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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, 1996
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. [X]
The registrant's revenues for the fiscal year ended December 31, 1996 were
$23,700,000.
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
February 28, 1997, was $46,168,000. The number of shares of common stock
outstanding at such date was 3,682,341.
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UNITED SECURITY BANCORPORATION
ANNUAL REPORT ON FORM 10-KSB FOR THE
FISCAL YEAR ENDED
DECEMBER 31, 1996
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I Page
<S> <C>
Item 1: Description of Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Item 2: Description of Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Item 3: Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Item 4: Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . 18
PART II
Item 5: Market for Common Equity and Related Stockholder Matters . . . . . . . . . . . . . . . . . 18
Item 6: Management's Discussion and Analysis or Plan of Operation . . . . . . . . . . . . . . . . 19
Item 7: Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Item 8: Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
PART III
Item 9: Directors and Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange Act . . . . . . . . . . . . . . . 26
Item 10:Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Item 11:Security Ownership of Certain Beneficial Owners and
Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Item 12:Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . . . 26
Item 13:Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
</TABLE>
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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, 1996, the
Company had total consolidated assets of $231.0 million, net loans of $176.4
million and deposits of $197.4 million. The Company was founded in 1983 and
has been profitable in every year since its inception. In 1994, a private
issue stock sale was completed with proceeds of $2.2 million. In 1995, the
Company completed a public offering selling $8.5 million in stock and is listed
on NASDAQ under the symbol "USBN".
THE BANKS
USB was formed in 1974 and serves customers in Spokane and northeastern
Washington from seven branches. HSB was formed in 1989 and 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, 1996, 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 enabled them to maintain a stable and relatively low-cost
retail deposit base.
USB INSURANCE
USB Insurance began operating in April 1987 and is engaged in selling a full
line of insurance and financial products such as annuities and mutual funds on
an agency basis to individuals, commercial, industrial and agricultural
enterprises from locations in Colville, Chewelah and Kettle Falls, Washington.
Its business was significantly enhanced in 1990 through the acquisition 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, 1996 were $1,202,000 as compared to revenues of $1,303,000
for 1995. The insurance operation was profitable in 1996 and 1995.
USB LEASING
USB Leasing began operation in 1986 and is engaged in equipment leasing to
small and medium-sized companies in the markets it serves. The Company has
used a portion of the proceeds from its May, 1995 stock sale to expand its
leasing operations. Leasing assets grew to $3.0 million as of December 31,
1996 from $1.5 million as of December 31, 1995. The leasing operation was
profitable in 1996. Management of the Company expects to continue expanding
its leasing business over the next several years.
USB MORTGAGE
The Company provided USB Mortgage with a portion of the proceeds received in
the public offering of the Company's common stock in 1995. Management expects
to continue expanding its mortgage business over the next several years. As of
December 31, 1996 assets were $2.7 million. The mortgage operation was
profitable in 1996.
BUSINESS STRATEGY
The Company's business strategy is to continue to build a growing, profitable
community banking and financial services network by emphasizing high quality
customer service and by focusing on the financial needs of consumers and small
to medium-sized businesses. The Company intends to pursue an aggressive growth
strategy, the key components of which include:
* Increasing market share in existing markets
* Expanding the markets served through new branch openings and
acquisitions
* Expanding nonbanking financial services
* Providing superior customer service
Increase Market Share in Existing Markets. Since its formation in 1983, the
Company has focused on commercial banking to small and medium- sized
businesses, professionals and other individuals. Management believes that the
Company can continue to gain market share by targeting products and services.
To augment this strategy, the Banks opened branches in downtown Spokane and
Yakima, Washington in late 1995.
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. Further branch expansion has been approved and is being
planned.
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.
Branches Acquisition. In March, 1997 the Company announced that it had reached
definitive agreement to purchase five branches in central and eastern Washington
from a commercial bank. The transaction includes Home Security Bank's purchase
of three branches in Mabton, Naches and Walla Walla, Washington bringing its
total to six. United Security Bank would purchase two branches located in
Davenport and Moses Lake, Washington bringing its total to nine. The purchases
are expected to be completed in July, 1997, subject to regulatory approval. The
amounts involved will not be known until the transaction is complete, but based
on current information about $40 million in deposits and $1.2 million in branch
facilities are expected to be purchased with the deposits expected to cost
approximately $3.2 million. The Company earnings should improve because of the
increase in volume as the deposits purchased are used to fund loans. The cost of
funds for the new deposits is approximately 2.5%. The deposits will be used to
fund overnight federal funds sold earning about 5.50% currently until new loans
are originated by the Company.
Expand Nonbanking Financial Services. The Company intends to aggressively
expand the nonbanking products and services offered through USB Insurance, USB
Leasing, and USB Mortgage, and expects to develop other products and services,
including real estate-related financial services not currently offered through
the Banks. USB Insurance will seek to expand its emphasis on marketing a full
line of insurance and financial products such as annuities and mutual funds to
individuals and commercial enterprises, and USB Leasing will continue to focus
on providing commercial leases to small and medium-sized businesses that
utilize computers, heavy, non-specialized, industrial equipment, and
agricultural equipment. Management believes the expansion of the Company's
customer base through internal growth and possible acquisitions should create
significant new opportunities for each of the nonbank subsidiaries to
cross-market their products and services.
Under current federal regulations, the Company is precluded from maintaining
offices for USB Insurance in any Bank branch serving a community of more than
5,000 inhabitants. As a consequence, the products and services offered by
these subsidiaries are necessarily limited to the smaller communities in the
Company's service areas in which the Banks maintain branches. 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
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UNITED SECURITY BANCORPORATION
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, 1996, the Company had total loans and leases outstanding of
approximately $178 million, which equals 90.4% of the Company's total deposits
and 77.2% of its total assets. $120 million of these loans were originated by
USB and $55 million were originated by HSB. At December 31, 1996, virtually all
of the loans held by the Company were to borrowers within the Banks' principal
market areas.
The following table sets forth the composition of the Company's loan portfolio
at December 31, 1996, 1995, and 1994.
<TABLE>
<CAPTION>
December 31,
1996 1995 1994
($ in thousands) Amount % Amount % Amount %
<S> <C> <C> <C> <C> <C> <C>
Commercial $97,086 54% $75,011 52% $61,968 50%
Agricultural 25,621 14% 19,787 14% 16,721 14%
Real estate mortgage 29,318 16% 25,048 18% 24,883 20%
Real estate construction 9,954 6% 10,169 7% 8,126 7%
Consumer 10,527 6% 9,234 6% 7,781 6%
Other 6,422 4% 4,508 3% 3,286 3%
-------- -------- -------- -------- -------- --------
Total loans 178,928 100% 143,757 100% 122,765 100%
======== ======== ========
Deferred loan fees, net of deferred costs 508 505 438
Allowance for loan losses 2,034 1.14% 1,391 0.97% 1,246 1.02%
-------- ======== -------- ======== -------- ========
Loans, net $176,386 $141,861 $121,081
======== ======== ========
</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
Company holds real property as collateral. At December 31, 1996, mortgage
loans included approximately $19.1 million of adjustable and fixed rate first
mortgage loans secured by one to four family residential properties,
approximately $4.3 of second mortgage loans secured by one to four family
residential properties, approximately $5.0 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.
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
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UNITED SECURITY BANCORPORATION
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 44% of the loans in the Company's portfolio have interest rates
that float with the lending Bank's reference rate (which is in turn based on
various indices such as the rates of interest charged by money center banks).
LENDING AND CREDIT MANAGEMENT. USB and HSB each follow loan policies, which
have been approved by each Bank's board of directors and are overseen by the
Company. The policies establish levels of loan commitment (by loan type) and
credit review and grading criteria, and other matters such as loan
administration, loans to affiliates, costs, problem loans and loan loss
reserves, and related items. Loans are typically reviewed and graded on a
monthly basis.
All loan applications are processed at the Banks' branch lending offices. All
loan applications are approved by designated officers in accordance with the
respective guidelines and underwriting policies of the Banks. Credit limits
generally vary according to the type of loan and the individual loan officer's
experience. The maximum current loan limits available to any one individual
vary from $25,000 per loan to $300,000 per loan. In addition, five individuals
currently can combine their credit authority, to a maximum of $750,000 for USB
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, 1996, the Banks, as a
matter of policy, do not extend credit to any single borrower in excess of
$3,052,000 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, 1996, 1995 and 1994, the outstanding balance of
loan participations sold outside the Company were $25,205,000, $22,365,000, and
$23,383,000, 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 1996, the Mortgage Company sold $17.7 million
mortgage loans, consisting of $16.6 million of fixed-rate residential loans and
$1.1 million of adjustable rate residential loans. Fees received on such sales
are included in interest and fees earned on loans, and accounted for
approximately 3.0%, .8%, and 1.7% of such interest and fees in each of the
three years ended December 31, 1996, 1995, and 1994, respectively. Such loans
are sold on a servicing released basis, meaning the Company does not retain
mortgage servicing responsibilities.
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UNITED SECURITY BANCORPORATION
NONPERFORMING ASSETS. The following table provides information for the
Company's nonperforming assets as of December 31, 1996, 1995, and 1994.
<TABLE>
<CAPTION>
Year ended December 31,
($ in thousands) 1996 1995 1994
<S> <C> <C> <C>
Nonperforming loans:
Nonaccrual loans $457 $777 $775
Accrual loans 90 days or more past due 441 612 228
-------- -------- --------
Total nonperforming loans 898 1,389 1,003
Other real estate owned and other repossed assets 205 370 231
-------- -------- --------
Total nonperforming assets $1,103 $1,759 $1,234
======== ======== ========
Allowance for loan losses $2,034 $1,391 $1,246
Ratio of total nonperforming assets to total assets 0.48% 0.92% 0.75%
Ratio of total nonperforming loans to total loans 0.50% 0.97% 0.82%
Ratio of allowance for loan losses to total nonperforming loans 226.5% 100.1% 124.2%
</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. Additional other loans are also consider
impaired as identified by management. Loans classified impaired are evaluated
as part of management's allowance for loan loss adequacy review. The fair
value of the collateral is evaluated to determine if a specific allowance for
loan loss is needed for impaired loans. See note 5 to the Consolidated
Financial Statements.
Real estate properties acquired through, or in lieu of, loan foreclosure are to
be sold and are initially recorded at fair value at the date of foreclosure
establishing a new cost basis. After foreclosure, valuations are periodically
performed by management and the real estate is carried at the lower of carrying
amount or fair value less cost to sell. Real estate properties and other
repossessed assets of the Company had a book value of $205,000 as of December
31, 1996, consisting primarily of commercial and chattel property.
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses represents management's recognition of the risks
of extending credit and its evaluation of the quality of the loan portfolios of
the Banks. The allowance is maintained at levels considered adequate by
management to provide for anticipated loan losses, and is based on management's
assessment of various factors affecting the loan portfolios, including problem
loans, business conditions and loss experience, an overall evaluation of the
quality of the underlying collateral, and collateral selling costs. The
allowance is increased by provisions charged to operations and is reduced by
loans charged off, net of any recoveries.
The decline in real estate market values in many parts of the country and the
significant losses experienced by many financial institutions in the late
1980's, have resulted in increased regulatory
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UNITED SECURITY BANCORPORATION
scrutiny of the loan portfolios of financial institutions such as the Company
and the Banks, particularly with respect to commercial real estate and
multi-family residential real estate loans. Management of the Company
periodically reviews the status of loans that are contractually past due and
the net realizable value of the collateral securing such loans, and establishes
reserves through the provision of loan losses where ultimate collection of such
loans is questionable. The provision for loan losses also reflects a general
allocation of unanticipated losses based in part on the size of the Company's
loan portfolio and management's assessment of economic conditions within the
Company's service area. Management believes that the 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, 1996, 1995 and 1994.
<TABLE>
<CAPTION>
Years ended December 31,
($ in thousands) 1996 1995 1994
<S> <C> <C> <C>
Balance of allowance for loan losses at beginning of period $1,391 $1,246 $802
Charge-offs
Commercial 253 114 117
Agricultural 1
Real estate (mortgage and construction)
Consumer 58 24 2
Other 61 52 28
-------- -------- --------
Total charge-offs 372 190 148
Recoveries
Commercial, financial and agricultural 7 13 6
Consumer 1 5
Real estate (mortgage and construction)
Other 1 1
-------- -------- --------
Total recoveries 9 18 7
Net charge-offs 363 172 141
Provision for loan losses 1,006 317 585
-------- -------- --------
Balance of allowance for loan losses at end of period $2,034 $1,391 $1,246
======== ======== ========
Ratio of net charge-offs to average loans 0.22% 0.13% 0.13%
Average loans and leases outstanding during the period $164,109 $131,818 $106,032
</TABLE>
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UNITED SECURITY BANCORPORATION
The following table sets forth the allowance for loan losses by loan category,
based on management's assessment of the risk associated with such categories as
of the dates indicated, and summarizes the percentage of gross loans in each
category to total gross loans.
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1995 1994
AMOUNT OF AMOUNT OF AMOUNT OF
($ in thousands) ALLOWANCE % ALLOWANCE % ALLOWANCE %
<S> <C> <C> <C> <C> <C> <C>
Commercial $1,098 54% $726 52% $623 50%
Agricultural 285 14% 191 14% 175 14%
Real estate-mortgage 325 16% 242 18% 249 20%
Real estate-construction 122 6% 98 7% 87 7%
Consumer 122 6% 89 6% 75 6%
Other 82 4% 45 3% 37 3%
-------- -------- -------- -------- -------- --------
Total $2,034 100% $1,391 100% $1,246 100%
======== ======== ======== ======== ======== ========
</TABLE>
INVESTMENTS
Management of the investment portfolio is consolidated into a single investment
committee of the Company, which comprises the Company's president and chief
executive officer and its vice president and chief financial officer, and the
president's and cashier's of USB and HSB. The investment committee of the
Company is responsible for reviewing and approving the investment strategies
and recommendations of each of the Banks, consistent with the Company's
asset/liability and investment policy.
The following table sets forth the carrying value, by type, of the securities
in the Company's portfolio at December 31, 1996, 1995 and 1994.
<TABLE>
<CAPTION>
DECEMBER 31,
($ in thousands) 1996 1995 1994
<S> <C> <C> <C>
U.S. government and agencies $2,299 $4,051 $12,599
States and political subdivisions 3,704 365 106
Mortgage-backed securities 6,348 13,545 6,460
Other 3,262 4,440 3,970
-------- -------- --------
Total securities $15,613 $22,401 $23,135
======== ======== ========
</TABLE>
As of December 31, 1996 and 1995, the amortized cost of the Company's
investment portfolio exceeded its market value by $394,000 and $124,000,
respectively. No portion of the Company's investment portfolio is invested in
derivative securities (being securities whose value derives from the value of
an underlying security or securities, or market index of underlying securities'
values), and to the Company's knowledge, no portion of any mutual fund held in
the Company's investment portfolio was invested in derivative securities.
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UNITED SECURITY BANCORPORATION
The following table sets forth the book values, maturities and approximate
average aggregate yields of securities in the Company's investment portfolio by
type at December 31, 1996.
<TABLE>
<CAPTION>
Type and Maturity
($ in thousands) Yield Amount
<S> <C> <C>
U.S. Treasury and other U.S. government agencies and corporations:
1 year or less $0
Over 1 through 5 years 799
Over 5 through 10 years 1,500
Over 10 years
--------
Total 6.08% 2,299
--------
States and political subdivisions
1 year or less 35
Over 1 through 5 years 125
Over 5 through 10 years 3,279
Over 10 Years 265
--------
Total 8.04% 3,704
--------
Mortgage-backed securities
1 year or less 2,331
Over 1 through 5 years 3,650
Over 5 through 10 years 367
Over 10 years
--------
Total 6.51% 6,348
--------
Other securities:
1 year or less 3,262
Over 1 through 5 years
Over 5 through 10 years
Over 10 years
--------
Total 6.79% 3,262
--------
Total investment securities:
1 year or less 5,628
Over 1 through 5 years 4,574
Over 5 through 10 years 5,146
Over 10 years 265
--------
Total 6.74% $15,613
========
</TABLE>
Yields were determined by dividing aggregate annual interest income for 1996 by
average balances obtained from the quarter-end balances for 1996. The yields
for tax-exempt securities have been computed on a full tax equivalent basis
using an assumed tax rate of 34%. Maturities of mortgage-backed securities are
estimated and are based on the average lives of the underlying mortgage loans,
adjusted to incorporate prepayment assumptions.
11
<PAGE> 12
UNITED SECURITY BANCORPORATION
DEPOSITS
The Company's primary source of funds has historically been customer deposits.
The Banks strive to maintain a high percentage of noninterest-bearing
deposits, which are low cost funds and result in higher interest margins. At
December 31, 1996, 1995, and 1994, the Company's ratios of noninterest-bearing
deposits to total deposits were 16.9%, 15.7%, and 15.6%, respectively.
The Company offers a variety of accounts designed to attract both short-term
and long-term deposits from its customers. These accounts include negotiable
order of withdrawal ("NOW") accounts, money market investment accounts, savings
accounts, and certificates of deposit and other time deposits.
Interest-bearing accounts earn interest at rates established by management of
the Banks, based on competitive market factors and management's desire to
increase or decrease certain types or maturities of deposits consistent with
the Banks policies. The Company traditionally has not sought brokered deposits
and does not intend to do so in the future.
The following table sets forth the average balances for each major category of
deposit and the weighted-average interest rate paid for deposits in 1996, 1995
and 1994.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1996 1995 1994
AVERAGE INTEREST AVERAGE INTEREST AVERAGE INTEREST
($ in thousands) BALANCE RATE BALANCE RATE BALANCE RATE
<S> <C> <C> <C> <C> <C> <C>
Interest-bearing demand deposits $56,483 4.44% $43,558 4.28% $37,089 3.75%
Savings deposits 14,822 3.02% 15,411 3.18% 16,361 3.20%
Time deposits 82,840 5.91% 75,340 6.03% 54,871 4.58%
Noninterest-bearing demand deposits 29,060 21,598 22,508
-------- -------- --------
Total $183,205 $155,907 $130,829
======== ======== ========
</TABLE>
The following table shows the amounts and maturities of certificates of deposit
that had balances of more than $100,000 at December 31, 1996, 1995 and 1994.
<TABLE>
<CAPTION>
DECEMBER 31,
($ in thousands) 1996 1995 1994
<S> <C> <C> <C>
Certificates of Deposit over $100,000 with remaining maturity:
Less than three months $12,103 $8,541 $6,576
Three to six months 3,635 5,106 1,098
Over six months to one year 8,312 5,994 2,521
Over one year 504 2,052 5,711
-------- -------- --------
Total $24,554 $21,693 $15,906
======== ======== ========
</TABLE>
12
<PAGE> 13
UNITED SECURITY BANCORPORATION
COMPETITION
While the Company encounters a great deal of competition in its lending
activities, management believes there is less competition in the Company's
specialty middle market and neighborhood bank niche than there was a few years
ago. The Company believes that its competitive position has been strengthened
by the consolidation in the banking industry, which has resulted in a focus on
the larger accounts with less contact between the bank officers and their
customers. The Company's strategy by contrast, is to remain a middle market
lender, which maintains close long-term relationships with its customers.
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.
EMPLOYEES
As of December 31, 1996, the Company had 150 employees, of which 67 were
employed by USB, 36 were employed by HSB, 19 were employed by USB Insurance, 3
were employed by USB Leasing, 19 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. For the branches acquisition disclosed on
page 5 management anticipates acquiring approximately 18 full-time equivalent
employees as part of the acquisition and also hiring an additional approximately
5 lending officers for customer loan origination services.
13
<PAGE> 14
UNITED SECURITY BANCORPORATION
EFFECT OF GOVERNMENTAL POLICY
One of the most significant factors affecting the Bank's earnings is the
difference between the interest rates paid by the Bank on its deposits and its
other borrowings and the interest rates earned by the Bank on loans to its
customers and securities owned by the Bank. The yields of its assets and the
rates paid on its liabilities are sensitive to changes in prevailing interest
rates. Thus, the earnings and growth of the Bank will be influenced by general
economic conditions, the monetary and fiscal policies of the federal
government, and the policies of regulatory agencies, particularly the Federal
Reserve Board, which implements national monetary policy. An important
function of the Federal Reserve System is to regulate the money supply and
credit conditions in order to mitigate recessionary and inflationary pressures.
Among the techniques used to implement these objectives are open market
operations in United States government securities and changes in reserve
requirements of banks and in the cost of short-term bank borrowings. These
techniques influence overall growth and distribution of credit, bank loans,
investments and deposits, and may also affect interest rates charged on loans
or paid on deposits. The nature and impact of any future changes in monetary
policies cannot be predicted.
From time to time, legislation has been enacted which has the effect of
increasing the cost of doing business, limiting or expanding permissible
activities, or affecting the competitive balance between banks and other
financial institutions. Legislative proposals which could affect the Company
and the banking business in general have been proposed and may be introduced
before the United States Congress and other governmental bodies. These
proposals may alter the Company's structure, regulation, disclosure and
reporting requirements. In addition, various banking regulatory agencies
frequently propose rules and regulations to implement and enforce existing
legislation. It cannot be predicted whether or in what form any such
legislation or regulations will be enacted or the extent to which the business
of the Company would be affected thereby.
SUPERVISION AND REGULATION
General. As a bank holding company, the Company is subject to regulation under
the Bank Holding Company Act of 1956, as amended (the "BHCA"), and its
examination and reporting requirements. Under the BHCA, a bank holding company
may not directly or indirectly acquire the ownership or control of more than 5%
of the voting shares or substantially all of the assets of any company,
including a bank or savings and loan association, without the prior approval of
the Federal Reserve Board. In addition, bank holding companies are generally
prohibited under the BHCA from engaging in nonbanking activities, subject to
certain exceptions.
The Company and its subsidiaries are subject to supervision and examination by
applicable federal and state banking agencies. The earnings of the Company's
subsidiaries, and therefore the earnings of the Company, are affected by
general economic conditions, management policies and the legislative and
governmental actions of various regulatory authorities, including the Federal
Reserve Board, the FDIC, the Division of Finance and various other state
financial institution regulatory agencies. In addition, there are numerous
governmental requirements and regulations that affect the activities of the
Company and its subsidiaries.
Certain Transactions with Affiliates. There are various legal restrictions on
the extent to which a bank holding company and certain of its nonbank
subsidiaries can borrow or otherwise obtain credit from its bank subsidiaries.
In general, these restrictions require that any such extensions of credit must
be on
14
<PAGE> 15
nonpreferential terms and secured by designated amounts of specified collateral
and be limited, as to any one of the holding company or such nonbank
subsidiaries, to 10% of the lending bank's capital stock and surplus, and as to
the holding company and all such nonbank subsidiaries in the aggregate, to 20%
of such capital stock and surplus.
Payment of Dividends. The Company is a legal entity separate and distinct from
the Banks, the Mortgage Company, the Leasing Company and Insurance Company.
The principal source of the Company's revenues is dividends from the Bank.
Various federal and state statutory provisions limit the amount of dividends
the Bank can pay to the Company without regulatory approval. The approval of
appropriate federal or state bank regulatory agencies is required for any
dividend if the total of all dividends declared by the Bank in any calendar
year would exceed the total of the institution's net profits, as defined by
regulatory agencies, for such year combined with its retained net profits for
the preceding two years. The payment of dividends by the Bank may also be
affected by other factors, such as the maintenance of adequate capital.
Capital Adequacy. The Federal Reserve Board has issued standards for measuring
capital adequacy for bank holding companies. These standards are designed to
provide risk-responsive capital guidelines and to incorporate a consistent
framework for use by financial institutions operating in major international
financial markets. The banking regulators have issued standards for banks that
are similar to, but not identical with, the standards for bank holding
companies.
In general, the risk-related standards require financial institutions and
financial institution holding companies to maintain capital levels based on
"risk adjusted" assets, so that categories of assets with potentially higher
credit risk will require more capital backing than categories with lower credit
risk. In addition, financial institutions and financial institution holding
companies are required to maintain capital to support off-balance sheet
activities such as loan commitments.
FDIC Insurance Assessments. The subsidiary depository institutions of the
Company are subject to FDIC deposit insurance assessments. The FDIC has
adopted a risk-based premium schedule. Each financial institution is assigned
to one of three capital groups--well capitalized, adequately capitalized or
undercapitalized--and further assigned to one of three subgroups within a
capital group, on the basis of supervisory evaluations by the institution's
primary federal and, if applicable, state supervisors, and on the basis of
other information relevant to the institution's financial condition and the
risk posed to the applicable insurance fund. The actual assessment rate
applicable to a particular institution will, therefore, depend in part upon the
risk assessment classification so assigned to the institution by the FDIC. See
"--FIRREA and FDICIA."
The Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA"), adopted in August 1989 to provide for the resolution of insolvent
savings associations, required the FDIC to establish separate deposit insurance
funds--the Bank Insurance Fund ("BIF") for banks and the Savings Association
Insurance Fund ("SAIF") for savings associations. FIRREA also required the
FDIC to set deposit insurance assessments at such levels as would cause BIF and
SAIF to reach their "designated reserve ratios" of 1.25 percent of the deposits
insured by them within a reasonable period of time. Due to low costs of
resolving bank insolvencies in the last few years, BIF reached its designated
reserve ratio in May 1995. As a result, effective January 1, 1996, the FDIC
eliminated deposit insurance assessments (except for the minimum $2,000 payment
required by law) for banks that are well capitalized and well managed and
reduced the deposit insurance assessments for all other banks.
15
<PAGE> 16
Support of Subsidiary Bank. Under Federal Reserve Board policy, the Company is
expected to act as a source of financial strength to the Bank and to commit
resources to support the Bank in circumstances where it might not choose to do
so absent such a policy. This support may be required at times when the
Company may not find itself able to provide it. In addition, any capital loans
by the Company to the Bank would also be subordinate in right of payment to
deposits and certain other indebtedness of such subsidiary.
Consistent with this policy regarding bank holding companies serving as a
source of financial strength for their subsidiary banks, the Federal Reserve
Board has stated that, as a matter of prudent banking, a bank holding company
generally should not maintain a rate of cash dividends unless its net income
available to common shareholders has been sufficient to fully fund the
dividends and the prospective rate of earnings retention appears consistent
with the bank holding company's capital needs, asset quality and overall
financial condition.
FIRREA and FDICIA. FIRREA contains a cross-guarantee provision which could
result in insured depository institutions owned by the Company being assessed
for losses incurred by the FDIC in connection with assistance provided to, or
the failure of, any other insured depository institution owned by the Company.
Under FIRREA, failure to meet the capital guidelines could subject a banking
institution to a variety of enforcement remedies available to federal
regulatory authorities, including the termination of deposit insurance by the
FDIC.
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
made extensive changes to the federal banking laws. FDICIA instituted certain
changes to the supervisory process, including provisions that mandate certain
regulatory agency actions against undercapitalized institutions within
specified time limits. FDICIA contains various other provisions that may
affect the operations of banks and savings institutions.
The prompt corrective action provision of FDICIA requires the federal banking
regulators to assign each insured institution to one of five capital categories
("well capitalized," "adequately capitalized" or one of three
"undercapitalized" categories) and to take progressively more restrictive
actions based on the capital categorization, as specified below. Under FDICIA,
capital requirements would include a leverage limit, a risk-based capital
requirement and any other measure of capital deemed appropriate by the federal
banking regulators for measuring the capital adequacy of an insured depository
institution. All institutions, regardless of their capital levels, are
restricted from making any capital distribution or paying any management fees
that would cause the institution to fail to satisfy the minimum levels for any
relevant capital measure.
The FDIC and the Federal Reserve Board adopted capital-related regulations
under FDICIA. Under those regulations, a bank will be well capitalized if it:
(i) had a risk-based capital ratio of 10% or greater; (ii) had a ratio of Tier
1 capital to risk-adjusted assets of 6% or greater; (iii) had a ratio of Tier 1
capital to adjusted total assets of 5% or greater; and (iv) was not subject to
an order, written agreement, capital directive or prompt corrective action
directive to meet and maintain a specific capital level for any capital
measure. An association will be adequately capitalized if it was not "well
capitalized" and: (i) had a risk-based capital ratio of 8% or greater; (ii)
had a ratio of Tier 1 capital to risk-adjusted assets of 4% or greater; and
(iii) had a ratio of Tier 1 capital to adjusted total assets of 4% or greater
(except that certain associations rated "Composite 1" under the federal banking
agencies' CAMEL rating system may be adequately capitalized if their ratios of
core capital to adjusted total assets were 3% or greater).
<PAGE> 17
FDICIA also makes extensive changes in existing rules regarding audits,
examinations and accounting. It generally requires annual on-site, full scope
examinations by each bank's primary federal regulator. It also imposes new
responsibilities on management, the independent audit committee and outside
accountants to develop or approve reports regarding the effectiveness of
internal controls, legal compliance and off-balance sheet liabilities and
assets.
Depositor Preference Statute. Legislation enacted in August 1993 provides a
preference for deposits and certain claims for administrative expenses and
employee compensation against an insured depository institution, in the
liquidation or other resolution of such an institution by any receiver. Such
obligations would be afforded priority over other general unsecured claims
against such an institution, including federal funds and letters of credit, as
well as any obligation to shareholders of such an institution in their capacity
as such.
The Interstate Banking and Community Development Legislation. In September
1994, legislation was enacted that is expected to have a significant effect in
restructuring the banking industry in the United States. The Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994 ("Riegle-Neal")
facilitates the interstate expansion and consolidation of banking organizations
by permitting (i) bank holding companies that are adequately capitalized and
managed, one year after enactment of the legislation, to acquire banks located
in states outside their home states regardless of whether such acquisitions are
authorized under the law of the host state, (ii) the interstate merger of banks
after June 1, 1997, subject to the right of individual states to "opt in" or to
"opt out" of this authority before that date, (iii) banks to establish new
branches on an interstate basis provided that such action is specifically
authorized by the law of the host state, (iv) foreign banks to establish, with
approval of the regulators in the United States, branches outside their home
states to the same extent that national or state banks located in the home
state would be authorized to do so, and (v) banks to receive deposits, renew
time deposits, close loans, service loans and receive payments on loans and
other obligations as agent for any bank or thrift affiliate, whether the
affiliate is located in the same state or a different state. One effect of
Riegle-Neal is to permit the Company to acquire banks located in any state and
to permit bank holding companies located in any state to acquire banks and bank
holding companies in Missouri. Overall, Riegle-Neal is likely to have the
effects of increasing competition and promoting geographic diversification in
the banking industry.
16
<PAGE> 18
UNITED SECURITY BANCORPORATION
FACILITIES
At December 31, 1996, 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. The
Company owns each of the owned facilities described below, which were leased to
its subsidiaries described below for a 5 year term.
<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 7,653 3,436 1991
Kettle Falls Branch(5) 10,000 4,702 2,825 1982
Spokane Northpointe Branch(6) 50,000 11,223 10,400 1993
Spokane Valley Branch(7) 22,500 6,978 3,975 1994
Sunnyside Branch(8) 12,000 5,120 5,000 1992
Prosser Branch(9) 10,000 3,668 5,000 1989
Yakima Branch(10) 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 Note 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 leases approximately 1,850 square feet of
shared office space at an annual rate of $10 per square foot or $18,600
per year. Their lease expires in 2000.
(4) The Company leases approximately 3,064 square feet of this facility to USB
Insurance at an annual rental of $9.50 per square foot, or $29,000 per
year and 4,589 square feet to USB, or $43,476 per year.
(5) The Company leases this facility to USB and USB Insurance, square footage
of approximately 4,227 and 475, respectively. At an amount of $37,620 and
$4,440 per year, respectively.
(6) The Company leases this facility to USB and USB Mortgage, square footage of
approximately 9,009 and 878, respectively. At an amount of $100,344 and
$9,780 per year, respectively. The remainder of the space is used by the
Company as its headquarters.
(7) The Company leases this facility to USB, USB Mortgage, USB Leasing, a
securities brokerage firm, and a pharmaceutical, square footage of
approximately 3,080; 1,129; 775; 768; and 225, respectively. At an amount
of $27,456; $10,068; $8,460; $9,256; and $4,200 per year, respectively.
(8) The Company leases this facility to HSB for $56,004 per year.
(9) The Company leases this facility to HSB for $34,008 per year.
(10) The Company leases this facility to HSB at an annual rental of $9.80 per
square foot or $97,800 per year. HSB 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.
17
<PAGE> 19
UNITED SECURITY BANCORPORATION
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.
Periodically and in the ordinary course of business, various claims and
lawsuits are brought against the Company or the Banks, such as claims to
enforce lines, condemnation proceedings on properties in which the Banks hold
security interests, claims involving the making and servicing of real property
loans and other issues incident to the business of the Company and the Banks.
In the opinion of management, the ultimate liability, if any, resulting from
such claims or lawsuits will not have a material adverse effect on the
financial position or results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the Company's shareholders during the
fourth quarter of 1996.
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
1997, and for 1996 and 1995 as reported by NASDAQ. Prior to May, 1995 the
stock price quotes were reported by the primary broker.
<TABLE>
<CAPTION>
1997 1996 1995
HIGH LOW HIGH LOW HIGH LOW
<S> <C> <C> <C> <C> <C> <C>
First Quarter(1) $15.13 $12.73 $12.27 $10.80 $6.19 $5.48
Second Quarter $12.27 $10.68 $6.95 $6.39
Third Quarter $13.64 $10.68 $8.67 $6.48
Fourth Quarter $13.86 $11.59 $11.56 $8.05
</TABLE>
- ----------------------
(1) Through February 28, 1997
HOLDERS. The number of holders of common stock of record on February 28, 1997
was approximately 1,200.
DIVIDENDS. The Company has declared and paid the following dividends
subsequent to January 1, 1994: On January 28, 1994, the Company paid a 15%
stock dividend; on July 31, 1994, the Company paid a $.07 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 and February 25,
1997 the Company issued 10% stock split-ups. 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 Note 12 to the Consolidated
Financial Statements.
18
<PAGE> 20
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 giving effect to the dividend, the Company is insolvent or the
liabilities of the Company exceed the Company's assets. Payment of dividends,
including stock dividends, on the Common Stock is also affected by statutory
limitations, which restrict the ability of the Banks to pay upstream dividends
to the Company. Under Washington banking law as it applies to the Banks, no
dividend may be declared or paid in an amount greater than net profits then
available, and after a portion of such net profits have been added to the
surplus funds of the Bank.
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, 1996, 16.9% of the Company's total
deposits were noninterest-bearing. For the years ended December 31, 1996,
1995, and 1994, the Company's average net interest margins were 6.4%, 6.1%, and
6.0%, respectively. See Liquidity and Capital Resources.
Net income is also affected by levels of provisions for loan losses,
noninterest income (primarily service charges on deposits, insurance
commissions, life insurance proceeds, and other operating income) and
noninterest expenses (primarily salaries and benefits, occupancy expense, data
processing cost, business and occupation tax, and other operating expenses).
For the three years ended December 31, 1996, 1995, and 1994, the provision for
loan losses was $1,006,000, $317,000, and $585,000, respectively. Net
charge-offs during the year ended December 31, 1996 were $363,000 as compared
to $172,000 and $141,000 during 1995 and 1994, respectively. For the three
years ended December 31, 1996, 1995, and 1994 noninterest income as a
percentage of personnel expenses was 50%, 76%, and 58%, respectively.
19
<PAGE> 21
UNITED SECURITY BANCORPORATION
NET INTEREST INCOME
The following table sets forth information with regard to average balances of
assets and liabilities for the Company, as well as the total dollar amounts of
interest income from interest-earning assets and interest expense on
interest-bearing liabilities, resultant yields or costs, net interest income,
net interest spread (the difference between the average yield on
interest-earning assets and the average cost of interest-bearing liabilities),
net interest margin and the ratio of average interest-earning assets to average
interest-bearing liabilities.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1996 1995
AVERAGE AVERAGE
($ in thousands) BALANCE INTEREST % BALANCE INTEREST %
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Loans $161,708 $18,483 11.43% $131,558 $14,930 11.35%
Lease financing 2,401 282 11.75% 260 46 17.69%
Taxable securities 15,404 1,038 6.74% 24,030 1,634 6.80%
Nontaxable securities 3,732 208 5.57% 228 13 5.70%
Federal funds sold 7,460 402 5.39% 3,788 205 5.41%
Time deposits with other banks 5,935 306 5.16% 3,746 228 6.09%
--------- --------- --------- --------- --------- ---------
Total interest earning assets 196,640 $20,719 10.54% 163,610 $17,056 10.42%
========= ========= ========= =========
Noninterest earning assets 19,066 14,804
--------- ---------
Total assets $215,706 $178,414
========= =========
LIABILITIES
Interest-bearing demand deposits $56,483 $2,506 4.44% $43,558 $1,865 4.28%
Savings deposits 14,822 447 3.02% 15,411 490 3.18%
Time deposits 82,840 4,897 5.91% 75,340 4,546 6.03%
--------- --------- --------- --------- --------- ---------
Total interest-bearing deposits 154,145 7,850 5.09% 134,309 6,901 5.14%
Short-term debt 105 5 4.76% 1,084 35 3.23%
Long-term debt 3,077 292 9.49% 779 78 10.01%
--------- --------- --------- --------- --------- ---------
Total interest-bearing liabilities 157,327 $8,147 5.18% 136,172 $7,014 5.15%
========= ========= ========= =========
Noninterest bearing demand deposits 29,060 21,598
Other noninterest bearing liabilities 2,695 1,303
--------- ---------
Total liabilities 189,082 159,073
STOCKHOLDERS' EQUITY 26,624 19,341
--------- ---------
Total liabilities and stockholders' equity $215,706 $178,414
========= =========
Net interest income $12,572 5.36% $10,042 5.27%
========= ========= ========= =========
Net interest margin to average
earning assets 6.39% 6.14%
========= =========
</TABLE>
<TABLE>
1994
AVERAGE
BALANCE INTEREST %
<S> ($ in thousands) <C> <C> <C>
ASSETS
Loans $106,003 $11,223 10.59%
Lease financing 29 8 27.59%
Taxable securities 16,601 902 5.43%
Nontaxable securities 128 3 2.34%
Federal funds sold 5,899 216 3.66%
Time deposits with other banks 1,091 35 3.21%
--------- --------- --------- 18
Total interest earning assets 129,751 $12,387 9.55%
========= =========
Noninterest earning assets 15,244
---------
Total assets $144,995
=========
LIABILITIES
Interest-bearing demand deposits $37,089 $1,389 3.75%
Savings deposits 16,361 523 3.20%
Time deposits 54,871 2,515 4.58%
--------- --------- ---------
Total interest-bearing deposits 108,321 4,427 4.09%
Short-term debt 1,447 111 7.67%
Long-term debt 814 81 9.95%
--------- --------- ---------
Total interest-bearing liabilities 110,582 $4,619 4.18%
========= =========
Noninterest bearing demand deposits 22,508
Other noninterest bearing liabilities 1,444
---------
Total liabilities 134,534
STOCKHOLDERS' EQUITY 10,461
---------
Total liabilities and stockholders' equity $144,995
=========
Net interest income $7,768 5.37%
========= =========
Net interest margin to average
earning assets 5.99%
=========
</TABLE>
Nonaccrual loans are included with loan balances. Average balances are based
on quarterly balances for 1994.
20
<PAGE> 22
UNITED SECURITY BANCORPORATION
The following table illustrates the changes in the Company's net interest
income due to changes in volumes and interest rates.
<TABLE>
<CAPTION>
1996 VS 1995 1995 VS 1994
INCREASE (DECREASE) IN NET INTEREST INCOME DUE TO CHANGES IN
($ in thousands) Volume Rate Total Volume Rate Total
<S> <C> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS
Loans $3,669 $120 $3,789 $2,731 $1,014 $3,745
Securities (348) (53) (401) 407 335 742
Federal funds sold 199 (2) 197 (77) 66 (11)
Interest-bearing deposits in other banks 133 (55) 78 85 108 193
-------- --------- --------- -------- --------- ---------
Total interest earning assets 3,653 10 3,663 3,146 1,523 4,669
-------- --------- --------- -------- --------- ---------
INTEREST BEARING LIABILITIES
Interest-bearing demand deposits 553 88 641 242 234 476
Savings deposits (19) (24) (43) (30) (3) (33)
Time deposits 453 (102) 351 938 1,093 2,031
-------- --------- --------- -------- --------- ---------
Total interest bearing deposits 987 (38) 949 1,150 1,324 2,474
Short-term debt (32) 2 (30) (28) (48) (76)
Long-term debt 230 (16) 214 (3) (3)
-------- --------- --------- -------- --------- ---------
Total interest bearing liabilities 1,185 (52) 1,133 1,119 1,276 2,395
-------- --------- --------- -------- --------- ---------
Total increase (decrease) in net interest income $2,468 $62 $2,530 $2,027 $247 $2,274
======== ========= ========= ======== ========= =========
</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 asset/liability
committee of the Company. In order to control risk in a rising interest rate
environment, management's philosophy has been to shorten the average maturity
of the investment portfolio in order to achieve a more asset sensitive
position, therefore allowing quicker asset repricing. Conversely, in a
declining interest rate environment, the philosophy is to lengthen the average
maturity of the investment portfolio, thereby becoming more liability
sensitive.
The ALM policy is also designed to maintain an appropriate balance between
rate-sensitive assets and liabilities in order to maximize interest rate
spreads. The Banks monitor the sensitivity of their assets and liabilities
with respect to changes in interest rates and maturities, and direct the
allocation of their funds accordingly. The strategy of each Bank has been to
maintain, to the extent possible, a balanced position between assets and
liabilities, and to place emphasis on the sensitivity of its assets.
Generally, the Banks attempt to maintain liquid assets, in order to meet
funding requirements in the current period, and a ratio of interest income to
average earning assets of 4% to 6%. At December 31, 1996, the net interest
margins of USB and HSB were 5.11% and 5.08%, respectively. Should interest
rates trend upward in the near future, the Company could become more asset
sensitive through the sale of investment securities, although the amount
realized on the sale would be adversely affected by the increased rates.
Management believes there will be less movement in rates on short-term
liabilities such as
21
<PAGE> 23
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
Company's interest-earning assets.
The following table sets forth the Company's contractual payment, maturity or
repricing information for interest-earning assets and interest-bearing
liabilities, and the resulting cumulative interest rate gap as of December 31,
1996. The amounts in the table are derived from internal data from the Company
and could be significantly affected by factors such as changes in prepayment
experience, early withdrawals of deposits and competition. Mortgage-backed
securities, which are included with securities are estimated and based on the
average lives of the underlying mortgage loans, adjusted to incorporate
prepayment assumptions.
<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 $15,910 $12,408 $53,059 $18,360 $99,737
Floating-rate loans 78,683 78,683
Securities 590 1,792 9,970 3,261 15,613
Other interest-earning assets 16,743 250 16,993
------------------------------------------------------------
Total interest-earning assets $111,926 $14,450 $63,029 $21,621 $211,026
============================================================
INTEREST-BEARING LIABILITIES:
Savings and NOW accounts $80,735 $80,735
Certificates of deposit over $100,000 12,103 11,947 504 24,554
Other time deposits 16,476 36,809 5,544 58,829
Long-term debt 2,496 13 103 630 3,242
------------------------------------------------------------
Total interest-bearing liabilities $111,810 $48,769 $6,151 $630 $167,360
============================================================
Interest sensitivity gap $116 ($34,319) $56,878 $20,991
Cumulative interest sensitive gap 116 (34,203) 22,675 43,666
As a percentage of total assets 0.05% -14.80% 9.81% 18.90%
</TABLE>
Certain shortcomings are inherent in the method of analysis presented in the
foregoing table. For example, although certain assets and liabilities may have
similar maturities and periods to repricing, they may react differently to
changes in market interest rates. Also, interest rates on assets and
liabilities may fluctuate in advance of changes in market interest rates, while
interest rates on other assets and liabilities may follow changes in market
interest rates. Additionally, certain assets have features that restrict
changes in the interest rates of such assets, both on a short-term basis and
over the lives of such assets. In the event of a change in market interest
rates, prepayments and early withdrawals could cause significant deviation from
the stated payments, maturities and repricings.
22
<PAGE> 24
UNITED SECURITY BANCORPORATION
The following table presents the aggregate maturities of loans in each major
category of the Banks' loan portfolios at December 31, 1996. Actual maturities
may differ from the contractual maturities shown below as a result of renewals
and prepayments.
<TABLE>
<CAPTION>
AGGREGATE MATURITIES AT DECEMBER 31, 1996
LESS THAN ONE TO OVER FIVE
($ in thousands) ONE YEAR FIVE YEARS YEARS TOTAL
<S> <C> <C> <C> <C>
Commercial, financial and agricultural $46,043 $44,528 $32,136 $122,707
Real estate-mortgage 6,515 14,036 8,767 29,318
Real estate-construction 8,992 927 35 9,954
Consumer 2,244 6,711 1,572 10,527
Other 2,909 3,188 325 6,422
----------------------------------------------
Total $66,703 $69,390 $42,835 $178,928
==============================================
</TABLE>
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996 AND 1995
GENERAL. The Company's net income was $3,162,000 for the year ended December
31, 1996. Net interest income improved 25% from $10,042,000 to $12,572,000 due
to strong loan demand. 1996 earnings were decreased by an operating loss of
$860,000 due to a former Home Security Bank employee embezzlement. The Company
has made a claim for the loss under the terms and conditions of its Financial
Institution Bond. The claim was timely filed. The Bond provides $2.8 million in
coverage with a $50,000 deductible. The Insurance carrier has confirmed that
the coverage was in effect and the loss will be covered unless an exclusion
applies or coverage terminated. Under the terms of the policy, the coverage
terminates as soon as any director or officer not in collusion with the
embezzler becomes aware of the defalcation. In that event, USB would be
entitled to recover only the amount of the defalcation up to the date of such
knowledge. This possibility exists here because the embezzler had a personal
relationship with the president of the bank who resigned approximately six
months before the defalcation was discovered. His termination had nothing to do
with the defalcation. To date, the bank is aware of no evidence indicating that
the president of the bank had any knowledge of the defalcation. Management
expects to recover $715,000 of the recorded loss from its insurance company
less the $50,000 insurance policy deductible. The remaining $145,000 is
interest expense due customers, which had been appropriately added to their
deposit balance. Earnings were $3,751,000 for the year ended December 31, 1995,
which included $651,000 from the net life insurance proceeds from the death of
a key employee.
Return on average assets and equity were 1.47% and 11.90%, respectively, for
fiscal 1996, as compared to 2.10% and 19.39%, respectively, for fiscal 1995.
Total assets increased 21% to $231,049,000 for the year ended December 31, 1996
from $191,578,000 as of December 31, 1995. Total loans increased 25% to
$178,420,000 from $143,252,000 the previous year-end. The increase in loans
resulted from an increase in loan demand throughout the two Banks service areas
and increased loan and lease activity for the two nonbank subsidiaries, USB
Mortgage and USB Leasing.
Return on assets and equity in 1995 were 1.67% and 15.36%, respectively before
the net life insurance proceeds described above. Equity was increased by $8.5
million in 1995 from the public offering completed in June. See Liquidity and
Capital Resources for further information.
Deposits increased 21% to $197,399,000 as of December 31, 1996 from
$163,791,000 the previous year. Noninterest bearing demand deposits increased
30% to $33,281,000 as of December 31, 1996.
NET INTEREST INCOME. The Company's net interest spread was 5.36% in 1996
compared to 5.27% and 5.37% in 1995 and 1994, respectively. The net interest
margin to average earning assets was 6.39%, 6.14%, and 5.99% for 1996, 1995,
and 1994, respectively. Net interest income increased 25% to $12,572,000 for
1996 from $10,042,000 the previous year.
23
<PAGE> 25
UNITED SECURITY BANCORPORATION
NONINTEREST INCOME AND EXPENSE. Noninterest income, which consists of service
charges, commissions, life insurance proceeds, and other income, decreased 21%
to $2,981,000 in 1996 compared to $3,765,000 the previous year. The decline
was due to $1,030,000 of life insurance proceeds received in 1995 described
above. Noninterest income was 9% higher in 1996 without the one-time gain for
the life insurance proceeds. Fees and service charges for banking services
increased by 25% in 1996. Noninterest expense increased 17% to $9,872,000
during 1996 compared to $8,414,000 in 1995. The Banks opened branches in
downtown Spokane and in Yakima in late 1995, also the mortgage and leasing
subsidiaries significantly increased activity during 1996. As described above
1996 noninterest expense was increased by $860,000 due to an operating loss.
In 1995 noninterest expense included $379,000 due to death benefit expense.
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 benefits 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 $191,578,000 for the year ended December 31, 1995
from $163,911,000 as of December 31, 1994. Total loans increased 17% to
$143,252,000 from $122,327,000 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 income 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 margin was 5.27% in 1995
compared to 5.37% in 1994. The net interest margin to average earning assets
was 6.14% and 5.99% for 1995 and 1994, respectively. Net interest income
increased 29% to $10,042,000 for 1995 from $7,768,000 the previous year.
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 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.
24
<PAGE> 26
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
capital stock. The Company's ability to incur indebtedness is limited by
government regulations and its ability to service borrowings is dependent upon
the availability of dividends from the Banks and nonbank subsidiaries. The
payment of dividends by the Banks is subject to limitations imposed by law and
governmental regulations.
The Banks may borrow on a short-term basis to compensate for reductions in
other sources of funds. Bank borrowings may also be used on a longer-term
basis to support expanded lending activities and to match the maturity of
repricing intervals of assets.
The Company's total stockholders' equity increased to $28,013,000 at December
31, 1996, from $24,863,000 at December 31, 1995 and $12,186,000 at December 31,
1994. At December 31, 1996, stockholders' equity was 12.12% of total assets,
compared to 12.96% at December 31, 1995. At December 31, 1996, the Company
held cash and cash-equivalent assets of $27.4 million. At such date, virtually
all of the Company's investment securities ($15 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, 1996. 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. The Company has 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.
25
<PAGE> 27
UNITED SECURITY BANCORPORATION
ITEM 7. FINANCIAL STATEMENTS
The consolidated financial statements of the Company and its subsidiaries for
the years ended December 31, 1996, 1995, and 1994, which have been audited by
McFarland and Alton, P.S., are included elsewhere in this report, beginning on
page 29. An index to such financial statements appears on page 28.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
During the years ended December 31, 1996, 1995, and 1994, 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.
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 1997 proxy statement, and is incorporated by reference
herein.
ITEM 10. EXECUTIVE COMPENSATION.
The information requested by this item is contained in the
registrant's 1997 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 1997 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 1997 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.
26
<PAGE> 28
UNITED SECURITY BANCORPORATION
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
UNITED SECURITY BANCORPORATION
By: /s/ William C. Dashiell
----------------------------------
William C. Dashiell, its
President and Chief Executive Officer
Date: March 18, 1997
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>
<S> <C>
By: /s/ David C. Blankenship By: /s/ Chad Galloway
------------------------------ ---------------------------------------
David C. Blankenship, Director Chad Galloway, Vice President and
Date: March 18, 1997 Chief Financial Officer
Date: March 18, 1997
By: /s/ Rand Elliott By: /s/ James L. Moe
------------------------------ ---------------------------------------
Rand Elliott, Director James L. Moe, Director
Date: March 18, 1997 Date: March 18, 1997
By: /s/ Robert J. Gardner By: /s/ Keith P. Sattler
------------------------------- ---------------------------------------
Robert J. Gardner, Director Keith P. Sattler, Director
Date: March 18, 1997 Date: March 18, 1997
By: /s/ Robert L. Golob By: /s/ Dann Simpson
------------------------------ ---------------------------------------
Robert L. Golob, Director Dann Simpson, Director
Date: March 18, 1997 Date: March 18, 1997
By: /s/ Stanley W. Horton By: /s/ Norman J. Traaen
------------------------------ ------------------------------
Stanley W. Horton, Director Norman J. Traaen, Director
Date: March 18, 1997 Date: March 18, 1997
</TABLE>
27
<PAGE> 29
UNITED SECURITY BANCORPORATION
TABLE OF CONTENTS
INDEPENDENT AUDITOR'S REPORT ON CONSOLIDATED
FINANCIAL STATEMENTS 29
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF CONDITION 30
CONSOLIDATED STATEMENTS OF INCOME 31
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY 32
CONSOLIDATED STATEMENTS OF CASH FLOWS 33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 34 - 56
28
<PAGE> 30
UNITED SECURITY BANCORPORATION
Independent Auditor's Report
Board of Directors and Shareholders
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, 1996 and
1995, and the related consolidated statements of income, changes in
stockholders' equity, and cash flows for the years ended December 31, 1996,
1995, and 1994. These consolidated financial statements are the responsibility
of the Corporation's management. Our responsibility is to express an opinion
on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of United Security
Bancorporation and subsidiaries as of December 31, 1996 and 1995, and the
results of its operations, changes in stockholders' equity, and its cash flows
for the years ended December 31, 1996, 1995 and 1994, 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 impaired loans effective
January 1, 1995, to conform with Statement of Financial Accounting Standards
Nos. 114 and 118, and its method of accounting for impairment of long-lived
assets and long-lived assets to be disposed of effective January 1, 1996, to
confirm with statement of Financial Standard No. 121.
February 26, 1997
except for note 21 as to
which the date is March 7, 1997
Spokane, Washington /s/ McFarland & Alton, P.S.
29
<PAGE> 31
UNITED SECURITY BANCORPORATION
CONSOLIDATED STATEMENTS OF CONDITION
DECEMBER 31, 1996 AND 1995
($ In thousands)
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
ASSETS
Cash and due from banks $10,430 $7,889
Overnight interest bearing deposits with other banks 6,223 4,337
Federal funds sold 10,770 3,355
-------- --------
Cash and cash equivalents (Note 3) 27,423 15,581
Securities (Note 4) 15,613 22,401
Loans, net of allowance for loan losses of $2,034 in 1996 and
$1,391 in 1995 (Notes 2, 5, 13, and 17) 176,386 141,861
Accrued interest receivable 2,108 1,635
Premises and equipment, net (Notes 6 and 11) 6,117 6,383
Foreclosed real estate 205 370
Life insurance and salary continuation assets (Note 7) 2,311 2,315
Other assets (Note 8) 886 1,032
-------- --------
TOTAL ASSETS $231,049 $191,578
======== ========
LIABILITIES
Noninterest bearing - demand deposits $33,281 $25,643
Interest bearing deposits:
NOW and savings accounts 80,735 59,044
Time, $100,000 and over (Note 9) 24,554 21,693
Other time (Notes 9 and 11) 58,829 57,411
-------- --------
TOTAL DEPOSITS (Note 17) 197,399 163,791
Note payable (Note 10) 2,491
Capital lease obligations (Note 11) 751 767
Accrued interest payable 630 580
Other liabilities (Note 7) 1,765 1,577
-------- --------
TOTAL LIABILITIES 203,036 166,715
Commitments and contingencies (Notes 11, 20 and 21)
STOCKHOLDERS' EQUITY
Common stock, no par, shares authorized 15 million in 1996, 5 million in 1995;
issued and outstanding 3,682,341 in 1996 and 3,332,310 in 1995 (Note 12) 21,001 20,837
Retained earnings (Note 13) 7,276 4,114
Net unrealized loss on securities available-for-sale,
net of tax of $136 in 1996 and $45 in 1995 (Note 4) (264) (88)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 28,013 24,863
-------- --------
TOTAL LIABILITIES and STOCKHOLDERS' EQUITY $231,049 $191,578
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
30
<PAGE> 32
UNITED SECURITY BANCORPORATION
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
($ In thousands, except per share amounts)
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $18,765 $14,976 $11,231
Interest on securities 1,246 1,647 905
Other Interest Income 708 433 251
-------- -------- --------
TOTAL INTEREST INCOME 20,719 17,056 12,387
-------- -------- --------
INTEREST EXPENSE
Interest on deposits 7,850 6,901 4,427
Interest on notes and capital leases 297 113 192
-------- -------- --------
TOTAL INTEREST EXPENSE 8,147 7,014 4,619
-------- -------- --------
NET INTEREST INCOME 12,572 10,042 7,768
Provision for loan losses (Note 5) 1,006 317 585
-------- -------- --------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 11,566 9,725 7,183
-------- -------- --------
NONINTEREST INCOME
Fees and service charges 1,109 887 758
Insurance commissions 1,200 1,255 1,160
Securities gains, net 53 53 4
Life insurance proceeds (Note 7) 1,030
Other 619 540 336
-------- -------- --------
TOTAL NONINTEREST INCOME 2,981 3,765 2,258
-------- -------- --------
NONINTEREST EXPENSE
Salaries and employee benefits 5,960 4,980 3,875
Occupancy expense, net 618 488 268
Equipment expense 701 579 657
Operational loss (Note 20) 860
Death benefit expense (Note 7) 379
Amortization on noncompete agreements 23 75 172
FDIC assessments 4 209 291
State business and occupation tax 279 251 189
Other operating expense 1,427 1,453 994
-------- -------- --------
TOTAL NONINTEREST EXPENSE 9,872 8,414 6,446
-------- -------- --------
INCOME BEFORE INCOME TAX EXPENSE 4,675 5,076 2,995
FEDERAL INCOME TAX EXPENSE (Note 8) 1,513 1,325 1,017
-------- -------- --------
NET INCOME $3,162 $3,751 $1,978
======== ======== ========
Earnings per common share $0.86 $1.20 $1.01
Weighted average shares outstanding (Note 12) 3,675,283 3,128,638 1,953,682
</TABLE>
The accompanying notes are an integral part of these statements.
31
<PAGE> 33
UNITED SECURITY BANCORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
($ in thousands)
<TABLE>
<CAPTION>
NET
UNREALIZED
COMMON STOCK RETAINED GAINS ESOP
SHARES AMOUNT EARNINGS (LOSSES) GUARANTEE TOTAL
<S> <C> <C> <C> <C> <C>
Balances, January 1, 1994 516,551 $5,509 $3,238 ($29) ($75) $8,643
January 1, 1994 adoption of SFAS No. 115,
net of taxes 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 (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) 1,150,000 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 460 460
Net income for 1995 3,751 3,751
10% stock split-up on February 5, 1996 (Note 12) 302,456
-------------------------------------------------------------------------
Balances, December 31, 1995 3,332,310 20,837 4,114 (88) 24,863
Common stock issued for options
exercised (Note 15) 15,720 171 171
Redemption of fractional shares (7) (7)
Net change in unrealized loss on available-for-sale
securities, net of taxes (176) (176)
Net income for 1996 3,162 3,162
10% stock split-up on February 25, 1997 (Note 12) 334,311
-------------------------------------------------------------------------
Balances, December 31, 1996 3,682,341 $21,001 $7,276 ($264) $0 $28,013
=========================================================================
</TABLE>
The accompanying notes are an integral part of these statements.
32
<PAGE> 34
UNITED SECURITY BANCORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
($ in thousands)
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $3,162 $3,751 $1,978
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 1,006 317 585
Depreciation and amortization 507 462 433
Amortization and accretion of securities 10 51 139
Gain on sale of premises and equipment (4) (1)
Deferred income taxes 144 34 (132)
Gain on sale of other real estate (35)
(Increase) decrease in assets:
Accrued interest receivable (473) (156) (544)
Life insurance and salary continuation assets 4 (402) (1,913)
Other assets 92 (24) 16
Increase/(decrease) in liabilities:
Accrued interest payable 50 226 150
Other liabilities 188 1,105 (386)
--------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 4,690 5,325 325
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available-for-sale:
Maturities 8,436 3,535 6,572
Sales 7,215 11,745 2,240
Purchases (8,898) (13,570) (13,075)
Securities held-to-maturity:
Maturities 25 10 170
Purchases (266) (340)
Net increase in loans and leases (35,731) (21,391) (33,879)
Purchases of premises and equipment (241) (1,777) (1,825)
Proceeds from sale of premises and equipment 32 5
Proceeds from foreclosed real estate sales 365 191 333
--------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES (29,095) (21,565) (39,459)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 33,608 17,162 32,491
Federal funds purchased (2,725) 2,725
Proceeds from note payable 2,529
Principal payments on notes payable (38) (485) (236)
Principal payments on capital lease obligations (16) (38) (57)
Proceeds from issuance of capital stock 171 8,455 2,180
Cash paid for redemption of fractional shares (7) (9) (10)
Cash dividends paid (141)
--------- --------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 36,247 22,360 36,952
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 11,842 6,120 (2,182)
Cash and cash equivalents at January 1 15,581 9,461 11,643
--------- --------- ---------
Cash and cash equivalents at December 31 $27,423 $15,581 $9,461
========= ========= =========
Interest paid $8,242 $6,788 $4,469
Income taxes paid $1,633 $1,168 $1,441
Supplemental Schedule of Noncash Investing and Financing Activities
Foreclosed real estate acquired in settlement of loans $210 $326 $66
</TABLE>
The accompanying notes are an integral part of these statements.
33
<PAGE> 35
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 principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of certain assets and liabilities as of the date of the
statement of financial condition and certain revenues and expenses for the
period. Actual results could differ, either positively or negatively, from
those estimates.
Material estimates that are particularly susceptible to significant change in
the near-term relate to the determination of the allowance for loan losses and
the valuation of real estate acquired in connection with foreclosures or in the
satisfaction of loans. In connection with the determination of the allowance
for loan losses and other real estate owned, management obtains independent
appraisals for significant properties.
Management believes that the allowances for loan losses and other real estate
owned are adequate. While management uses currently available information to
recognize losses on loans and other real estate owned, future additions to the
allowances may be necessary based on changes in economic conditions. In
addition, various regulatory agencies, as an integral part of their examination
process, periodically review the Corporation's allowance for loan losses and
other real estate owned. Such agencies may require the Corporation to
recognize additions to the allowances based on their judgments of information
available to them at the time of their examination.
SECURITIES:
Most of the securities are classified available-for-sale. Securities
available-for-sale consist of debt and marketable equity securities. Debt
securities consist primarily of obligations of the U.S. government, state
governments and domestic corporations.
34
<PAGE> 36
UNITED SECURITY BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Marketable equity securities consist primarily of mutual funds whose portfolios
consist primarily of U.S. Government backed debt securities. Unrealized
holding gains and losses, net of tax, on available-for-sale securities are
excluded from earnings and reported as a net amount in a separate component of
stockholders' equity until realized. Gains and losses on the sale of
available-for-sale securities are determined using the specific-identification
method. Premiums and discounts are recognized in interest income using the
effective interest method.
Securities held-to-maturity 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.
The accrual of interest on impaired loans is discontinued when, in management's
opinion, the borrower may be unable to meet payments as they become due. When
interest accrual is discontinued, all unpaid interest is reversed. Interest
income is subsequently recognized only to the extent cash payments are
received.
An allowance for probable losses on loans is maintained at a level deemed by
management to be adequate to provide for potential loan losses through charges
to operating expense. The allowance is based upon a continuing review of
loans, which includes consideration of actual net loan loss experience, changes
in the size and character of the loan portfolio, identification of individual
problem situations which may affect the borrower's ability to repay, and
evaluation of current economic conditions. Loan losses are recognized through
charges to the allowance.
OTHER REAL ESTATE:
Real estate properties acquired through, or in lieu of, loan foreclosure are to
be sold and are initially recorded at fair value at the date of foreclosure
establishing a new cost basis. After foreclosure, valuations are periodically
performed by management and the real estate is carried at the lower of carrying
amount or fair value less cost to sell. Revenue and expenses from operations
and changes in the valuation allowance were insignificant at December 31, 1996
and 1995.
35
<PAGE> 37
UNITED SECURITY BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PREMISES AND EQUIPMENT:
Land is carried at cost. Premises and equipment are stated at cost less
accumulated depreciation over estimated useful lives, which range from 3 to 31
years. Depreciation expense is computed using primarily the straight-line
method for financial statement purposes. Accelerated depreciation methods are
used for federal income tax purposes. Normal costs of maintenance and repairs
are charged to expense as incurred.
INTANGIBLES:
Intangible assets acquired in the form of goodwill, customer lists and
covenants to not compete are being amortized using the straight-line method
over five to eight years.
INCOME TAXES:
The Corporation and its subsidiaries file a consolidated federal income tax
return. The income tax related to the individual entities is generally
computed as if each one had filed a separate tax return and is based on amounts
reported in the statements of income (after exclusion of non-taxable permanent
differences such as interest on state and municipal securities) and include
deferred taxes on temporary differences in the recognition of income and
expense for tax and financial statement purposes. Deferred taxes are computed
using the asset and liability approach as prescribed in Statement No. 109,
Accounting for Income Taxes.
PER SHARE AMOUNTS:
All per share amounts have been calculated on the basis of weighted average
number of shares outstanding during each year. All share and per share amounts
have been adjusted giving retroactive effect to stock splits, stock split-ups,
and stock dividends.
CASH EQUIVALENTS:
For the purposes of presentation in the consolidated financial statements of
cash flows, cash and cash equivalents include cash on hand, amounts due from
banks, certificates of deposit and bankers acceptances with original maturities
of 90 days or less, federal funds sold and overnight deposits with other banks.
Generally, federal funds are purchased and sold for one-day periods.
STOCK OPTIONS:
Employee stock options are accounted for under Accounting Principle Board
Opinion (APB) No. 25, Accounting for Stock Issued to Employees. Stock options
are granted at exercise prices not less than the fair market value of common
stock on the date of grant. Under APB No. 25, no compensation expense is
recognized pursuant to the Corporation's stock options plans. The Corporation
has disclosed the proforma amounts of net income and earnings per share that
would have been reported had it elected to follow the fair value recognition
provisions of SFAS No. 123 (Note 15).
36
<PAGE> 38
UNITED SECURITY BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECLASSIFICATIONS:
Certain reclassifications of December 31, 1995 and 1994 balances have been made
to conform with the December 31, 1996 presentation; there was no impact on net
income, earnings per share or stockholders' equity as previously reported.
RECENT ACCOUNTING PRONOUNCEMENTS:
In 1996, the Financial Accounting Standards Board (FASB) issued statement No.
125, Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities. This statement provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities. Those standards are based on consistent
application of a financial-components approach that focuses on control. Under
that approach, after a transfer of financial assets, an entity recognizes the
financial and servicing assets it controls and the liabilities it has incurred.
This statement provides consistent standards for distinguishing transfers of
financial assets that are sales from transfers that are secured borrowings.
This statement is effective January 1, 1997. Management does not believe that
adoption of this statement will have a material impact on its financial
condition or results of operations.
NOTE 2. ACCOUNTING CHANGES
In 1995, the Corporation adopted Statement of Financial Accounting Standards
(SFAS) No. 114, Accounting by Creditors for Impairment of a Loan, as amended by
SFAS 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. Additional other loans are also classified as impaired when in
the opinion of management they may become nonaccrual and/or greater than 90
days or more delinquent. 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.
In 1996, the Corporation formally adopted SFAS No. 121, Accounting for
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of. This
statement addresses situations where information indicates that a company might
be unable to recover, through future operations or sales, the carrying amount
of long-lived assets and certain identifiable intangible assets and goodwill.
Under this statement impairment is measured based on the present value of
expected cash flows from the assets and its eventual disposition.
37
<PAGE> 39
UNITED SECURITY BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 1996 and 1995 were
approximately $230,000 and $274,000, respectively. The average amounts of
federal funds sold and overnight interest bearing deposits with other banks for
the years ended December 31, 1996 and 1995, were $13,395,000 and $4,390,000,
respectively. Similarly, averages of federal funds purchased were $105,000 and
$59,000, for 1996 and 1995, respectively. The balance of federal funds
purchased at December 31, 1996 and 1995 was $0.
NOTE 4. SECURITIES
Debt and equity securities have been classified according to management's
intent. The amortized cost of securities and their fair values at December 31
were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 Gross Gross
($ in thousands) Amortized Unrealized Unrealized Fair Financial
Cost Gains Losses Value Statements
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE-FOR-SALE:
U.S. Treasury securities $500 $0 $0 $500 $500
Obligations of federal government
agencies 1,800 (1) 1,799 1,799
Obligations of states, municipalities
and political subdivisions 3,250 (151) 3,099 3,099
Mortgage backed securities 6,395 23 (70) 6,348 6,348
Other securities 3,463 (201) 3,262 3,262
--------- --------- --------- --------- ---------
15,408 23 (423) 15,008 15,008
SECURITIES HELD-TO-MATURITY:
Obligations of states, municipalities
and political subdivisions 605 10 (4) 611 605
--------- --------- --------- --------- ---------
Total $16,013 $33 ($427) $15,619 $15,613
========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995 Gross Gross
($ in thousands) Amortized Unrealized Unrealized Fair
Cost Gains Losses Value Total
<S> <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
--------- --------- --------- --------- ---------
22,169 122 (255) 22,036 22,036
SECURITIES HELD-TO-MATURITY:
Obligations of states, municipalities
and political subdivisions 365 9 374 365
--------- --------- --------- --------- ---------
Total $22,534 $131 ($255) $22,410 $22,401
========= ========= ========= ========= =========
</TABLE>
38
<PAGE> 40
UNITED SECURITY BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. SECURITIES (CONTINUED)
Securities taxable interest income was $951,000, $1,567,000, and $842,000 for
1996, 1995 and 1994, respectively. Securities nontaxable interest income was
$208,000, $13,000 and $3,000 for 1996, 1995, and 1994, respectively. Dividend
income was $87,000, $67,000, and $60,000 for 1996, 1995, and 1994,
respectively.
Securities with an amortized cost of $3,645,000 and $3,574,000 at December 31,
1996 and 1995, respectively, were pledged to secure public deposits for
purposes required or permitted by law. Market value of these securities was
$3,596,000 and $3,595,000 at December 31, 1996 and 1995, respectively.
Included in other securities are marketable equity securities with amortized
costs totaling $2,292,000 and $2,142,000, and market values of $2,091,000 and
$1,982,000 at December 31, 1996 and 1995, respectively. Also included in other
securities is $1,167,000 in 1996 and $1,054,000 in 1995 of Federal Home Loan
Bank (FHLB) Stock, which can be sold back to the Federal Home Loan Bank at
cost, but is restricted as to purchase and sale based on the level of business
activity the Corporation has with the FHLB.
Gross realized gains on securities available for sale were $54,000, $93,000,
and $24,000 for 1996, 1995, and 1994, respectively. Gross realized losses were
$1,000, $40,000, and $20,000 for 1996, 1995, and 1994, respectively.
The contractual scheduled maturity of securities held-to-maturity and
securities available-for-sale at December 31, 1996 were as follows:
<TABLE>
<CAPTION>
Available-for-Sale Held-to-Maturity
Amortized Fair Amortized Fair
($ in thousands) Cost Value Cost Value
<S> <C> <C> <C> <C>
Due in one year or less $3,463 $3,262 $35 $35
Due from one year to five years 800 799 125 127
Due from five to ten years 4,750 4,599 180 189
Due after ten years 265 260
Mortgage backed securities 6,395 6,348
--------- --------- --------- ---------
$15,408 $15,008 $605 $611
========= ========= ========= =========
</TABLE>
Expected maturities will differ from contractual maturities because the issues
of certain debt securities have the right to call or prepay their obligations
without any penalties.
39
<PAGE> 41
UNITED SECURITY BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. LOANS AND ALLOWANCE FOR LOAN LOSSES
Loan categories as of December 31, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
($ in thousands) 1996 1995
<S> <C> <C>
Commercial and industrial $97,086 $75,011
Agricultural 25,621 19,787
Real estate mortgage 29,318 25,048
Real estate construction 9,954 10,169
Installment 10,527 9,234
Lease financing 3,038 1,336
Bank cards and other 3,384 3,172
--------- ---------
Total loans 178,928 143,757
Allowance for loan losses (2,034) (1,391)
Deferred loan fees, net of deferred costs (508) (505)
--------- ---------
Net loans $176,386 $141,861
========= =========
</TABLE>
Variable rate loans were $78,683,000 and $64,324,000 as of December 31, 1996
and 1995, respectively. Remaining loans were fixed rate loans.
Changes in the allowance for loan losses are as follows:
<TABLE>
<CAPTION>
($ in thousands) 1996 1995 1994
<S> <C> <C> <C>
Balance, beginning of year $1,391 $1,246 $802
Provision charged to operations 1,006 317 585
Loans charged-off (372) (190) (148)
Recoveries 9 18 7
--------- --------- ---------
Balance, end of year $2,034 $1,391 $1,246
========= ========= =========
</TABLE>
40
<PAGE> 42
UNITED SECURITY BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. LOANS AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)
A summary of loans by contractual maturity as of December 31, 1996 and 1995 is
as follows:
<TABLE>
<CAPTION>
($ in thousands) 1996 1995
<S> <C> <C>
Maturity within one year $66,703 $47,066
One to five years 69,390 65,503
Over five years 42,835 31,188
--------- ---------
$178,928 $143,757
========= =========
</TABLE>
Impaired loan information as of December 31, 1996 and 1995:
<TABLE>
<CAPTION>
($ in thousands) 1996 1995
<S> <C> <C>
Impaired loans with specific allowance for loan losses $987 $176
Impaired loans without a specific allowance for loan losses 1,513 1,178
--------- ---------
Total impaired loans $2,500 $1,354
========= =========
Impaired loans allowance for loan losses $234 $104
Average impaired loans 1,409 956
Interest income recognized for impaired loans 182 31
</TABLE>
NOTE 6. PREMISES AND EQUIPMENT
Major classifications of premises and equipment are summarized as of December
31, 1996 and 1995 as follows:
<TABLE>
<CAPTION>
($ in thousands) 1996 1995
<S> <C> <C>
Premises, including premises under capital lease,
1996 and 1995 $802 (Note 11) $4,466 $4,447
Equipment 2,583 2,391
Leasehold improvements 46 39
--------- ---------
7,095 6,877
Less accumulated depreciation, including accumulated
amortization on assets under capital lease,
1996 $241; 1995 $201 (3,005) (2,521)
--------- ---------
4,090 4,356
Land 2,027 2,027
--------- ---------
Premises and equipment, net $6,117 $6,383
========= =========
</TABLE>
41
<PAGE> 43
UNITED SECURITY BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. LIFE INSURANCE AND SALARY CONTINUATION PLAN
United Security Bank and Home Security Bank maintain salary continuation plans
for the benefit of certain of their directors, executive officers and other key
employees. The plan became effective in 1994 and provides for monthly payments
to such persons, or their designated beneficiaries, for a period of ten years
following retirement at age 65, or death prior to retirement. Amounts payable
to eligible participants are determined by reference to such person's salary or
directors' fee as of the date of each such person's agreement under the plan.
The plan is generally available to most directors, executive officers and other
key employees of the Banks, and vests according to years of service. Persons
employed by the Banks for at least six continuous years following the effective
date of the plan are deemed vested with respect to 20% of the salary
continuation benefits available to them, and become vested in an additional 20%
of such benefits for each succeeding year of employment thereafter until the
employee becomes fully vested. Eligible persons employed by the Banks for at
least ten continuous years prior to the effective date of the plans are deemed
fully vested. The Banks' obligations under the salary continuation plan are
funded by prepaid policies of universal life insurance covering the lives of
the plan participants. The Banks are the beneficiaries of the life insurance
policies.
Cash surrender values, salary continuance benefit obligations at age 65, and
the recorded liability were as follows as of December 31, 1996 and 1995:
<TABLE>
<CAPTION>
($ in thousands) 1996 1995
<S> <C> <C>
Cash surrender value $2,311 $2,315
Present value at age 65 of all participants after full vesting is obtained 1,653 2,294
Present value at age 65 of the current fully vested participants 597 597
Recorded liability for future benefit obligation 216 144
</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.
The unpaid portion of the death benefit expense was $248,000 and $278,000 as of
December 31, 1996 and 1995, respectively. These amounts and the recorded
liability for the future benefit obligation disclosed above have been accrued
and are included with other liabilities on the statements of condition.
42
<PAGE> 44
UNITED SECURITY BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. FEDERAL INCOME TAXES
The components of federal income tax expense for the years presented are as
follows:
<TABLE>
<CAPTION>
($ in thousands) 1996 1995 1994
<S> <C> <C> <C>
Current expense $1,369 $1,291 $1,149
Deferred tax expense (credit) 144 34 (132)
--------- --------- ---------
Federal income tax expense $1,513 $1,325 $1,017
========= ========= =========
</TABLE>
The effective tax rate differs from the statutory federal tax rate as follows:
<TABLE>
<CAPTION>
($ in thousands) 1996 1995 1994
<S> <C> <C> <C>
Federal Income tax at statutory rates $1,590 $1,726 $1,009
Effect of tax-exempt life insurance proceeds (357)
Effect of tax-exempt interest income (76) (13) (9)
Effect of nondeductible expenses and other (1) (31) 17
--------- --------- ---------
Federal income tax expense $1,513 $1,325 $1,017
========= ========= =========
</TABLE>
The following are the significant components of deferred tax assets and
liabilities. The net amount is classified with other other assets in the
consolidated financial statements:
<TABLE>
<CAPTION>
($ in thousands) 1996 1995
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $441 $238
Unrealized losses on available-for-sale securities 136 45
Deferred compensation expense 84 94
Other 18
--------- ---------
Total deferred tax assets 661 395
--------- ---------
Deferred tax liabilities:
Deferred loan fees 306 153
Lease financing 166 71
FHLB stock dividend income 105
Other 79 11
--------- ---------
Total deferred tax liabilities 656 235
--------- ---------
--------- ---------
Net deferred tax assets $5 $160
========= =========
</TABLE>
The applicable tax expense, net for securities gains and losses was $18,000,
$18,000, and $1,000 for 1996, 1995, and 1994, respectively.
43
<PAGE> 45
UNITED SECURITY BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. TIME DEPOSIT MATURITIES
At December 31, 1996, the scheduled maturities of time deposits were as
follows:
<TABLE>
<CAPTION>
($ in thousands)
<S> <C>
1997 $76,452
1998 5,111
1999 931
2000 343
2001 391
Later years 155
---------
Total $83,383
=========
</TABLE>
NOTE 10. NOTE PAYABLE
The note payable as of December 31, 1996 consists of a borrowing by United
Security Bancorporation from an outside bank for five years to finance the
purchase of real estate from its Bank subsidiaries. The debt provides for
monthly payments of $23,000 including interest at 8.75%. The debt reprices
annually at prime plus .25%. At December 31, 1996 the scheduled maturities
were as follows:
<TABLE>
<CAPTION>
($ in thousands)
<S> <C>
1997 $45
1998 50
1999 55
2000 61
2001 2,280
---------
Total $2,491
=========
</TABLE>
NOTE 11. COMMITMENTS AND CONTINGENT LIABILITIES
In the ordinary course of business, the Corporation has various outstanding
commitments and contingent liabilities that are not reflected in the
accompanying consolidated financial statements. In addition, the Corporation
is a defendant in certain claims and legal actions arising in the ordinary
course of business. In the opinion of management, after consultation with
legal counsel, the ultimate disposition of these matters is not expected to
have a material adverse effect on the consolidated financial condition of the
Corporation.
Lease commitments:
During 1990, United Security Bank sold the land and buildings occupied by two
of its branches. The Bank has leased the real estate back for a term of 20
years and continues to operate the branches at these same sites. The leases
have been treated as capital leases (Note 6). The associated gain created by
this transaction, amounting to $358,000, has been deferred and is being
amortized using the straight-line method over the term of the lease. This
deferred gain is included in other liabilities. At December 31,
44
<PAGE> 46
UNITED SECURITY BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11. COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
1996 and 1995, the deferred gain net of amortization was $261,000 and $279,000,
respectively. Amortization of capital leases is included in depreciation
expense.
The minimum annual rental commitments on capital and operating leases at
December 31, 1996, exclusive of taxes and other charges, are summarized as
follows:
<TABLE>
<CAPTION>
($ in thousands)
<S> <C>
1997 $172
1998 172
1999 172
2000 162
2001 163
Later years 1,213
---------
Total minimum payments due 2,054
Less: Amount representing interest (690)
---------
Present value of net minimum lease payments $1,364
=========
</TABLE>
One of the Banks leases a branch facility under a ten year operating lease with
an additional ten year option from a Partnership partially owned by certain
Directors. Total rental expense on operating leases amounted to $80,000,
$32,000, and $0 for 1996, 1995, and 1994, respectively (Note 17).
Other commitments and contingent liabilities:
The Corporation is a party to financial instruments with off-statement of
condition risk in the normal course of business to meet the financing needs of
its customers and to reduce its own exposure to fluctuations in interest rates.
These financial instruments include commitments to extend credit, standby
letters of credit and financial guarantees. Those instruments involve, to
varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the statement of condition. The contract or notional
amounts of those instruments reflect the extent of involvement the Corporation
has in particular classes of financial instruments.
The Corporation's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit and financial guarantees written is represented by
the contractual notional amount of those instruments. The Corporation uses the
same credit policies in making commitments and conditional obligations as it
does for statement of condition instruments. Unless noted otherwise, the
Corporation does not require collateral or other security to support financial
instruments with credit risk.
45
<PAGE> 47
UNITED SECURITY BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11. COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
<TABLE>
<CAPTION>
Contract or
Notional Amount
($ in thousands) 1996 1995
<S> <C> <C>
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit $28,239 $26,936
Standby letters of credit and financial guarantees written 1,989 1,441
Unused commitments on bankcards 4,648 4,355
--------- ---------
TOTAL $34,876 $32,732
========= =========
</TABLE>
The Corporation does not anticipate any material losses as a result of the
commitments or guarantees.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected
to expire without being drawn upon, the total commitment amount does not
necessarily represent future cash requirements. The Corporation evaluates each
customer's creditworthiness on a case-by-case basis. The amount of collateral
obtained if deemed necessary by the Corporation upon extension of credit is
based on management's credit evaluation of the counterparty. Collateral held
varies but may include accounts receivable, inventory, property, plant and
equipment and income producing commercial properties.
Standby letters of credit and financial guarantees written are conditional
commitments issued by the Corporation to guarantee the performance of a
customer of a third party. Those guarantees are primarily issued to support
public and private borrowing arrangements, including commercial paper, bond
financing and similar transactions. The credit risk involved in issuing
letters of credit is essentially the same as that involved in extending loan
facilities to customers.
All the Banks' loans, commitments, and commercial and standby letters of credit
have been granted to customers in the Banks' market area. As such, significant
changes in economic conditions in the State of Washington or within its primary
industries could adversely effect the 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 $3,052,000 and $1,000,000 for United Security Bank and Home Security
Bank, respectively.
As of December 31, 1996 and 1995, the Banks had unused lines of credit of
$34,618,000 and $27,697,000, respectively. The lines were available for
short-term and long-term borrowings.
46
<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 SPLIT, STOCK SPLIT-UP, AND STOCK DIVIDENDS:
In January, 1996 and on January 28, 1997 the Board of Directors declared 10%
common stock dividends in the form of split-ups. The intent of the stock
split-ups was to obtain a reduction in the unit market price of shares and to
obtain wider distribution and improved marketability of the stock. No transfer
from retained earnings to capital stock was recorded. In July, 1995; January,
1995; and January, 1994, the Board of Directors declared stock dividends of
10%, 10%, and 15%, respectively. The Corporation recorded a transfer from
retained earnings to common stock for the value of the additional shares
issued. 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 the stock split, stock split-ups and stock dividends.
47
<PAGE> 49
UNITED SECURITY BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 1996 and 1995, the amount of retained earnings of United Security
Bank, available for dividends, amounted to $5,762,000 and $3,201,000,
respectively. Home Security Bank had $426,000 and $882,000 available for
dividends at December 31, 1996 and 1995, 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.
NOTE 14. EMPLOYEE STOCK OWNERSHIP PLAN (ESOP) AND PROFIT SHARING 401(K) PLAN
United Security Bancorporation sponsors an ESOP. An ESOP plan is a form of
retirement plan whereby the Corporation receives a deduction for contributions
to the Plan and the Plan invests all or a portion of the employer Trust
contributions and Trust earnings in stock of the Corporation. The Plan is
qualified under Section 401(a) of the Internal Revenue Code as a stock bonus
plan. Employees 21 years or older become eligible for participation after
1,000 hours or more of service in a plan year, and benefits fully vest after
five years of service. Contributions to the ESOP plan totaled $185,000,
$146,000 and $122,000 for 1996, 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.
The Corporation has a Profit Sharing 401(k) Plan. There were no employer
contributions in 1996, 1995 and 1994 to the plan.
48
<PAGE> 50
UNITED SECURITY BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15. STOCK OPTION PLAN
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. In 1996, the Plan
was amended to increase the number of shares that may be issued pursuant to the
exercise of options granted to the lesser of 8% of the common stock then
outstanding or 300,000 shares. A Board of Directors Compensation Committee and
an Executive Remuneration Committee were formed to direct the granting of the
options.
In November, 1995, 83,840 common stock options were granted to identified
directors and executive officers. After retroactive effect of stock dividends
and split-ups, the option price at December 31, 1996 was $9.82. The options
were granted for a five year term from the date of option and may be exercised
anytime prior to that date, subject to conditions prescribed in the Proxy
Statement of the May 24, 1995 Annual Meeting of United Security Bancorporation.
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.
The status of the Plan as of December 31, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
1996 1995
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
<S> <C> <C> <C> <C>
Outstanding at beginning of year 83,840 10.91
Granted 83,840 12.12
Exercised (15,720) 10.91
Forfeited (10,776)
--------- ---------
Outstanding and exercisable at year-end 57,344 9.82 83,840 10.91
========= =========
Weighted average fair value of options granted
during the year 5.02
</TABLE>
The following table summarizes information about stock options outstanding and
exercisable at December 31, 1996:
<TABLE>
<S> <C>
Exercise price $9.82
Options outstanding and exercisable:
Number outstanding at end of year 57,344
Weighted average remaining contractual life 3.8 years
Weighted average exercise price $9.82
</TABLE>
49
<PAGE> 51
UNITED SECURITY BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15. STOCK OPTION PLAN (CONTINUED)
If the fair value based method of accounting per SFAS No. 123 had been used for
1996 and 1995 the results and assumptions would have been as follows:
<TABLE>
<CAPTION>
( $ in thousands, except per share) 1996 1995
<S> <C>
Results using fair value based method of accounting:
Net income $3,198 $3,473
Earnings per share $.87 $1.11
Assumptions used to make the fair value calculation:
Risk free interest rate 5.60% 5.60%
Expected volatility 29.97% 29.97%
Expected cash dividends 0% 0%
Expected stock option life 4.8 years 4.8 years
</TABLE>
NOTE 16. PARENT COMPANY ONLY STATEMENTS
The following are the condensed statements of condition, income, and cash flows
for the parent company only, United Security Bancorporation. These statements
are presented using the equity method of accounting; therefore, accounts of the
subsidiaries have not been included. Intercompany transactions and balances
have not been eliminated. The following information should be read in
conjunction with the other notes to the consolidated financial statements.
Condensed Statements of Condition
($ in thousands)
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1995
<S> <C> <C>
Cash $2,470 $3,375
Investment securities 803
Investment in and advances to:
Bank subsidiaries 20,323 17,748
Nonbank subsidiaries 3,322 1,998
Premises and equipment 4,596 905
Other assets 67 113
--------- ---------
TOTAL ASSETS $30,778 $24,942
========= =========
Note payable (Note 10) $2,491
Accrued expenses and other liabilities 274 $79
Stockholders' equity 28,013 24,863
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $30,778 $24,942
========= =========
</TABLE>
50
<PAGE> 52
UNITED SECURITY BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16. PARENT COMPANY ONLY STATEMENTS (CONTINUED)
Condensed Statements of Income
($ in thousands, except per share)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1996 1995 1994
<S> <C> <C> <C>
Income:
Dividends:
Bank subsidiaries $647 $667 $556
Nonbank subsidiaries 23
Rent income 470 8
Other income 200 191 21
--------- --------- ---------
1,317 866 600
--------- --------- ---------
Expenses:
Salaries and benefits 701 513 338
Interest expense 216
Depreciation 169 12 3
Other operating expenses 277 151 111
--------- --------- ---------
1,363 676 452
--------- --------- ---------
Income/(loss) before tax benefit and equity in
undistributed net income of subsidiaries (46) 190 148
Income tax benefit 241 155 151
--------- --------- ---------
Income before equity in undistributed net income of
subsidiaries 195 345 299
Equity in undistributed net income (loss) of:
Bank subsidiaries 2,751 3,446 1,758
Nonbank subsidiaries 216 (40) (79)
--------- --------- ---------
Net income $3,162 $3,751 $1,978
========= ========= =========
Net income per common share $0.86 $1.20 $1.01
========= ========= =========
</TABLE>
51
<PAGE> 53
UNITED SECURITY BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16. PARENT COMPANY ONLY STATEMENTS (CONTINUED)
Condensed Statements of Cash Flows
($ in thousands)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1996 1995 1994
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $3,162 $3,751 $1,978
Adjustments to reconcile net income to cash provided
by operating activities:
Equity in undistributed net income of subsidiaries (2,967) (3,406) (1,679)
Depreciation 169 12 3
(Increase) decrease in assets:
Receivables 25 690
Other assets 46 17 (58)
Increase (decrease) in liabilities:
Accounts payable (115) (299)
Income taxes payable 9 (58) (216)
Other liabilities 187 23
--------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 606 249 419
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in and advances to subsidiaries (1,109) (3,941) (2,134)
Purchase of investment securities (1,204)
Sale of investment securities 803 401
Purchase of premises and equipment (3,860) (736) (181)
--------- --------- ---------
NET CASH (USED) BY INVESTING ACTIVITIES (4,166) (5,480) (2,315)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of capital stock 171 8,455 2,180
Proceeds from note payable 2,529
Principal payments on note payable (38)
Cash paid for redemption of fractional shares (7) (9) (10)
Cash dividends paid (141)
--------- --------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,655 8,446 2,029
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH (905) 3,215 133
CASH, beginning of year 3,375 160 27
--------- --------- ---------
CASH, end of year $2,470 $3,375 $160
========= ========= =========
Schedule of Noncash Investing and Financing Activity
Guarantee of debt for ESOP $20
</TABLE>
52
<PAGE> 54
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 $9,525,000 and $7,976,000 at December 31, 1996 and 1995,
respectively. During 1996 and 1995, $8,814,000 and $11,082,000, respectively
of new or renewed related party loans were made and repayments and adjustments
totaled $7,265,000 and $7,952,000, respectively.
DEPOSITS FROM RELATED PARTIES:
Deposits from related parties totaled $5,351,000 and $4,118,000 at December 31,
1996 and 1995, respectively.
PAYMENTS TO RELATED PARTIES:
Fees paid to a Director for professional services totaled $8,000, $11,000, and
$10,000 for the years ended December 31, 1996, 1995, and 1994, respectively.
Building lease rent of $80,000 and $32,000 was paid to a Partnership partially
owned by certain Directors in 1996 and 1995, respectively.
Construction expenses paid to related parties totaled $0, $4,000, and $31,000
for the years ended December 31, 1996, 1995, and 1994, respectively.
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, $0, and $48,000 for the years ended December 31, 1996,
1995, and 1994, respectively. Commissions of $10,000, $36,000 and $111,000 for
1996, 1995 and 1994, respectively, were received by USB Insurance related to
the purchase of life insurance plans on directors and officers of the Banks.
53
<PAGE> 55
UNITED SECURITY BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Financial Accounting Standards Board's Statement of Financial Accounting
Standards No. 107, "Disclosures about Fair Value of Financial Instruments"
(FASB 107), requires disclosure of fair value information about financial
instruments, which it is practicable to estimate fair value. As defined by
FASB 107, financial instruments include the categories listed below. It does
not include the value of property, plant and equipment and intangible assets
such as customer relationships and core deposit intangibles. Fair values of
off-statement of condition lending commitments are based on fees currently
charged to enter into similar agreements, taking into account the remaining
terms of the agreements and the counterparties' credit standing. The fair
value of the fees at December 31, 1996 and 1995, were insignificant. See Note
11 for the notional amount of the commitments to extend credit.
The following table summarizes carrying amounts, estimated fair values, and
assumptions used by the Corporation to estimated fair value as of December 31,
1996 and 1995:
<TABLE>
<CAPTION>
ESTIMATED
AS OF DECEMBER 31, 1996: ASSUMPTIONS USED IN CARRYING FAIR
($ in thousands) ESTIMATING FAIR VALUE AMOUNT VALUE
<S> <C> <C> <C>
FINANCIAL ASSETS:
Cash and due from banks Equal to carrying value $10,430 $10,430
Federal funds sold Equal to carrying value 10,770 10,770
Overnight interest bearing deposits
with other banks Equal to carrying value 6,223 6,223
Securities Quoted market prices 15,613 15,619
Loans Fixed-rate loans: Discounted expected future cash flows,
variable-rate loans: equal to carrying value, net of
allowance for loan losses 176,386 177,487
FINANCIAL LIABILITIES:
Deposits Fixed-rate certificates of deposit:
Discounted expected future cash flows
All other deposits: Equal to carrying value 197,399 197,443
Note payable Variable rate, equal to carrying value 2,491 2,491
AS OF DECEMBER 31, 1995:
FINANCIAL ASSETS:
Cash and due from banks Equal to carrying value $7,889 $7,889
Federal funds sold Equal to carrying value 3,355 3,355
Overnight interest bearing deposits
with other banks Equal to carrying value 4,337 4,337
Securities Quoted market prices 22,401 22,410
Loans Discounted expected future cash flows,
net of allowance for loan losses 141,861 143,398
FINANCIAL LIABILITIES:
Deposits Fixed-rate certificates of deposit:
Discounted expected future cash flows
All other deposits: Equal to carrying value 163,791 163,992
</TABLE>
54
<PAGE> 56
UNITED SECURITY BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19. REGULATORY MATTERS
The Banks are subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory actions by regulators that, if undertaken, could
have a direct material effect on the Bank's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Banks must meet specific capital guidelines that involve
quantitative measures of the Bank's assets, liabilities, and certain
off-statement of condition items. The Banks capital amounts and classification
are also subject to qualitative judgments by the regulators about components,
risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Banks to maintain minimum amounts and ratios set forth in the table
below of total and Tier I capital to risk-weighted and average assets.
<TABLE>
<CAPTION>
ACTUAL ADEQUATELY CAPITALIZED WELL CAPITALIZED
($ in thousands) AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
<S> <C> <C> <C> <C> <C> <C>
AS OF DECEMBER 31, 1996:
Total capital to risk weighted assets:
Consolidated $30,129 16.43% > $14,659 8.00% > $18,327 10.00%
United Security Bank 16,576 13.41% > 9,878 8.00% > 12,349 10.00%
Home Security Bank 5,984 10.75% > 4,449 8.00% > 5,562 10.00%
Tier I capital to risk weighted assets:
Consolidated 28,092 15.32% > 7,325 4.00% > 10,992 6.00%
United Security Bank 15,129 12.24% > 4,936 4.00% > 7,407 6.00%
Home Security Bank 5,431 10.02% > 2,223 4.00% > 3,336 6.00%
Leverage capital, Tier I capital to average assets:
Consolidated 28,092 12.23% > 9,175 4.00% > 11,472 5.00%
United Security Bank 15,129 10.54% > 5,733 4.00% > 7,168 5.00%
Home Security Bank 5,431 7.31% > 2,968 4.00% > 3,711 5.00%
AS OF DECEMBER 31, 1995:
Total capital to risk weighted assets:
Consolidated 26,175 17.33% > 12,078 8.00% > 15,099 10.00%
United Security Bank 13,610 13.04% > 8,346 8.00% > 10,433 10.00%
Home Security Bank 5,513 12.79% > 3,446 8.00% > 4,308 10.00%
Tier I capital to risk weighted assets:
Consolidated 24,784 16.41% > 6,035 4.00% > 9,056 6.00%
United Security Bank 12,595 12.07% > 4,170 4.00% > 6,258 6.00%
Home Security Bank 5,136 11.92% > 1,721 4.00% > 2,583 6.00%
Leverage capital, Tier I capital to average assets:
Consolidated 24,784 13.23% > 7,485 4.00% > 9,359 5.00%
United Security Bank 12,595 10.05% > 5,006 4.00% > 6,259 5.00%
Home Security Bank 5,136 8.83% > 2,323 4.00% > 2,905 5.00%
</TABLE>
As of December 31, 1996 United Security Bancorporation and subsidiaries, United
Security Bank and Home Security Bank were considered well capitalized based on
regulatory capital standards.
55
<PAGE> 57
UNITED SECURITY BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 20. In late 1996, the corporation detected a defalcation by a former
employee at its bank subsidiary, Home Security Bank. The identified loss of
$860,000 has been recorded as an operational loss in the statement of income
for the year ended December 31, 1996. The Corporation is in the process of
submitting a claim to its fidelity bond carrier. Accordingly, the amount of
recovery from its insurance carrier, if any, of the losses has not been
recognized in the accompanying consolidated financial statements. Furthermore,
any additional losses related to this defalcation that could be discovered in
the future, are not subject to estimation and are therefore not recorded in the
consolidated financial statements.
NOTE 21. SUBSEQUENT EVENT
BRANCHES ACQUISITION:
In March, 1997 the Corporation announced that it had reached definitive
agreement to purchase five branches from a commercial bank. The transaction
includes Home Security Bank's purchase of three branches located in Mabton,
Naches, and Walla Walla, Washington, bringing its branch total to six. United
Security Bank would purchase two branches located in Davenport and Moses Lake,
Washington, bringing its branch total to nine. The purchases are expected to
be completed in July, 1997, subject to regulatory approval. Following
completion of this transaction the Corporation, United Security Bank and Home
Security Bank will have fifteen branches located in Central and Eastern
Washington state. The purchase includes deposits, deposit-secured loans, and
branch facilities. The amounts involved will not be known until the
transaction is complete, but based on current information about $40 million in
deposits and $1.2 illion in branch facilities are expected to be purchased at a
deposit premium of $3.2 million.
56
<PAGE> 1
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)
57
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 10,430
<INT-BEARING-DEPOSITS> 6,223
<FED-FUNDS-SOLD> 10,770
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 15,008
<INVESTMENTS-CARRYING> 605
<INVESTMENTS-MARKET> 611
<LOANS> 178,420
<ALLOWANCE> 2,034
<TOTAL-ASSETS> 231,049
<DEPOSITS> 197,399
<SHORT-TERM> 0
<LIABILITIES-OTHER> 2,395
<LONG-TERM> 3,242
0
0
<COMMON> 21,001
<OTHER-SE> 7,012
<TOTAL-LIABILITIES-AND-EQUITY> 231,049
<INTEREST-LOAN> 18,765
<INTEREST-INVEST> 1,246
<INTEREST-OTHER> 708
<INTEREST-TOTAL> 20,719
<INTEREST-DEPOSIT> 7,850
<INTEREST-EXPENSE> 8,147
<INTEREST-INCOME-NET> 12,572
<LOAN-LOSSES> 1,006
<SECURITIES-GAINS> 53
<EXPENSE-OTHER> 9,872
<INCOME-PRETAX> 4,675
<INCOME-PRE-EXTRAORDINARY> 4,675
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,162
<EPS-PRIMARY> .86
<EPS-DILUTED> .86
<YIELD-ACTUAL> 10.54
<LOANS-NON> 457
<LOANS-PAST> 441
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,391
<CHARGE-OFFS> 372
<RECOVERIES> 9
<ALLOWANCE-CLOSE> 2,034
<ALLOWANCE-DOMESTIC> 2,034
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
