811)
Income tax benefit (expense) 97 (65) 105
Other payments received from subsidiaries 24 12 371
------ ------ ------
NET CASH PROVIDED BY OPERATING ACTIVITIES 249 419 24
------ ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in and advances to subsidiaries (3,941) (2,134)
Purchase of investment securities (1,204)
Sale of investment securities 401
Purchase of premises and equipment (736) (181)
------ ------ ------
NET CASH (USED) BY INVESTING ACTIVITIES (5,480) (2,315) 0
------ ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of capital stock 8,455 2,180
Cash paid for redemption of fractional shares (9) (10) (8)
Cash dividends paid (141) (148)
------ ------ ------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 8,446 2,029 (156)
------ ------ ------
NET INCREASE (DECREASE) IN CASH 3,215 133 (132)
CASH, beginning of year 160 27 159
------ ------ ------
CASH, end of year $3,375 $160 $27
====== ====== ======
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES
Net income $3,751 $1,978 $1,365
Adjustments to reconcile net income to cash provided
by operating activities:
Equity in undistributed net income of subsidiaries (3,406) (1,679) (1,153)
Depreciation 12 3 2
(Increase) decrease in assets:
Receivables 25 690 (521)
Other assets 17 (58) (36)
Increase (decrease) in liabilities:
Accounts payable (115) (299) 350
Income taxes payable (58) (216) 17
Other liabilities 23
------ ------ ------
NET CASH PROVIDED BY OPERATING ACTIVITIES $249 $419 $24
====== ====== ======
SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITY
Guarantee of debt for ESOP $20 $75
====== ======
</TABLE>
52
<PAGE> 53
UNITED SECURITY BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17. RELATED PARTY TRANSACTIONS
LOANS TO RELATED PARTIES:
Loans to the Corporation's officers and directors are on substantially the same
terms, including interest rates and collateral, as those prevailing at the time
for comparable transactions with unrelated persons and do not involve more than
normal risk of collectibility. The aggregate dollar amount of these loans was
approximately $7,976,000 and $4,846,000 at December 31, 1995 and 1994,
respectively. During 1995, $11,082,000 of new or renewed related party loans
were made and repayments and adjustments totaled $7,952,000.
DEPOSITS FROM RELATED PARTIES:
Deposits from related parties totaled $4,118,000 and $2,077,000 at December 31,
1995 and 1994, respectively.
PAYMENTS TO RELATED PARTIES:
Fees paid to a Director for professional services totaled $11,000, $10,000, and
$18,000 for the years ended December 31, 1995, 1994, and 1993, respectively.
Building lease rent of $32,000 was paid to a Director in 1995.
Construction expenses paid to related parties totaled $4,000, $31,000, and
$22,000 for the years ended December 31, 1995, 1994, and 1993, respectively.
A note payable to a Director for $132,000 was paid off during 1995 (Note 10).
INSURANCE COVENANTS AND COMMISSIONS PAID TO RELATED PARTIES:
Payments made to a Director under a contract payable for covenants not to
compete amounted to $0, $48,000, and $224,000 for the years ended December 31,
1995, 1994, and 1993, respectively. Commissions of $36,000 and $111,000 for
1995 and 1994, respectively, were received by USB Insurance related to the
purchase of life insurance plans on directors and officers of the Banks.
53
<PAGE> 54
UNITED SECURITY BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Financial Accounting Standards Board's Statement of Financial Accounting
Standards No. 107, "Disclosures about Fair Value of Financial Instruments"
(FASB 107), requires disclosure of fair value information about financial
instruments, which it is practicable to estimate fair value. As defined by
FASB 107, financial instruments include the categories listed below. It does
not include the value of property, plant and equipment and intangible assets
such as customer relationships and core deposit intangibles.
The following table summarizes carrying amounts, estimated fair values, and
assumptions used by the Corporation to estimated fair value as of December 31,
1995:
<TABLE>
<CAPTION>
Estimated
Assumptions Used in Carrying Fair
($ in thousands) Estimating Fair Value Amount Value
---------------- -------------------------------------- -------- ---------
<S> <C> <C> <C>
FINANCIAL ASSETS:
Cash and due from banks Equal to carrying value $ 7,889 $ 7,889
Federal funds sold Equal to carrying value 3,355 3,355
Overnight interest bearing
deposits with other banks Equal to carrying value 4,337 4,337
Securities available-for-sale Quoted market prices 22,036 22,036
Securities held-to-maturity Quoted market prices 365 374
Loans Discounted expected future cash flows,
net of allowance for loan losses 141,861 143,398
FINANCIAL LIABILITIES:
Deposits Fixed-rate certificates of deposit:
Discounted expected future cash flows
All other deposits: Equal to carrying value 163,791 163,992
Capital lease obligations Discounted expected future cash flows 767 972
OFF-STATEMENT OF CONDITION
LIABILITIES:
Commitments (Note 11) Equal to face value 32,732
</TABLE>
54
<PAGE> 55
UNITED SECURITY BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19. REGULATORY MATTERS
The Banks are subject to various regulatory capital requirements administered
by the federal banking agencies. The FDIC measures the Banks capital using a
leverage limit together with certain risk-based ratios. The FDIC requires most
banks it regulates to maintain a minimum leverage ratio, defined as core (Tier
1) capital divided by total regulatory assets of at least 4 to 5 percent. it
also requires total capital of at least 8 percent of risk-weighted assets; and
Tier 1 capital of at least 4 percent of risk-weighted assets. 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.
FDICIA created a statutory framework that increased the importance of meeting
capital requirements. FDICIA established five capital categories: well
capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized and critically undercapitalized. An institution's category
depends upon where its capital levels are in relation to relevant capital
measures, which include a risk-based capital measure, a leverage ratio capital
measure and certain other factors. The FDIC has adopted new regulations which
implement this statutory framework. In order to be well capitalized a bank
must have a ratio of total capital to risk-weighted assets of 10 percent, a
ratio of Tier 1 capital to risk-weighted assets of 6 percent, and a leverage
ratio of Tier 1 capital to risk-weighted assets of 5 percent. In order to be
adequately capitalized an institution must have ratios of 8, 4, and 4 percent
as described above, respectively.
<TABLE>
<CAPTION>
As of December 31,
($ in thousands) 1995 1994
<S> <C> <C>
UNITED SECURITY BANK
Total capital $12,630 $ 8,021
Total capital to risk weighted assets 13.13% 10.40%
Tier 1 capital to risk weighted assets 12.16% 9.34%
Leverage ratio to risk weighted assets 10.13% 8.38%
HOME SECURITY BANK
Total capital $ 5,119 $ 3,823
Total capital to risk weighted assets 11.92% 11.75%
Tier 1 capital to risk weighted assets 12.79% 10.94%
Leverage ratio to risk weighted assets 8.83% 8.44%
</TABLE>
As of December 31, 1995 United Security Bank and Home Security Bank were
considered well capitalized.
55
<PAGE> 56
UNITED SECURITY BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 20. SUBSEQUENT EVENTS
STOCK SPLIT-UP
The Corporation's Board of Directors declared a 10% common stock dividend in
the form of a split-up on January 12, 1996 to shareholders of record on January
29, 1996. The stock was issued on February 5, 1996. A cash payment of $7,000
was paid for fractional shares based on the closing price on the Board stock
dividend declaration date. The number of shares outstanding have been restated
at December 31, 1995 to reflect the subsequent issuance of stock. All weighted
average shares outstanding and per share amounts have also been retroactively
restated. The intent of the stock split-up was to obtain a reduction in the
unit market price of shares and to obtain wider distribution and improved
marketability of the stock. No transfer from retained earnings to capital
stock was recorded.
BORROWING
Near the end of January, 1996, United Security Bancorporation borrowed $2.6
million for five years to complete the transfer of Bank real estate to the
Parent Company. The debt provides for monthly payments of $23,000
including interest at 8.75%. The debt reprices annually at prime plus .25%.
56
<PAGE> 1
UNITED SECURITY BANCORPORATION
Exhibit 21
57
<PAGE> 2
UNITED SECURITY BANCORPORATION
SUBSIDIARIES OF REGISTRANT
1. United Security Bank (Washington)
2. Home Security Bank (Washington)
3. USB Insurance Agencies, Inc. (Washington)
4. USB Leasing, Inc. (Washington)
5. USB Mortgage Company, Inc. (Washington)
58
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DECEMBER 31,
1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH UNITED SECURITY
BANCORPORATION FORM 10-KSB.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<EXCHANGE-RATE> 1
<CASH> 7,889
<INT-BEARING-DEPOSITS> 4,337
<FED-FUNDS-SOLD> 3,355
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 22,036
<INVESTMENTS-CARRYING> 365
<INVESTMENTS-MARKET> 374
<LOANS> 143,252
<ALLOWANCE> 1,391
<TOTAL-ASSETS> 191,813
<DEPOSITS> 163,791
<SHORT-TERM> 0
<LIABILITIES-OTHER> 2,392
<LONG-TERM> 767
0
0
<COMMON> 20,837
<OTHER-SE> 4,026
<TOTAL-LIABILITIES-AND-EQUITY> 191,813
<INTEREST-LOAN> 14,976
<INTEREST-INVEST> 1,647
<INTEREST-OTHER> 433
<INTEREST-TOTAL> 17,056
<INTEREST-DEPOSIT> 6,901
<INTEREST-EXPENSE> 7,014
<INTEREST-INCOME-NET> 10,042
<LOAN-LOSSES> 317
<SECURITIES-GAINS> 53
<EXPENSE-OTHER> 8,414
<INCOME-PRETAX> 5,076
<INCOME-PRE-EXTRAORDINARY> 5,076
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,751
<EPS-PRIMARY> 1.32
<EPS-DILUTED> 1.32
<YIELD-ACTUAL> 10.42
<LOANS-NON> 777
<LOANS-PAST> 612
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,246
<CHARGE-OFFS> 190
<RECOVERIES> 18
<ALLOWANCE-CLOSE> 1,391
<ALLOWANCE-DOMESTIC> 1,391
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
