UNITED SECURITY BANCORPORATION, 10-Q, 2000-10-27

UNITED SECURITY BANCORPORATION
10-Q, 2000-10-27
STATE COMMERCIAL BANKS

Previous: NETWORK SIX INC, 10-Q, 2000-10-27

Next: ENZON INC, DEF 14A, 2000-10-27

United States
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-Q

(Mark One)

[X]	Quarterly report under Section 13 or 15 (d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2000 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 000-18561

UNITED SECURITY BANCORPORATION
(Exact Name of Registrant as Specified in Its Charter)

Washington	91-1259511
(State or Other Jurisdiction of	(I.R.S. Employer
Incorporation or Organization)	Identification No.)

9506 North Newport Highway, Spokane, WA 99218-1200
(Address of Principal Executive Offices)

(509) 467-6949
(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that 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 [ ]

The issuer has one class of capital stock, that being common stock. On October 19, 2000, there were 7,065,146 shares of such stock outstanding.

UNITED SECURITY BANCORPORATION

INDEX TO QUARTERLY REPORT ON FORM 10-Q

September 30, 2000

Table of Contents


				Page

Independent Accountant’s Report					3

Part I	Financial Information

		Item 1.	Financial Statements

			Consolidated Statements of Condition – September 30, 2000 and December 31, 1999		4

			Consolidated Statements of Income - Three and Nine Months Ended September 30, 2000 and 1999		5

			Consolidated Condensed Statements of Cash Flows - Nine Months Ended September 30, 2000 and 1999		6

			Notes to Consolidated Financial Statements		7 - 8

		Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		9 - 10

		Item 3.	Quantitative and Qualitative Disclosures About Market Risk.		11

Part II		Other Information

		Item 6.	Exhibits and Reports on Form 8-K		11

Signatures					11

UNITED SECURITY BANCORPORATION

Independent Accountant’s Report

Board of Directors and Shareholders
United Security Bancorporation

We have reviewed the accompanying condensed consolidated statement of condition of United Security Bancorporation and subsidiaries as of September 30, 2000, and the related condensed consolidated statements of income for the three and nine months ended September 30, 2000, and cash flows for the nine months ended September 30, 2000. These financial statements are the responsibility of United Security Bancorporation’s management.

We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements for them to be in conformity with generally accepted accounting principles.

We have previously audited, in accordance with generally accepted auditing standards, the consolidated statement of condition of United Security Bancorporation and subsidiaries as of December 31, 1999, and the related consolidated statements of income, stockholders’ equity and cash flows for the year then ended (which are not presented herein), and in our report dated January 21, 2000, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated statement of condition as of December 31, 1999, is fairly presented, in all material respects, in relation to the consolidated statement of condition from which it has been derived.

Everett, Washington /s/ Moss Adams LLP
October 13, 2000

UNITED SECURITY BANCORPORATION

UNITED SECURITY BANCORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION

($ In thousands)	September 30,			December 31,
ASSETS	2000			1999

Cash and due from banks	$	20,485		$	21,387
Overnight interest bearing deposits with other banks		6,338			4,632

Cash and cash equivalents		26,823			26,019

Securities		51,479			53,141

Loans, net of allowance for loan losses of $4,599 in 2000
and $4,349 in 1999		467,314			418,210
Accrued interest receivable		6,259			4,494
Premises and equipment, net		13,084			13,133
Foreclosed real estate and other foreclosed assets		1,524			1,179
Life insurance and salary continuation assets		4,268			4,049
Intangible assets		5,905			6,189
Other assets		1,598			1,312

TOTAL ASSETS	$	578,254		$	527,726

LIABILITIES
Noninterest bearing - demand deposits	$	91,889		$	82,299
Interest bearing:
NOW and savings accounts		210,948			196,513
Time, $100,000 and over		60,314			56,430
Other time		142,975			117,657

TOTAL DEPOSITS		506,126			452,899
Short-term borrowings		2,282			7,508
Capital lease obligations		672			690
Accrued interest payable		1,970			1,367
Other liabilities		3,311			2,340

TOTAL LIABILITIES		514,361			464,804

STOCKHOLDERS' EQUITY
Common stock, no par, shares authorized 15,000,000; issued
and outstanding 7,139,947 in 2000 and 6,942,439 in 1999		47,912			44,471
Retained earnings		16,509			19,460
Accumulated other comprehensive loss, net of tax		(528	)		(1,009	)

TOTAL STOCKHOLDERS' EQUITY		63,893			62,922

TOTAL LIABILITIES and STOCKHOLDERS' EQUITY	$	578,254		$	527,726

The accompanying notes are an integral part of these statements.

UNITED SECURITY BANCORPORATION

UNITED SECURITY BANCORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME

($ In thousands, except per share)	Three Months Ended September 30,					Year-to-Date September 30,

	2000			1999		2000			1999

INTEREST INCOME
Interest and fees on loans and leases	$	12,128		$	10,232	$	33,467		$	29,289
Interest on securities		874			748		2,517			2,870
Other interest income		53			194		331			380

TOTAL INTEREST INCOME		13,055			11,174		36,315			32,539

INTEREST EXPENSE
Interest on deposits		5,050			3,744		13,852			11,039
Interest on borrowings		221			94		449			325

TOTAL INTEREST EXPENSE		5,271			3,838		14,301			11,364

NET INTEREST INCOME		7,784			7,336		22,014			21,175
Provision for loan losses		352			549		996			1,066

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		7,432			6,787		21,018			20,109

NONINTEREST INCOME
Fees and service charges		617			611		1,857			1,891
Insurance commissions		268			278		735			771
Securities gains/(losses)		(340	)				(352	)		66
Other		380			247		771			2,178

TOTAL NONINTEREST INCOME		925			1,136		3,011			4,906

NONINTEREST EXPENSE
Salaries and employee benefits		3,194			2,890		9,427			8,642
Occupancy expense, net		446			369		1,333			1,154
Equipment expense		362			308		1,105			990
Intangible amortization		93			95		284			284
Other operating expense		1,028			1,056		3,342			3,288

TOTAL NONINTEREST EXPENSE		5,123			4,718		15,491			14,358

INCOME BEFORE TAXES		3,234			3,205		8,538			10,657

INCOME TAX EXPENSE		1,058			564		2,554			3,012

NET INCOME	$	2,176		$	2,641	$	5,984		$	7,645

Basic earnings per common share	$	0.30		$	0.35	$	0.81		$	1.00

Diluted earnings per common share	$	0.30		$	0.34	$	0.81		$	0.99
Basic weighted average shares outstanding		7,258,305			7,633,462		7,372,720			7,629,720
Diluted weighted average shares outstanding		7,299,085			7,740,431		7,420,917			7,733,504

The accompanying notes are an integral part of these statements.

UNITED SECURITY BANCORPORATION

UNITED SECURITY BANCORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
September 30, 2000 and 1999
($ in thousands)

	2000			1999

Cash flows from operating activities:
Net income	$	5,984		$	7,645
Provision for loan losses		996			1,066
Depreciation and amortization		828			672
(Increase)/decrease in assets and liabilities:
Accrued interest receivable		(1,765	)		(916	)
Life insurance and salary continuation assets		(219	)		(179	)
Other assets		(2	)		30
Accrued interest payable		603			(176	)
Other liabilities		971			(343	)

Net cash provided by operating activities		7,396			7,799

Cash flows from investing activities:
Securities:
Maturities		10,483			34,435
Sales		5,128			10,150
Purchases		(13,468	)		(12,480	)
Net increase in loans		(50,100	)		(52,395	)
Sales of premises and equipment		509			974
Purchases of premises and equipment		(1,288	)		(1,779	)
Foreclosed real estate activity		(345	)		50

Net cash change in investing activities		(49,081	)		(21,045	)

Cash flows from financing activities:
Net change in deposits		53,227			(2,398	)
Short-term borrowings activity		(5,226	)		10,439
Principal payments on capital lease obligations		(18	)		(16	)
Cash payments for stock repurchases		(5,916	)
Cash received from stock sales		422			197
Cash redemption of fractional shares					(17	)

Net cash provided by financing activities		42,489			8,205

Net change in cash and cash equivalents		804			(5,041	)
Cash and cash equivalents, beginning of year		26,019			37,089

Cash and cash equivalents, end of quarter	$	26,823		$	32,048

The accompanying notes are an integral part of these statements.

UNITED SECURITY BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. Management Statement

The consolidated financial statements include United Security Bancorporation and its wholly owned subsidiaries (USBN), United Security Bank, Home Security Bank, Bank of Pullman, Grant National Bank, AmericanWest Bank, and USB Insurance Agencies, Inc. after eliminating all significant intercompany balances and transactions.

The interim unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, all adjustments consisting only of normal recurring accruals necessary for a fair presentation of the financial condition and the results of operations for the interim periods included herein have been made. The consolidated statement of condition of USBN as of December 31, 1999 has been derived from the audited consolidated statement of condition of USBN as of that date. The results of operations for the nine months ended September 30, 2000, are not necessarily indicative of results to be anticipated for the year ending December 31, 2000. For additional information, refer to the consolidated financial statements and footnotes thereto included in USBN’s annual report on Form 10-K for the year ended December 31, 1999.

NOTE 2. Securities

Most of the securities are classified as available-for-sale and are stated at fair value, and unrealized holding gains and losses, net of related deferred taxes, are reported as a separate component of stockholders’ equity. Gains or losses on available-for-sale securities sales are reported as part of noninterest income based on the net proceeds and the adjusted carrying amount of the securities sold, using the specific identification method. Carrying amount and fair values at September 30, 2000 and December 31, 1999 were as follows:

	September 30, 2000						December 31, 1999

		Amortized		Fair		Financial		Amortized		Fair		Financial
($ in thousands)		Cost		Value		Statements		Cost		Value		Statements

Securities available-for-sale:
U.S. Treasury securities	$	2,499	$	2,510	$	2,510	$	2,503	$	2,503	$	2,503
Obligations of federal government agencies		18,790		18,388		18,388		16,888		16,317		16,317
Mortgage backed securities		9,513		9,332		9,332		10,014		9,812		9,812
Obligations of states, municipalities and
political subdivisions		7,646		7,682		7,682		8,201		8,163		8,163
Other securities		13,127		12,862		12,862		16,356		15,639		15,639

		51,575		50,774		50,774		53,962		52,434		52,434
Securities held-to-maturity:
Obligations of states, municipalities and
political subdivisions		705		706		705		707		699		707

Total	$	52,280	$	51,480	$	51,479	$	54,669	$	53,133	$	53,141

UNITED SECURITY BANCORPORATION

NOTE 3. LOANS

Loan detail by category as of September 30, 2000 and December 31, 1999 were as follows:

($ in thousands)	September 30, 2000			December 31, 1999

Commercial and industrial	$	299,709		$	246,796
Agricultural		71,781			67,025
Real estate mortgage		58,756			66,690
Real estate construction		12,863			14,781
Installment		21,957			21,190
Bank cards and other		7,668			6,939

Total loans		472,734			423,421
Allowance for loan losses		(4,599	)		(4,349	)
Deferred loan fees, net of deferred costs		(821	)		(862	)

Net loans	$	467,314		$	418,210

NOTE 4. ALLOWANCE FOR LOAN LOSSES

The allowance for loan loss is maintained at levels considered adequate by management to provide for possible loan losses. The allowance is based on management’s assessment of various factors affecting the loan portfolio, including problem loans, business conditions and loss experience, and an overall evaluation of the quality of the underlying collateral. Changes in the allowance for loan losses during the three and nine months ended September 30, 2000 and 1999 were as follows:

	Three Months Ended September 30,						Year-To-Date September 30,

($ in thousands)		2000			1999			2000			1999

Balance, beginning of period	$	4,300		$	3,996		$	4,349		$	3,819
Provision for loan losses		352			549			996			1,066
Loan charge-offs		(75	)		(348	)		(822	)		(853	)
Loan recoveries		22			20			76			185
Balance, end of period	$	4,599		$	4,217		$	4,599		$	4,217

NOTE 5. Stock Repurchases

In June 2000 the Board of Directors approved a stock repurchase program authorizing the repurchase of up to 732,000 shares. If all 732,000 shares are repurchased, it will represent approximately 10% of USBN’s outstanding common stock. As of September 30, 2000 approximately 177,000 shares have been repurchased for $1.7 million. Currently, USBN has 7.1 million shares outstanding. In addition to the current stock repurchase program approximately 385,000 shares were repurchased in first quarter 2000.

UNITED SECURITY BANCORPORATION

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion contains a review of the results of operations and financial condition for third quarter and the results in 2000 and 1999. This information should be read in conjunction with the financial statements and related notes appearing in this report. The reader is assumed to have access to USBN’s Form 10-K for the year ended December 31, 1999, which contains additional information.

This discussion may contain certain forward-looking statements, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those stated. Readers are cautioned not to place undue reliance on these forward-looking statements.

Overview

A performance summary and detailed discussion regarding the third quarter and results for 2000 and 1999 follows this table.

UNITED SECURITY BANCORPORATION AND SUBSIDIARIES
PERFORMANCE SUMMARY

	Three Months Ended September 30,							Year-To-Date September 30,

					%							%
($ in thousands, except per share)	2000		1999		Change			2000		1999		Change

Interest income	$	13,055	$	11,174		16.8	%	$	36,315	$	32,539		11.6	%
Interest expense		5,271		3,838		37.3	%		14,301		11,364		25.8	%

Net interest income		7,784		7,336		6.1	%		22,014		21,175		4.0	%
Provision for loan losses		352		549		-35.9	%		996		1,066		-6.6	%

Net interest income after provision for loan losses		7,432		6,787		9.5	%		21,018		20,109		4.5	%
Noninterest income		925		1,136		-18.6	%		3,011		4,906		-38.6	%
Noninterest expense		5,123		4,718		8.6	%		15,491		14,358		7.9	%

Income before income taxes		3,234		3,205		0.9	%		8,538		10,657		-19.9	%
Income taxes		1,058		564		87.6	%		2,554		3,012		-15.2	%

Net income	$	2,176	$	2,641		-17.6	%	$	5,984	$	7,645		-21.7	%


Basic earnings per common share	$	0.30	$	0.35		-14.3	%		$0.81	$	1.00		-19.0	%
Diluted earnings per common share	$	0.30	$	0.34		-11.8	%		$0.81	$	0.99		-18.2	%

Net Income

USBN reported net income of $5,984,000 for the first nine months of 2000 compared to $7,645,000 for the same period in 1999. Diluted earnings per share were $.81 in 2000 and $.99 in 1999. Third quarter earnings were $2,176,000 for 2000 and $2,641,000 for 1999. Diluted earnings per share were $.30 for 2000 and $.34 for 1999. Third quarter and 2000 net earnings were reduced $125,000 and $.02 due to a loss on the sale of securities, offset with a gain on the sale of real estate. 1999 net earnings were improved by $825,000 and $.11 per share from the gain on the sale of the Bank of the West name.

UNITED SECURITY BANCORPORATION

Net Interest Income

Year 2000 net interest income grew 4% to $22,014,000 compared to $21,175,000 in 1999. The growth in net interest income was due to loan volume growth, which on an average basis grew to $442 million in 2000 from $386 million in 1999. The net interest margin to average earning assets declined from 6.16% in 1999 to 5.87% in 2000. The net interest margin was .07% lower in 2000 compared to 1999 due to the impact of reduced interest income from nonaccrual loans.

Provision for Loan Losses

The allowance for possible loan losses is based on management’s evaluation of the loan portfolio. The allowance for loan losses is .97% of loans as of September 30, 2000 and 1.02% as of September 30, 1999. Loans outstanding have grown 14% during that same period.

Noninterest Income

Noninterest income declined by $1,250,000 due to a nonrecurring gain from the sale of the Bank of the West name in June 1999. Noninterest income was $3,011,000 in 2000 and $4,906,000 in 1999 including the gain on the sale of the name. Fees and service charges declined slightly to $1,857,000 in 2000 from $1,891,000 in 1999 with a comparative improvement during third quarter 2000 as the fees related to deposits increased. Insurance commissions declined to $735,000 in 2000 compared to $771,000 in 1999. During third quarter 2000 USBN sold $2,663,000 of marketable equity securities, which lead to a loss of $340,000 in securities losses. The funds received from the sale were reinvested in new loan originations, which will improve future net interest income. This loss was offset by a gain of $168,000 on the sale of real estate related to the relocation of a bank branch. Other noninterest income was lower in 2000 primarily due to nonrecurring gains on the sale of the name, escrow servicing and real estate owned.

Noninterest Expense

Noninterest expense increased 8% to $15,491,000 in 2000 from $14,358,000 in 1999. The increase was primarily due to additional expenses for the six new branches opened by USB and BOP in the latter part of 1999 and to accrue expense for a new employee incentive program designed to create and reward productivity. Also expense was incurred for a new Computer Center opened in first quarter 2000.

Stock Repurchase Program

UNITED SECURITY BANCORPORATION

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Management considers interest rate risk to be a market risk that could have a significant effect on the financial condition of USBN. There have been no material changes in reported market risks faced by USBN since the end of the most recent fiscal year.

Part II
Other Information

Item 6. Exhibits and Reports on Form 8-K

(a)	Exhibits Exhibit 27	Financial Data Schedule.

(b)	Reports on Form 8-K None in third quarter 2000.

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on October 19, 2000.

	UNITED SECURITY BANCORPORATION

	\s\ WES COLLEY

	Wes Colley, President and Chief Executive Officer

	\s\ CHAD GALLOWAY

	Chad Galloway, Vice President and Chief Financial Officer