-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Eftyx0nLdLeWfBSoMjOrrwrH78NEPe3BtjwIiINfd3KoLZpSUHrs7kP5fhGCB8l9 NBa7qP5bon94NlgUPH5bbw== 0000891020-98-000442.txt : 19980330 0000891020-98-000442.hdr.sgml : 19980330 ACCESSION NUMBER: 0000891020-98-000442 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980327 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNITED SECURITY BANCORPORATION CENTRAL INDEX KEY: 0000726990 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 911259511 STATE OF INCORPORATION: WA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-18561 FILM NUMBER: 98576693 BUSINESS ADDRESS: STREET 1: 9506 N NEWPORT HWY CITY: SPOKANE STATE: WA ZIP: 99218-1200 BUSINESS PHONE: 5094676949 MAIL ADDRESS: STREET 1: 9506 N NEWPORT HWY CITY: SPOKANE STATE: WA ZIP: 99218-1200 10-K 1 FORM 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____________ to ____________ Commission file number 0-18561 UNITED SECURITY BANCORPORATION (Exact name of registrant as specified in its charter) Washington 91-1259511 (State or other jurisdiction (IRS Employer of incorporation) Identification No.) 9506 North Newport Highway Spokane, Washington 99218-1200 (Address of principal executive offices) Registrant's telephone number, including area code (509) 467-6949 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to section 12(g) of the Act: Common Stock, no par value NASDAQ National Market System Title of each class Name of each exchange on which registered Check whether the registrant (1) filed all reports required to be filed by Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for such shorter period as the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Check if there is no disclosure of delinquent filers pursuant to Item 405 of Regulation S-K contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates of the registrant, computed by reference to the stock closing prices on stock at February 14, 1998, was $70,414,000. The number of shares of common stock outstanding at such date was 4,052,775. Documents incorporated by reference. Portions of the United Security Bancorporation Definitive Proxy Statement are incorporated by reference into Part III of the Form 10-K. 1 2 UNITED SECURITY BANCORPORATION ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 TABLE OF CONTENTS
PART I Page Item 1. Business ................................................................ 3 Item 2. Properties .............................................................. 17 Item 3. Legal Proceedings ....................................................... 19 Item 4. Submission of Matters to a Vote of Security Holders ..................... 19 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters ............................................................... 19 Item 6. Selected Financial Data ................................................. 21 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ................................................. 22 Item 7A. Quantitative and Qualitative Disclosures About Market Risk .............. 28 Item 8. Financial Statements and Supplementary Data ............................. 29 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure .............................................. 29 PART III Item 10. Directors and Executive Officers of the Registrant ...................... 29 Item 11. Executive Compensation .................................................. 29 Item 12. Security Ownership of Certain Beneficial Owners and Management ............................................................ 29 Item 13. Certain Relationships and Related Transactions .......................... 29 PART IV Item 14. Exhibits, Financial Statements, and Reports on Form 8-K ................. 29 SIGNATURES ................................................................................. 31
2 3 UNITED SECURITY BANCORPORATION PART I Item 1. BUSINESS. UNITED SECURITY BANCORPORATION United Security Bancorporation (Company) is a multi-bank holding company headquartered in Spokane, Washington. The Company owns three banks, United Security Bank (Washington) (USB), Home Security Bank (Washington) (HSB), and Bank of Pullman (Idaho) (BOP) (collectively, Banks), and also owns USB Insurance (Washington) (an insurance agency), USB Leasing (Washington) (a leasing company), and USB Mortgage (Washington) (a mortgage company). The Company conducts its banking business through twenty-four branches located in communities throughout eastern Washington, including Spokane and a branch in Moscow, Idaho. 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, 1997, the Company had total consolidated assets of $350.4 million, net loans of $226.7 million and deposits of $307.6 million. The Company was founded in 1983 and has been profitable in every year since its inception. In 1995, the Company completed a public offering selling $8.5 million in stock and is listed on NASDAQ under the symbol "USBN". THE BANKS USB was formed in 1974 and serves customers in Spokane and northeastern Washington from eleven branches. HSB was formed in 1989 and serves customers in southeastern Washington from six branches. BOP was acquired in 1997 and serves customers in eastern Washington with six branches and one branch in Moscow, Idaho. 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, 1997, 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, HSB, and BOP 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 3 4 UNITED SECURITY BANCORPORATION of two additional agencies in northeastern Washington. Total revenues of USB Insurance for the year ended December 31, 1997 were $1,170,000 as compared to revenues of $1,202,000 for 1996. The insurance operation has been profitable since 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 $5.3 million as of December 31, 1997. The leasing operation has been profitable since 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, 1997 assets were $2.9 million. The mortgage operation has been profitable since 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 these businesses. 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 their 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. 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, HSB, and BOP. USB recently opened branches in Liberty Lake and Qualchan both near the city of Spokane. 4 5 UNITED SECURITY BANCORPORATION Management considers a variety of criteria in evaluating potential branch expansion, including the demographics and short and long-term growth prospects for the location, the management and other resources needed to integrate the branch into its existing operations, the degree to which the branch would enhance the geographic diversity of 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, eastern Oregon and northern Idaho. Acquisition. On July 18, 1997 the Company purchased five branches from Wells Fargo Bank. HSB purchased three branches located in Mabton, Naches, and Walla Walla, Washington. USB purchased two branches located in Davenport and Moses Lake, Washington. These branches are located in the identified market place for the Banks. The acquisition increased deposits by approximately $35 million, premises and equipment by $1.9 million, and intangible assets by $2.1 million primarily for the core deposit acquisition cost. The purchase price was $3.2 million. Bank of Pullman. On October 20, 1997 the Company acquired Bank of Pullman for $11,955,000. BOP is located in the commercial center for the Palouse, the winter wheat growing region in Eastern Washington, and home of Washington State University. It has seven branches, six in Washington and one in Idaho. The Company initially purchased Community Ban Corporation, and its wholly-owned subsidiary BOP. Shortly following the acquisition Community Ban Corporation was dissolved, and BOP became a wholly-owned subsidiary of United Security Bancorporation. The acquisition was accounted for as a purchase transaction. Accordingly, the results of operations of BOP are included with the Company for periods subsequent to the date of acquisition. The acquisition increased assets by $64 million, intangible assets by $4.8 million, and deposits by $55 million as of December 31, 1997. 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. Provide Superior Customer Service. The Company attributes it success to its efforts to offer superior, personal service through professional bankers at all of its branches. The Company distinguishes itself in its markets by emphasizing a culture in which customers are the highest priority in all aspects of the Company's operations. Ongoing employee training is focused on customer needs, responsiveness and courtesy to customers. The Company's marketing efforts and operating practices emphasize the Company's ties to the local communities it serves, and its commitment to providing the highest level of personalized service. 5 6 UNITED SECURITY BANCORPORATION 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, 1997, the Company had total loans and leases outstanding of approximately $229 million, which equals 74.6% of the Company's total deposits and 65.4% of its total assets. $130 million of these loans were originated by USB, $60 million were originated by HSB, and $34 million by BOP. Virtually all of the loans held by the Company were to borrowers within the Banks' principal market areas. See loan category amounts for five years in Item 6, selected financial data. Commercial Loans. Commercial loans primarily consist of loans to businesses for various purposes, including revolving lines of credit, equipment financing loans and letters of credit. These loans generally mature within 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, 1997, loans included approximately $19.8 million of adjustable and fixed rate first mortgage loans secured by one to four family residential properties, approximately $5.3 of second mortgage loans secured by one to four family residential properties, approximately $6.1 million in loans secured by multifamily (five or more) residential properties. Mortgage loans typically mature in one to five years and require payments on amortization schedules ranging from one year to twenty years. Construction Loans. Construction loans are made to individuals and contractors to construct primarily single-family principal residences. These loans have maturities of three months to six months. Interest rates are typically adjustable, although some fixed-rate loans are made. 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 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 47% 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. 6 7 UNITED SECURITY BANCORPORATION LENDING AND CREDIT MANAGEMENT. USB, HSB and BOP 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, $500,000 for HSB and $500,000 for BOP with respect to certain loans. Loans in excess of the above amounts require the approval of the board of directors of the lending Bank. Under applicable federal and state law, permissible loans to one borrower by either of the Banks are also limited. As of December 31, 1997, the Banks, as a matter of policy, do not extend credit to any single borrower in excess of $2,500,000, $1,000,000, and $1,400,000 for USB, HSB, and BOP, respectively. To accommodate borrowers whose financing needs exceed their lending limits, the Banks can sell loan participations to one another or to outside participants. At December 31, 1997, 1996 and 1995, the outstanding balance of loan participations sold outside the Company were $24,091,000, $25,205,000, and $22,365,000, 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 1997, the Mortgage Company sold $2.1 million mortgage loans, consisting of $1.4 million of fixed-rate residential loans and $.7 million of adjustable rate residential loans. Fees received on such sales are included in interest and fees earned on loans, and accounted for approximately 2.0%, 3.0%, and .8% of such interest and fees in each of the three years ended December 31, 1997, 1996, and 1995, respectively. Such loans are sold on a servicing released basis, meaning the Company does not retain mortgage servicing responsibilities. NONPERFORMING ASSETS. The following table provides information for the Company's nonperforming assets as of December 31, 1997, 1996, and 1995.
YEAR ENDED DECEMBER 31, ($ in thousands) 1997 1996 1995 1994 1993 Nonperforming loans: Nonaccrual loans $2,181 $ 457 $ 777 $ 775 $ 811 Accrual loans 90 days or more past due 764 441 612 228 3 ------ ------ ------ ------ ------ Total nonperforming loans 2,945 898 1,389 1,003 814 Other real estate owned and other repossed assets 967 205 370 231 337 ------ ------ ------ ------ ------ Total nonperforming assets $3,912 $1,103 $1,759 $1,234 $1,151 ====== ====== ====== ====== ====== Allowance for loan losses $2,613 $2,034 $1,391 $1,246 $ 802 Ratio of total nonperforming assets to total assets 1.12% 0.48% 0.92% 0.75% 0.92% Ratio of total nonperforming loans to total loans 1.28% 0.50% 0.97% 0.82% 0.91% Ratio of allowance for loan losses to total nonperforming loans 88.7% 226.5% 100.1% 124.2% 98.5%
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 7 8 UNITED SECURITY BANCORPORATION 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 6 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 $967,000 as of December 31, 1997, consisting primarily of commercial and chattel property. ANALYSIS OF ALLOWANCE FOR LOAN LOSSES The allowance for loan losses represents management's recognition of the risks of extending credit and its evaluation of the quality of the loan portfolios of the Banks. The allowance is maintained at levels considered adequate by management to provide for anticipated loan losses, and is based on management's assessment of various factors affecting the loan portfolios, including problem loans, business conditions and loss experience, an overall evaluation of the quality of the underlying collateral, and collateral selling costs. The allowance is increased by provisions charged to operations and is reduced by loans charged off, net of any recoveries. The decline in real estate market values in many parts of the country and the significant losses experienced by many financial institutions in the late 1980's, have resulted in increased regulatory scrutiny of the loan portfolios of financial institutions such as the Company and the Banks, particularly with respect to commercial real estate and multi-family residential real estate loans. Management of the Company periodically reviews the status of loans that are contractually past due and the net realizable value of the collateral securing such loans, and establishes reserves through the provision of loan losses where ultimate collection of such loans is questionable. The provision for loan losses also reflects a general allocation of unanticipated losses based in part on the size of the Company's loan portfolio and management's assessment of economic conditions within the Company's service area. Management believes that the allowance for loan losses is adequate. 8 9 UNITED SECURITY BANCORPORATION The following table sets forth information regarding changes in the Company's allowance for loan losses as follows:
YEARS ENDED DECEMBER 31, ($ in thousands) 1997 1996 1995 1994 1993 Balance of allowance for loan losses at beginning of period $ 2,034 $ 1,391 $ 1,246 $ 802 $ 692 Charge-offs Commercial 453 253 114 117 54 Agricultural 112 1 19 Real estate (mortgage and construction) 272 Consumer 131 58 24 2 3 Other 22 61 52 28 14 -------- -------- -------- -------- -------- Total charge-offs 990 372 190 148 90 Recoveries Commercial, financial and agricultural 77 7 13 6 1 Consumer 3 1 5 4 Real estate (mortgage and construction) 37 4 Other 1 1 -------- -------- -------- -------- -------- Total recoveries 117 9 18 7 9 Net charge-offs 873 363 172 141 81 Provision for loan losses 752 1,006 317 585 191 Allowance acquired through acquisition 700 -------- -------- -------- -------- -------- Balance of allowance for loan losses at end of period $ 2,613 $ 2,034 $ 1,391 $ 1,246 $ 802 ======== ======== ======== ======== ======== Ratio of net charge-offs to average loans 0.45% 0.22% 0.13% 0.13% 0.10% Average loans and leases outstanding during the period $193,045 $164,109 $131,818 $106,032 $ 78,580
The following table sets forth the allowance for loan losses by loan category, based on management's assessment of the risk associated with such categories as of the dates indicated, and summarizes the percentage of gross loans in each category to total gross loans.
DECEMBER 31, 1997 1996 1995 1994 1993 AMOUNT OF AMOUNT OF AMOUNT OF AMOUNT OF AMOUNT OF ($ in thousands) ALLOWANCE % ALLOWANCE % ALLOWANCE % ALLOWANCE % ALLOWANCE % Commercial $1,391 53% $1,098 54% $ 726 52% $ 623 50% $ 417 52% Agricultural 384 15% 285 14% 191 14% 175 14% 137 17% Real estate-mortgage 487 19% 325 16% 242 18% 249 20% 104 13% Real estate-construction 96 4% 122 6% 98 7% 87 7% 48 6% Consumer 144 5% 122 6% 89 6% 75 6% 72 9% Other 111 4% 82 4% 45 3% 37 3% 24 3% ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Total $2,613 100% $2,034 100% $1,391 100% $1,246 100% $ 802 100% ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
9 10 UNITED SECURITY BANCORPORATION INVESTMENTS Management of the investment portfolio is consolidated into a single investment committee of the Company, which comprises the Company's chief executive officer, president and chief operations officer and its vice president and chief financial officer, and the presidents of USB, HSB, and BOP. 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, 1997, 1996 and 1995.
DECEMBER 31, ($ in thousands) 1997 1996 1995 U.S. Treasury and other U.S. Government agencies $55,443 $ 8,630 $17,596 States of the U.S. and political subdivisions 6,722 3,704 365 Other securities 4,605 3,279 4,440 ------- ------- ------- Total securities $66,770 $15,613 $22,401 ======= ======= =======
As of December 31, 1997, 1996 and 1995, the amortized cost of the Company's investment portfolio exceeded its market value by $77,000, $394,000 and $124,000, respectively. No portion of the Company's investment portfolio is invested in derivative securities (being securities whose value derives from the value of an underlying security or securities, or market index of underlying securities' values), and to the Company's knowledge, no portion of any mutual fund held in the Company's investment portfolio was invested in derivative securities. 10 11 UNITED SECURITY BANCORPORATION The following table sets forth the book values, maturities and approximate average aggregate yields of securities in the Company's investment portfolio by type at December 31, 1997.
Type and Maturity ($ in thousands) Yield Amount U.S. Treasury and other U.S. government agencies and corporations: 1 year or less $21,418 Over 1 through 5 years 34,025 Over 5 through 10 years Over 10 years ------- Total 6.75% 55,443 ------- States and political subdivisions 1 year or less 777 Over 1 through 5 years 4,756 Over 5 through 10 years 921 Over 10 Years 268 ------- Total 6.38% 6,722 ------- Other securities: 1 year or less 3,574 Over 1 through 5 years 1,031 Over 5 through 10 years Over 10 years ------- Total 7.24% 4,605 ------- Total investment securities: 1 year or less 25,769 Over 1 through 5 years 39,812 Over 5 through 10 years 921 Over 10 years 268 ------- Total 6.73% $66,770 =======
The yields for tax-exempt securities have been computed on a full tax equivalent basis using an assumed tax rate of 34%. Maturities of mortgage-backed securities, which are primarily included with U.S. government agencies, are estimated and are based on the average lives of the underlying mortgage loans, adjusted to incorporate prepayment assumptions. 11 12 UNITED SECURITY BANCORPORATION DEPOSITS The Company's primary source of funds has historically been customer deposits. The Banks strive to maintain a high percentage of noninterest-bearing deposits, which are low cost funds and result in higher interest margins. At December 31, 1997, 1996, and 1995, the Company's ratios of noninterest-bearing deposits to total deposits were 21.0%, 16.9%, and 15.7%, respectively. The Company offers a variety of accounts designed to attract both short-term and long-term deposits from its customers. These accounts include negotiable order of withdrawal ("NOW") accounts, money market investment accounts, savings accounts, and certificates of deposit and other time deposits. Interest-bearing accounts earn interest at rates established by management of the Banks, based on competitive market factors and management's desire to increase or decrease certain types or maturities of deposits consistent with the Banks policies. The Company traditionally has not sought brokered deposits and does not intend to do so in the future. The following table sets forth the average balances for each major category of deposit and the weighted-average interest rate paid for deposits in 1997, 1996 and 1995.
YEAR ENDED DECEMBER 31, 1997 1996 1995 AVERAGE INTEREST AVERAGE INTEREST AVERAGE INTEREST ($ in thousands) BALANCE RATE BALANCE RATE BALANCE RATE Interest-bearing demand deposits $ 81,020 4.65% $ 56,483 4.44% $ 43,558 4.28% Savings deposits 19,846 3.72% 14,822 3.02% 15,411 3.18% Time deposits 91,169 5.44% 82,840 5.91% 75,340 6.03% Noninterest-bearing demand deposits 39,325 29,060 21,598 -------- -------- -------- Total $231,360 $183,205 $155,907 ======== ======== ========
The following table shows the amounts and maturities of certificates of deposit that had balances of more than $100,000 at December 31, 1997, 1996 and 1995.
DECEMBER 31, ($ in thousands) 1997 1996 1995 Certificates of Deposit over $100,000 with remaining maturity: Less than three months $11,678 $12,103 $ 8,541 Three to six months 5,452 3,635 5,106 Over six months to one year 10,809 8,312 5,994 Over one year 2,222 504 2,052 ------- ------- ------- Total $30,161 $24,554 $21,693 ======= ======= =======
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. 12 13 UNITED SECURITY BANCORPORATION USB competes for deposits and banking business in northeastern Washington from eleven locations in Chewelah, Colville, Davenport, Kettle Falls, Ione, Moses Lake, and Spokane. The Bank's market area encompasses Stevens, Ferry, Grant, Lincoln and Pend Oreille Counties, and the northern and eastern portions of Spokane County. USB competes against two commercial banks and one mutual savings bank in Stevens County, one commercial bank and one credit union in Ferry County, four commercial banks, one federal savings bank and several credit unions in Grant County, and five commercial banks and two credit unions in Lincoln County and two commercial banks and one credit union in Pend Oreille County. In Spokane County, USB competes against approximately seven commercial banks, one mutual savings bank, several credit unions and savings and loans. HSB serves customers in southeastern and southcentral Washington from locations in Mabton, Naches, Sunnyside, Prosser, Yakima and Walla Walla. The bank's market area encompasses Yakima and Walla Walla Counties and the western portion of Benton County. HSB competes against commercial banks, savings and loans, and credit unions in its market area. BOP serves customers in the southeastern corner of the State of Washington and Latah County, Idaho. BOP is located in Whitman County with branches in Pullman, Colton, and Uniontown. Competition within Pullman includes two commercial banks, one mutual savings bank, and a credit union. In Palouse, Washington BOP competes with one local bank. Bank of Pullman transferred its charter to the State of Idaho in order to open a branch in Moscow, Idaho in 1997. Competition in Moscow, Idaho comes from four commercial banks, one savings bank and two credit unions. EMPLOYEES As of December 31, 1997, the Company had 214 employees, of which 84 were employed by USB, 48 were employed by HSB, 44 were employed by BOP, 15 were employed by USB Insurance, 2 were employed by USB Leasing, 13 were employed by USB Mortgage, and 8 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. 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 Sates government securities, changes in reserve requirements of banks, and in the cost of short-term borrowings. These techniques influence overall growth and distribution of credit, bank loans, investments and deposits, and may also affect interest rates charged on loans or paid on deposits. The nature and impact of future changes in monetary policies cannot be predicted. From time to time, legislation has been enacted which has the effect of increasing the cost of doing business, limiting or expanding permissible activities, or affecting the competitive balance between bank and other financial institutions. Legislative proposals which could affect the Company and the banking business in general have been proposed and may be introduced 13 14 UNITED SECURITY BANCORPORATION 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 Bank Holding Company Act of 1956, as amended (the "BHCA"), and its examination and reporting requirements. Under the BHCA, a bank holding company may not directly or indirectly acquire the ownership or control of more than 5% of the voting shares or substantially all of the assets of any company, including a bank or savings and loan association, without the prior approval of the Federal Reserve Board. In addition, bank holding companies are generally prohibited under the BHCA from engaging in nonbanking activities, subject to certain exceptions. The Economic Growth and Regulatory Paperwork Reduction Act of 1996 ("Economic Growth Act") amended the BHCA to eliminate the requirement that bank holding companies seek approval of the Board of Governors of the Federal Reserve ("FRB") before engaging de novo in permissible nonbanking activities if the holding company is well-capitalized and meets certain other specified criteria. A bank holding company meeting those specifications need only notify the FRB within 10 business days after beginning the activity. The Economic Growth Act also established an expedited procedure for well-capitalized bank holding companies meeting certain criteria to obtain FRB approval to acquire smaller companies that engage in permissible non-banking activities pre-approved by FRB order. 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 nonpreferential terms and secured by designated amounts of specified collateral and be limited, as to any one of the holding company or such nonbank subsidiaries, to 10% of the lending bank's capital stock and surplus, and as to the holding company and all such nonbank subsidiaries in the aggregate, to 20% of such capital stock and surplus. Tie-In Arrangements. The Company and its subsidiaries cannot engage in certain tie-in arrangements relating to any extension of credit, sale or lease of property or furnishing of services. For example, with certain exceptions, neither the Company nor its subsidiaries may condition an extension of credit to a customer on either (1) a requirement that the customer obtain additional services provided by it or (2) an agreement by the customer to refrain from obtaining other services from a competitor. In April of 1997, the FRB adopted significant amendments to its anti-tying rules that: (1) removed FRB-imposed anti-tying restrictions on bank holding companies and their non-bank subsidiaries; (2) allowed banks greater flexibility to package products with their affiliates; and (3) established a safe harbor from the tying restrictions for certain foreign transactions. These amendments are designed to enhance competition in banking and nonbanking products and allow banks and their affiliates to provide more efficient, lower cost service to their customers. However, the impact of the amendments on the Company and its subsidiaries is unclear at this time. 14 15 UNITED SECURITY BANCORPORATION 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 Banks. Various federal and state statutory provisions limit the amount of dividends the Banks 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 Banks in any calendar year would exceed the total of the institution's net profits, as defined by regulatory agencies, for such year combined with its retained net profits for the preceding two years. The payment of dividends by the Banks may also be affected by other factors, such as the maintenance of adequate capital. Capital Adequacy. The Federal Reserve Board has issued standards for measuring capital adequacy for bank holding companies. These standards are designed to provide risk-responsive capital guidelines and to incorporate a consistent framework for use by financial institutions operating in major international financial markets. The banking regulators have issued standards of banks that are similar to, but not identical with, the standards of bank holding companies. In general, the risk-related standards require financial institutions and financial institution holding companies to maintain capital levels based on "risk adjusted" assets, so that categories of assets with potentially higher credit risk will require more capital backing than categories with lower credit risk. In addition, financial institutions and financial institution holding companies are required to maintain capital to support off-balance sheet activities such as loan commitments. FDIC Insurance Assessments. The subsidiary depository institutions of 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 bank and the Savings Association Insurance Fund ("SAIF") for savings associations. FIRREA also required the FDIC to set deposit insurance assessments at such levels as would cause BIF and SAIF to reach their "designated reserve ratios" of 1.25 percent of the deposits insured by them within a reasonable period of time. Due to low costs of resolving bank insolvencies in the last few years, BIF reached its designated reserve ratio in May 1995. As a result, effective January 1, 1996, the FDIC eliminated deposit insurance assessments (except for the minimum $2,000 payment required by law) for banks that are well capitalized and well managed and reduced the deposit insurance assessments for all other banks. With the enactment of the Deposit Insurance Funds Act of 1996 ("Funds Act"), for the three-year period beginning in 1997, BIF-insured deposits such as those of the Bank are subject to a Financing Corporation ("FICO") premium assessment on domestic deposits at one-fifth the premium rate (roughly 1.3 basis points) imposed on SAIF-insured deposits (roughly 6.5 basis points). Beginning in the year 2000, BIF-insured institutions like the Bank will be required to pay the FICO obligations on a pro-rata basis with all thrift institutions; annual assessments are expected to equal approximately 2.4 basis points until 2017, to be phased out completely by 2019. The Funds Act provides for the merger of the BIF and SAIF on January 1, 1999, only if no thrift institutions exist on that date. Support of Subsidiary Banks. Under Federal Reserve Board policy, the Company is expected to act as a source of financial strength to the Banks and to commit resources to support the Banks in circumstances where it may not choose to do so absent such a policy. This support may be required at times when the Company may not find itself able to provide it. In addition, any capital loans by the Company to the Banks would also be subordinate in right of payment to 15 16 UNITED SECURITY BANCORPORATION 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 contain various other provisions that may affect the operations of banks and savings institutions. The prompt corrective action provision of FDICIA requires the federal banking regulators to assign each insured institution to one of five capital categories ("well capitalized," "adequately capitalized" or one of three "undercapitalized" categories) and to take progressively more restrictive actions based on the capital categorization, as specified below. Under FDICIA, capital requirements would include a leverage limit, a risk-based capital requirement and any other measure of capital deemed appropriate by the federal banking regulators for measuring the capital adequacy of an insured depository institution. All institutions, regardless of their capital levels, are restricted from making any capital distribution or paying any management fees that would cause the institution to fail to satisfy the minimum levels for any relevant capital measure. The FDIC and the Federal Reserve Board adopted capital-related regulations under FDICIA. Under those regulations, a bank will be well capitalized if it: (i) had a risk-based capital ratio of 10% or greater; (ii) had a ratio of Tier 1 capital to risk-weighted assets of 6% or greater; (iii) had a Tier 1 capital to average assets of 5% or greater and (iv) was not subject to an order, written agreement, capital directive or prompt correction action directive to meet and maintain a specific capital level for any capital measure. A bank will be adequately capitalized if it was not "well capitalized" and: (i) had a risk-based capital ratio of 8% or greater; (ii) had a ratio of Tier 1 capital to risk-weighted assets of 4% or greater; and (iii) had a ratio of Tier 1 capital to average assets of 4% or greater (except that certain associations rated "Composite 1" under the federal banking agencies' CAMEL rating system may be adequately capitalized if their ratios of core capital to adjusted total assets were 3% or greater). FDICIA also makes extensive changes in existing rules regarding audits, examinations and accounting. It generally requires annual on-site, full scope examinations by each bank's primary federal regulatory. It also imposes new responsibilities on management, the independent audit committee and outside accountants to develop or approve reports regarding the effectiveness of internal controls, legal compliance and off-balance sheet liabilities and assets. 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. 16 17 UNITED SECURITY BANCORPORATION 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 Washington. Under recent banking agency regulations, banks are prohibited from using their interstate branches primarily for deposit production. The FDIC and other banking agencies have accordingly implemented a loan-to-deposit ratio screen to ensure compliance with this prohibition. Overall, Riegle-Neal is likely to have the effects of increasing competition and promoting geographic diversification in the banking industry. Securities Registration and Reporting. The common stock of the Company is registered as a class with the SEC under the 1934 Act and thus is subject to the periodic reporting and proxy solicitation requirements and the insider-trading restrictions of that Act. The periodic reports, proxy statements, and other information filed by the Company under that Act can be inspected and copied at or obtained from the office of the SEC in Washington, D.C. In addition, the securities issued by the Company are subject to the registration requirements of the 1933 Act and applicable state securities laws unless exemptions are available. ITEM 2. PROPERTIES. At December 31, 1997, the Company owned or leased facilities in twenty-three locations in eastern Washington and one location in Moscow, Idaho. A description of the property is as follows: USB's Chewelah branch is a leased facility located at S. 106 2nd E. The building has approximately 9,600 square feet and was last renovated in 1983. Approximately 720 square feet is subleased to USB Insurance. The lease is treated as a Capital Lease. The lease agreement expires in 2010. See footnote 12 in the consolidated financial statements for further information. USB's Ione branch is a leased facility located at 222 Main. The building has approximately 3,000 square feet and was renovated in 1983. The lease is treated as a Capital Lease. The lease agreement expires in 2010. See footnote 12 in the consolidated financial statements for further information. USB leased its downtown Spokane facility in 1995 located at 222 N. Wall. The square footage is approximately 8,700 square feet. The lease agreement expires in 2005. The facility is leased from a Company partially owned by a Director of the Company. USB Mortgage and USB Leasing lease approximately 1,850 square feet of shared office space at this facility. Their lease expires in 2000. 17 18 UNITED SECURITY BANCORPORATION The Company owns the USB Colville branch located at 621 South Main and leases it to USB and USB Insurance. The building has approximately 7,700 square feet including 3,100 square feet leased to USB Insurance. The building was renovated in 1991. The Company owns the USB Kettle Falls branch located at Juniper and Highway 395 and leases this facility to USB for a branch and USB Insurance, square footage of approximately 4,200 and 475, respectively. The building was purchased in 1982. The Company owns the USB Northpointe branch located at North 9506 Newport Highway and leases it to USB for a branch and USB Mortgage, square footage of approximately 9,000 and 878, respectively. The remainder of the space or about 1,400 square feet is used by the Company as its headquarters. The building was renovated in 1993. This is also the headquarters location for USB. The mainframe computer location is at this site for the Company. The Company owns the USB Spokane Valley branch located at 14306 E. Sprague and leases it to USB for a branch, a doctor, a securities brokerage firm, and a pharmaceutical. Square footage is about 7,000 square feet with about 4,000 square feet used for banking services. In 1997 USB purchased its branch located in Davenport at 639 Morgan St. The building has approximately 1,350 square feet. In 1997 USB purchased its branch located in Moses Lake at 101 E. 4th Ave. The building has approximately 3,100 square feet. In 1997 the Company constructed the USB branch located in Liberty Lake at 1221 N. Liberty Lake Road. The building has approximately 1,900 square feet. The land is leased. In 1997 the Company constructed the USB branch located in Qualchan at 4233 S. Cheney Spokane Road. The building has approximately 1,900 square feet. The land is leased. The Company owns the HSB branch located in Sunnyside at 322 S. 6th Street. The building was purchased in 1992 and has approximately 5,120 square feet. This is the headquarters location for HSB. The Company owns the HSB branch located in Prosser at 1115 Meade Avenue. The building was purchased in 1989 and has approximately 3,700 square feet. The Company owns the HSB branch located in Yakima located at 315 N. 2nd Street. The building has approximately 10,000 square feet. HSB subleases approximately 2,300 square feet of space to a law firm. In 1997 HSB purchased its branch located in Mabton at 408 B Street. The building has approximately 2,400 square feet. In 1997 HSB purchased its branch located in Naches at 619 2nd St. The building has approximately 3,400 square feet. In 1997 HSB purchased its branch located in Walla Walla at 33 E. Main St. The building has approximately 6,000 square feet. BOP was acquired by the Company in 1997. Its main office located at 300 E. Main Street in Pullman is a leased facility with approximately 6,100 square feet. The building was built in 1900 and renovated in 1980. This is a leased facility. 18 19 UNITED SECURITY BANCORPORATION BOP has a second Pullman location at 1020 N. Grand. It has approximately 4,000 square feet of building space. The building was built in 1961. This is a leased facility. BOP has a third Pullman branch located on the Washington State University campus and was built in 1953 and renovated in 1968. This is a leased facility. The branch has 700 square feet of banking space. This branch will be relocated to South Grand in 1998. BOP has a leased branch in Moscow, Idaho at 505 S. Jackson, which is a new branch opened in 1997. The building area is approximately 1,440 square feet. BOP owns a branch in Colton located at 702 Broadway. It has approximately 3,100 square feet. The building was completed in 1900. BOP owns a branch building in Uniontown at 118 S. Montgomery St. It was built in 1900 and has approximately 1,000 square feet. BOP owns a branch located at Bridge & Main St. in Palouse. It was built in 1900 and has approximately 3,000 square feet. BOP leases an office of this building to an insurance company. 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 1997. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. MARKET INFORMATION. Effective in May, 1995 the Common Stock was approved for quotation on the Nasdaq National Market System (NASDAQ) under the symbol "USBN". 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 1997 and 1996 as reported by NASDAQ.
1997 1996 HIGH LOW HIGH LOW First Quarter $13.86 $11.57 $11.15 $9.82 Second Quarter $13.18 $11.59 $11.15 $9.71 Third Quarter $16.94 $12.62 $12.40 $9.71 Fourth Quarter $19.09 $16.14 $12.60 $10.54
Per share amounts have been adjusted giving retroactive effect to stock split-ups and stock dividends. 19 20 UNITED SECURITY BANCORPORATION HOLDERS. The number of holders of common stock of record on February 14, 1998 was approximately 1,200. DIVIDENDS. The Company has declared and paid the following dividends subsequent to January 1, 1995: 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 February 10, 1998, the Company paid a 10% stock dividend. 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. 20 21 UNITED SECURITY BANCORPORATION ITEM 6. SELECTED FINANCIAL DATA. The following table sets forth certain selected consolidated financial data of the Company at and for the years ended December 31: ($ in thousands, except per share amounts) 1997 1996 1995 1994 1993 Net interest income $ 14,780 $ 12,572 $ 10,042 $ 7,768 $ 6,021 Provision for loan losses 752 1,006 317 585 191 Noninterest income 3,717 2,981 3,765 2,258 2,149 Noninterest expense 10,628 9,872 8,414 6,446 5,918 Income before income tax expense 7,117 4,675 5,076 2,995 2,060 Income tax expense 2,253 1,513 1,325 1,017 695 Net income 4,864 3,162 3,751 1,978 1,365 Basic earnings per common share $ 1.20 $ 0.78 $ 1.09 $ 0.92 $ 0.72 Diluted earnings per common share $ 1.19 $ 0.78 $ 1.09 $ 0.92 $ 0.72 Return on average assets 1.81% 1.47% 2.10% 1.36% 1.17% Return on average equity 16.07% 11.90% 19.39% 18.91% 17.20% Assets $ 350,479 $ 231,049 $ 191,578 $ 163,911 $ 125,737 Securities 66,770 15,613 22,401 23,135 20,888 Loans: Commercial and industrial 122,482 97,086 75,011 61,968 46,593 Agricultural 33,787 25,621 19,787 16,721 15,136 Real estate mortgage 42,884 29,318 25,048 24,883 12,079 Real estate construction 8,440 9,954 10,169 8,126 6,303 Installment 12,666 10,527 9,234 7,781 6,185 Lease financing 5,209 3,038 1,336 54 Bank cards and other loans 4,541 3,384 3,172 3,286 2,874 Total loans 230,009 178,928 143,757 122,765 89,224 Allowance for loan loss to loans percentage 1.14% 1.14% 0.97% 1.02% 0.90% Deposits 307,586 197,399 163,791 146,629 114,139 Borrowings 6,989 3,242 767 4,035 1,658 Stockholders' equity 33,089 28,013 24,863 12,186 8,643 Equity to assets ratio 9.44% 12.12% 12.98% 7.43% 6.87% Book value per common share $ 8.16 $ 6.92 $ 6.17 $ 5.19 $ 4.53 Number of common shares outstanding 4,052,775 4,050,575 4,031,554 2,347,839 1,908,795 Weighted average shares outstanding 4,051,961 4,042,811 3,441,502 2,149,050 1,908,795
See Results of Operations for a description of the nonrecurring items impacting the above years for comparative purposes. 21 22 UNITED SECURITY BANCORPORATION ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. 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. For the years ended December 31, 1997, 1996, and 1995, the Company's average net interest margins were 6.1%, 6.4%, and 6.1%, respectively. See Asset/Liability Management. Net income is also affected by levels of provisions for loan losses, noninterest income (primarily service charges on deposits, insurance commissions, and other operating income) and noninterest expenses (primarily salaries and benefits, occupancy expense, data processing cost, legal and professional services expense, business and occupation tax, and other operating expenses). For the three years ended December 31, 1997, 1996, and 1995, the provision for loan losses was $752,000, $1,006,000, and $317,000, respectively. Net charge-offs during the year ended December 31, 1997 were $873,000 as compared to $363,000 and $172,000 during 1996 and 1995, respectively. For the three years ended December 31, 1997, 1996, and 1995 noninterest income as a percentage of personnel expenses was 57%, 50%, and 76%, respectively. NET INTEREST INCOME The following table sets forth information with regard to average balances of assets and liabilities, and interest income from interest-earning assets and interest expense on interest-bearing liabilities, resultant yields or costs, net interest income, net interest spread (the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities), and the net interest margin.
YEAR ENDED DECEMBER 31, 1997 1996 ($ in thousands) AVERAGE AVERAGE ASSETS BALANCE INTEREST % BALANCE INTEREST % Loans $193,045 $ 21,501 11.14% $164,109 $ 18,765 11.43% Taxable securities 26,274 1,790 6.81% 15,404 1,038 6.74% Nontaxable securities 5,785 369 6.38% 3,732 285 7.64% Federal funds sold 11,323 623 5.50% 7,460 402 5.39% Time deposits with other banks 8,884 486 5.47% 5,935 306 5.16% -------- -------- ----- -------- -------- ----- Total interest earning assets 245,311 $ 24,769 10.10% 196,640 $ 20,796 10.58% ======== ===== ======== ===== Noninterest earning assets 23,765 19,066 -------- -------- Total assets $269,076 $215,706 ======== ======== LIABILITIES Interest-bearing demand deposits $ 81,020 $ 3,768 4.65% $ 56,483 $ 2,506 4.44% Savings deposits 19,846 739 3.72% 14,822 447 3.02% Time deposits 91,169 4,956 5.44% 82,840 4,897 5.91% -------- -------- ----- -------- -------- ----- Total interest-bearing deposits 192,035 9,463 4.93% 154,145 7,850 5.09% Short-term debt 105 5 4.76% Long-term debt 4,796 432 9.01% 3,077 292 9.49% -------- -------- ----- -------- -------- ----- Total interest-bearing liabilities 196,831 $ 9,895 5.03% 157,327 $ 8,147 5.18% ======== ===== ======== ===== Noninterest bearing demand deposits 39,325 29,060 Other noninterest bearing liabilities 2,656 2,695 -------- -------- Total liabilities 238,812 189,082 STOCKHOLDERS' EQUITY 30,264 26,624 -------- -------- Total liabilities and stockholders' equity $269,076 $215,706 ======== ======== Net interest income $ 14,874 5.07% $ 12,649 5.40% ======== ==== ======== ===== Net interest margin to average earning assets 6.06% 6.43% ==== ====
YEAR ENDED DECEMBER 31, 1995 ($ in thousands) AVERAGE ASSETS BALANCE INTEREST % Loans $131,818 $ 14,976 11.36% Taxable securities 24,030 1,634 6.80% Nontaxable securities 228 17 7.46% Federal funds sold 3,788 205 5.41% Time deposits with other banks 3,746 228 6.09% -------- -------- ----- Total interest earning assets 163,610 $ 17,060 10.43% ======== ===== Noninterest earning assets 14,804 -------- Total assets $178,414 ======== LIABILITIES Interest-bearing demand deposits $ 43,558 $ 1,865 4.28% Savings deposits 15,411 490 3.18% Time deposits 75,340 4,546 6.03% -------- -------- ----- Total interest-bearing deposits 134,309 6,901 5.14% Short-term debt 1,084 35 3.23% Long-term debt 779 78 10.01% -------- -------- ----- Total interest-bearing liabilities 136,172 $ 7,014 5.15% ======== ===== Noninterest bearing demand deposits 21,598 Other noninterest bearing liabilities 1,303 -------- Total liabilities 159,073 STOCKHOLDERS' EQUITY 19,341 ======== Total liabilities and stockholders' equity $178,414 ======== Net interest income $ 10,046 5.28% ======== ===== Net interest margin to average earning assets 6.14% =====
Nonaccrual loans are included with loan balances. In the above table tax exempt securities income has been adjusted to a tax equivalent basis using an assumed tax rate of 34%. 22 23 UNITED SECURITY BANCORPORATION The following table illustrates the changes in the Company's net interest income due to changes in volumes and interest rates.
1997 VS 1996 1996 VS 1995 INCREASE (DECREASE) IN NET INTEREST INCOME DUE TO CHANGES IN ($ in thousands) VOLUME RATE TOTAL VOLUME RATE TOTAL INTEREST EARNING ASSETS Loans $ 3,309 $ (573) $ 2,736 $ 3,669 $ 120 $ 3,789 Securities 841 (22) 819 (348) (53) (401) Federal funds sold 208 13 221 199 (2) 197 Interest-bearing deposits in other banks 152 28 180 133 (55) 78 -------- -------- -------- -------- -------- -------- Total interest earning assets 4,510 (554) 3,956 3,653 10 3,663 -------- -------- -------- -------- -------- -------- INTEREST BEARING LIABILITIES Interest-bearing demand deposits 1,089 173 1,262 553 88 641 Savings deposits 152 140 292 (19) (24) (43) Time deposits 492 (433) 59 453 (102) 351 -------- -------- -------- -------- -------- -------- Total interest bearing deposits 1,733 (120) 1,613 987 (38) 949 Short-term debt (5) (5) (32) 2 (30) Long-term debt 163 (23) 140 230 (16) 214 -------- -------- -------- -------- -------- -------- Total interest bearing liabilities 1,891 (143) 1,748 1,185 (52) 1,133 ======== ======== ======== ======== ======== ======== Total increase (decrease) in net interest income $ 2,619 $ (411) $ 2,208 $ 2,468 $ 62 $ 2,530 ======== ======== ======== ======== ======== ========
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, 1997, the net interest margins of USB, HSB, and BOP were 5.46%, 5.10%, and 5.42%, 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 savings, negotiable order of withdrawal ("NOW") accounts and money market 23 24 UNITED SECURITY BANCORPORATION 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, 1997. 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.
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 INTEREST-EARNING ASSETS: Fixed-rate loans $ 10,521 $ 15,646 $53,886 $40,441 $120,494 Floating-rate loans 108,854 108,854 Securities 9,900 15,869 39,812 1,189 66,770 Other interest-earning assets 14,866 14,866 --------- --------- ------- ------- -------- Total interest-earning assets $ 144,141 $ 31,515 $93,698 $41,630 $310,984 ========= ========= ======= ======= ======== INTEREST-BEARING LIABILITIES: Savings and NOW accounts $ 129,811 $129,811 Certificates of deposit over $100,000 11,678 16,261 2,222 30,161 Other time deposits 22,618 49,710 10,645 55 83,028 Long-term debt 5,530 15 124 588 6,257 --------- --------- ------- ------- -------- Total interest-bearing liabilities $ 169,637 $ 65,986 $12,991 $ 643 $249,257 ========= ========= ======= ======= ======== Interest sensitivity gap $ (25,496) $ (34,471) $80,707 $40,987 Cumulative interest sensitive gap (25,496) (59,967) 20,740 61,727 As a percentage of total assets -7.27% -17.11% 5.92% 17.61%
Certain assumptions are inherent in the method of analysis presented in the foregoing table. For example, although certain assets and liabilities may have similar maturities and periods to repricing, they may react differently to changes in market interest rates. Also, interest rates on assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other assets and liabilities may follow changes in market interest rates. Additionally, certain assets have features that restrict changes in the interest rates of such assets, both on a short-term basis and over the lives of such assets. A change in market interest rates, prepayments and early withdrawals could cause significant deviation from the stated payments, maturities and repricings. 24 25 UNITED SECURITY BANCORPORATION The following table presents the aggregate maturities of loans in each major category of the Banks' loan portfolios at December 31, 1997. Actual maturities may differ from the contractual maturities shown below as a result of renewals and prepayments.
AGGREGATE MATURITIES AT DECEMBER 31, 1997 LESS THAN ONE TO OVER FIVE ($ in thousands) ONE YEAR FIVE YEARS YEARS TOTAL Commercial, financial and agricultural $68,732 $41,615 $45,922 $156,269 Real estate-mortgage 9,549 17,595 15,740 42,884 Real estate-construction 7,413 752 275 8,440 Consumer 5,392 5,933 1,341 12,666 Other 4,643 5,058 49 9,750 ------- ------- ------- -------- Total $95,729 $70,953 $63,327 $230,009 ======= ======= ======= ========
RESULTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 GENERAL. The Company's net income was $4,864,000 in 1997, $3,162,000 in 1996, and $3,751,000 in 1995. Basic earnings per share were $1.20, $.78, and $1.09 for 1997, 1996, and 1995, respectively. The results were impacted by the following nonrecurring items: 1. In 1997, the Company recovered from its insurance provider $796,000 for a theft by a former employee of its bank subsidiary, Home Security Bank. After income taxes the recovery improved 1997 net income by $525,000 or $.14 per share. In 1996, the Company detected and recorded an estimated operational loss of $860,000 for the theft. This reduced after tax net income by $568,000 or $.14 per share. Without the impact of the theft recovery and loss net income would have been $4,339,000 and $3,730,000 for 1997 and 1996, respectively. Earnings per share would have been $1.06 for 1997 and $.92 for 1996. 2. 1995 earnings were improved by $651,000 for the net of life insurance proceeds received of $1,030,000 less death benefit expense of $379,000 from the death of a key employee. Net income was improved by $780,000 or $.23 per share. Net income would have been $2,971,000 or $.86 per share without the net amount of the life insurance proceeds. The Company completed an acquisition of the Bank of Pullman in October, 1997 for $11,955,000. The acquisition was accounted for as a purchase transaction. Accordingly, the results of operations of Bank of Pullman increased net income of the Company subsequent to the date of acquisition by $225,000. The acquisition increased assets by $64 million, intangible assets by $4.8 million, and deposits by $55 million as of December 31, 1997. In July, 1997 the Company purchased five branches from Wells Fargo Bank. USB purchased two branches located in Davenport and Moses Lake, Washington. HSB purchased three branches located in Mabton, Naches, and Walla Walla, Washington. The acquisitions increased deposits by approximately $35 million, premises and equipment by $1.9 million, and intangible assets by $2.1 million. Return on average assets was 1.81%, 1.47%, and 2.10% for 1997, 1996, and 1995, respectively. Return on average equity was 16.07%, 11.90%, and 19.39% for 1997, 1996, and 1995, respectively. Without the nonrecurring items described above, return on assets would have been 1.61%, 1.73%, and 1.67% for 1997, 1996, and 1995, respectively. Return on equity would have been 14.34%, 14.01%, and 15.36% for 1997, 1996, and 1995, respectively. 25 26 UNITED SECURITY BANCORPORATION NET INTEREST INCOME. Net interest income increased 18% to $14,780,000 in 1997 compared to 1996. The increase in 1996 was 25% to $12,572,000 over 1995 results. The net interest income improvements were primarily the result of loan volume increases in 1997 and 1996. The Company's net interest margin to average earning assets was 6.06%, 6.43%, and 6.14% in 1997, 1996, and 1995, respectively. Consistent with the decline in market interest rates the yield on earning assets dropped by .44% in 1997 while the decline on interest-bearing liabilities was .15%. The yield on loans declined from 11.43% in 1996 to 11.14% in 1997. The Company's cost of funds declined from 5.18% in 1996 to 5.03% in 1997. NONINTEREST INCOME. Noninterest income, which consists of fees and service charges, insurance commissions, insurance proceeds, and other income, increased by 25% in 1997 to $3,717,000 and decreased 21% to $2,981,000 in 1996. Unusual insurance proceeds of $796,000 in 1997 for recovery of the theft loss and $1,030,000 in 1995 for life insurance are included in the income reported. Without the unusual income noninterest income would have been $2,921,000, $2,981,000, and $2,735,000 for 1997, 1996 and 1995, respectively. Fees and service charges for banking services increased by 19% in 1997 as the Company expanded its core deposit base with normal growth and the acquisitions of Bank of Pullman and Wells Fargo. The customer deposit base growth income was offset by declines in insurance commissions and leasing income in 1997. NONINTEREST EXPENSE. Noninterest expense increased by 8% in 1997 to $10,628,000 and 17% in 1996 to $9,872,000. The Company expanded its branch locations from 10 at the end of 1996 to 24 near the end of 1997. The acquisitions of Bank of Pullman and the Wells Fargo branches increased the number of full time equivalent employees to 214 as of December 31, 1997 from 150 as of December 31, 1996. Occupancy, equipment and other expense increased with the acquisitions and planned acquisition activity. The operational loss of $860,000 described above was reported in 1996. A death benefit expense of $379,000 was recorded in 1995 as described above. YEAR 2000 The Corporation is reviewing its automated systems and business processes to identify and correct any date-related problems that may arise with the change of the century at December 31, 1999. The provider of the Company's mainframe computer applications will provide a Year 2000 software compliance update. The Company intends to install and test the release by September 30, 1998. The installation will also upgrade the mainframe operating systems. The Company is also reviewing its PC hardware and software and its major automated systems suppliers for Year 2000 compliance. A small number of PCs and PC systems will require upgrades. USB, HSB, and BOP are incorporating Year 2000 issues into their standards of creditworthiness for new and renewed loans and are reviewing significant existing borrowers for Year 2000 risk. Review in this area will continue through 1999. The cost of complying with the Year 2000 issues is presently estimated to be $150,000 including staff time costs. 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. 26 27 UNITED SECURITY BANCORPORATION The Company's total stockholders' equity increased to $33,089,000 at December 31, 1997, from $28,013,000 at December 31, 1996 and $24,863,000 at December 31, 1995. At December 31, 1997, stockholders' equity was 9.44% of total assets, compared to 12.12% at December 31, 1996. The reduction was the results of the acquisitions of BOP and five Wells Fargo branches during 1997. At December 31, 1997, the Company held cash and cash-equivalent assets of $33.9 million. At such date, virtually all of the Company's investment securities ($65 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, 1997. 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 were allocated among the Company's subsidiaries. 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. NEW ACCOUNTING PRONOUNCEMENTS. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 130 "Reporting Comprehensive Income." This Statement establishes standards for reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. SFAS No. 130 requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. The Financial Accounting Standards Board also issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" in June 1997. SFAS No. 131 established standards for the way that public business enterprises report information about operating segments in annual financial statements. Both of these statements become effective for the Company on January 1, 1998 and provide additional disclosures about the Company's operations. They are not anticipated to have material effect on the financial position or results of operations of the Company. 27 28 UNITED SECURITY BANCORPORATION ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. MARKET RISK Management considers interest rate risk to be a market rate risk that could have a significant effect on the financial condition and results of operations. The Company does not use derivatives including forward and futures contracts, options, and swaps to manage its market and interest rate risks. All of the Company's transactions are denominated in U.S. dollars. Approximately 47% of the Company's loan portfolio have interest rates, which float with the lending Bank's reference rate. Fixed rate loans are generally made with a term of five years or less. In the Management Discussion and Analysis is a table presenting estimated maturity or pricing information indicating the Company's exposure to interest rate changes. The assumptions used in presenting the information are discussed before and after the table. In the Asset/Liability section of the Management Discussion and Analysis is a description of the process used to manage its interest rate risk. The following table discloses the balances of the financial instruments including the fair value as of December 31, 1997. The expected maturities take into consideration historical and estimated principal prepayments for loans and securities. Principal prepayments are the amounts of principal reduction in addition to contractual amortization. Fixed-rate and variable-rate loans are expected to have prepayment rates of 20%. Mortgage-backed securities are assumed to have a prepayment based on a broker analysis of the actual security held in the portfolio. The expected maturities for financial liabilities with no stated maturity reflect historical and estimated future roll-off rates. The roll-off rates for noninterest bearing deposits, interest-bearing demand deposits and savings deposits is 15%, 25%, and 20%, respectively. The interest rates disclosed are based on rates from 1997 results. Fair values are based on the calculations used in accordance with generally accepted accounting principles as disclosed in the financial statements.
Year ended December 31, 1997 EXPECTED MATURITY FAIR ($ in thousands) 1998 1999 2000 2001 2002 THEREAFTER TOTAL VALUE FINANCIAL ASSETS Cash and due from banks $ 19,058 $ 19,058 $ 19,058 Overnight interest-bearing deposits with other banks 9,656 9,656 9,656 Weighted average interest rate 5.47% Federal funds sold 5,210 5,210 5,210 Weighted average interest rate 5.50% Securities 25,769 13,070 7,887 8,038 10,817 1,189 66,770 66,790 Weighted average interest rate 6.73% Fixed rate loans 24,099 24,099 24,099 24,099 24,098 120,494 125,213 Weighted average interest rate 10.90% Variable rate loans 21,771 21,771 21,771 21,771 21,770 108,854 108,854 Weighted average interest rate 11.41% FINANCIAL LIABILITIES Noninterest bearing deposits 9,688 9,688 9,688 9,688 9,688 16,146 64,586 64,586 Interest-bearing demand deposits 24,422 24,422 24,422 24,421 97,687 97,687 Weighted average interest rate 4.65% Savings deposits 6,425 6,425 6,425 6,425 6,424 32,124 32,124 Weighted average interest rate 3.72% Time deposits 100,266 11,394 727 524 223 55 113,189 113,284 Weighted average interest rate 5.44% Notes payable 212 139 536 2,427 2,943 6,257 6,257 Weighted average interest rate 9.01%
The above table presents information about the Company's interest sensitivity, it does not predict future earnings. The Company uses budgeting and earnings projections to forecast earnings under different interest rate projections. It requires significant assumptions about the projection of loan prepayments, loan originations and liability funding sources, which may be inaccurate. Weighted average interest rates by expected maturity is not available. 28 29 UNITED SECURITY BANCORPORATION ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The consolidated financial statements and supplementary data of the Company and its subsidiaries for the years ended December 31, 1997, 1996, and 1995, which have been audited except as indicated by Moss Adams LLP or McFarland & Alton, P.S., are included elsewhere in this report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. In 1997 the Company selected Moss Adams LLP as its new independent auditors. During the years ended December 31, 1997, 1996, and 1995, there were no disagreements with Moss Adams LLP or 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 10. DIRECTORS AND EXECUTIVE OFFICERS. The information requested by this item is contained in the registrant's 1998 proxy statement, and is incorporated by reference herein. ITEM 11. EXECUTIVE COMPENSATION. The information requested by this item is contained in the registrant's 1998 proxy statement, and is incorporated by reference herein. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information requested by this item is contained in the registrant's 1998 proxy statement, and is incorporated by reference herein. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information requested by this item is contained in the registrant's 1998 proxy statement, and is incorporated by reference herein. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) (1) Financial Statements United Security Bancorporation and Subsidiaries: Independent Auditor's Reports on Consolidated Financial Statements Consolidated Statements of Condition Consolidated Statements of Income Consolidated Statements of Changes in Stockholders' Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements (a) (2) There are no financial statement schedules filed herewith. 29 30 UNITED SECURITY BANCORPORATION (a) (3) Exhibits 3.1 Articles of Incorporation of Registrant, as amended. Filed as Exhibit 3a to the Registrant's Registration Statement on Form S-14 (File No. 2-86318) and redesignated and incorporated by reference herein as Exhibit 3.1. 3.2 By-Laws of Registrant, as amended. Filed as Exhibit 3b to the Registrant's Registration Statement on Form S-14 (File No. 2-86318) and redesignated and incorporated by reference herein as Exhibit 3.2. 10.1 1995 Incentive Stock Option Plan. Form of Incentive Stock Option Plan Agreement. Filed herewith. 10.2 Form of Salary Continuation Agreement. Exhibit A of the agreement for William C. Dashiell, Daniel P. Murray , and Duane L. Brandenburg. Filed herewith. 21 Subsidiaries of Registrant. Reference is made to "Item 1. Business. United Security Bancorporation, The Banks, USB Insurance, USB Leasing, and USB Mortgage" for the required information. 27 Financial Data Schedule. (b) Reports on Form 8-K filed in fourth quarter 1997.
Date Item # Subject October 7, 1997 Item 5. United Security and The Wheatland Bank Terminate Merger October 24, 1997 Item 5. United Security completes acquisition of Bank of Pullman October 31, 1997 Item 2. Acquisition of Community Ban Corporation and Bank of Pullman November 6, 1997 Item 7. Community Ban Corporation and Bank of Pullman acquisition financial statements
(c) All schedules are omitted as the required information is not applicable or the information is presented in the Consolidated Financial Statements or related notes. 30 31 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 By: /s/ Richard Emery ------------------------------- ------------------------------------ William C. Dashiell, Chairman Richard Emery, President and and Chief Executive Officer and Chief Operating Officer and Director Director Date: March 24, 1998 Date: March 24, 1998
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. By: /s/ David C. Blankenship By: /s/ Chad Galloway ------------------------------- ------------------------------------ David C. Blankenship, Director Chad Galloway, Vice President and Date: March 24, 1998 Chief Financial Officer Date: March 24, 1998 By: /s/ Rand Elliott By: /s/ Dann Simpson ------------------------------- ------------------------------------ Rand Elliott, Director Dann Simpson, Director Date: March 24, 1998 Date: March 24, 1998 By: /s/ Robert J. Gardner By: /s/ Norman J. Traaen ------------------------------- ------------------------------------ Robert J. Gardner Norman J. Traaen Date: March 24, 1998 Date: March 24, 1998 By: /s/ Robert L. Golob By: /s/ Ron Wachter ------------------------------- ------------------------------------ Robert L. Golob, Director Ron Wachter, Director Date: March 24, 1998 Date: March 24, 1998 By: /s/ Keith P. Sattler ------------------------------- Keith P. Sattler, Director Date: March 24, 1998
31 32 UNITED SECURITY BANCORPORATION Independent Auditor's Report Board of Directors and Shareholders United Security Bancorporation Spokane, Washington We have audited the accompanying consolidated statement of financial condition of United Security Bancorporation and subsidiaries as of December 31, 1997, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for the year then ended. 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 audit. We conducted our audit 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 audit provides a reasonable basis for our opinion. In our opinion, the 1997 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, 1997, and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. January 29, 1998 /s/ Moss Adams LLP Everett, Washington 32 33 UNITED SECURITY BANCORPORATION Independent Auditor's Report Board of Directors and Shareholders United Security Bancorporation Spokane, Washington We have audited the accompanying consolidated statement of financial condition of United Security Bancorporation and subsidiaries as of December 31, 1996, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for the years ended December 31, 1996 and 1995. 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 the results of its operations, changes in stockholders' equity, and its cash flows for the years ended December 31, 1996 and 1995, in conformity with generally accepted accounting principles. February 26, 1997 /s/ McFarland & Alton, P.S. Spokane, Washington 33 34 UNITED SECURITY BANCORPORATION CONSOLIDATED STATEMENTS OF CONDITION DECEMBER 31, 1997 AND 1996 ($ In thousands)
1997 1996 ASSETS Cash and due from banks $ 19,058 $ 10,430 Overnight interest bearing deposits with other banks 9,656 6,223 Federal funds sold 5,210 10,770 ---------- ---------- Cash and cash equivalents (Note 4) 33,924 27,423 Securities (Note 5) 66,770 15,613 Loans, net of allowance for loan losses of $2,613 in 1997 and $2,034 in 1996 (Notes 6, 14, and 18) 226,735 176,386 Accrued interest receivable 2,867 2,108 Premises and equipment, net (Notes 7 and 12) 9,199 6,117 Foreclosed real estate and other foreclosed assets 967 205 Life insurance and salary continuation assets (Note 8) 2,512 2,311 Intangible assets (Note 2) 6,910 119 Other assets (Note 9) 595 767 ---------- ---------- TOTAL ASSETS $ 350,479 $ 231,049 ========== ========== LIABILITIES Noninterest bearing - demand deposits $ 64,586 $ 33,281 Interest bearing deposits: NOW and savings accounts 129,811 80,735 Time, $100,000 and over (Note 10) 30,161 24,554 Other time (Note 10) 83,028 58,829 ---------- ---------- TOTAL DEPOSITS (Note 18) 307,586 197,399 Notes payable (Note 11) 6,257 2,491 Capital lease obligations (Note 12) 732 751 Accrued interest payable 813 630 Other liabilities (Notes 8 and 9) 2,002 1,765 ---------- ---------- TOTAL LIABILITIES 317,390 203,036 Commitments and contingencies (Note 12) STOCKHOLDERS' EQUITY Common stock, no par, shares authorized 15 million; issued and outstanding 4,052,775 in 1997 and 4,050,575 in 1996 (Note 13) 28,383 21,001 Retained earnings (Note 14) 4,771 7,276 Net unrealized loss on securities available-for-sale, net of tax of $33 in 1997 and $136 in 1996 (Note 5) (65) (264) ---------- ---------- TOTAL STOCKHOLDERS' EQUITY 33,089 28,013 ---------- ---------- TOTAL LIABILITIES and STOCKHOLDERS' EQUITY $ 350,479 $ 231,049 ========== ==========
The accompanying notes are an integral part of these statements. 34 35 UNITED SECURITY BANCORPORATION CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995 ($ In thousands, except per share amounts)
1997 1996 1995 INTEREST INCOME Interest and fees on loans $ 21,501 $ 18,765 $ 14,976 Interest on securities 2,065 1,246 1,647 Other Interest Income 1,109 708 433 ------------ ------------ ------------ TOTAL INTEREST INCOME 24,675 20,719 17,056 ------------ ------------ ------------ INTEREST EXPENSE Interest on deposits 9,463 7,850 6,901 Interest on borrowings 432 297 113 ------------ ------------ ------------ TOTAL INTEREST EXPENSE 9,895 8,147 7,014 ------------ ------------ ------------ NET INTEREST INCOME 14,780 12,572 10,042 Provision for loan losses (Note 6) 752 1,006 317 ------------ ------------ ------------ NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 14,028 11,566 9,725 ------------ ------------ ------------ NONINTEREST INCOME Fees and service charges 1,322 1,109 887 Insurance commissions 1,125 1,200 1,255 Securities gains, net (21) 53 53 Life insurance proceeds (Note 8) 1,030 Insurance proceeds (Note 22) 796 Other 495 619 540 ------------ ------------ ------------ TOTAL NONINTEREST INCOME 3,717 2,981 3,765 ------------ ------------ ------------ NONINTEREST EXPENSE Salaries and employee benefits 6,481 5,960 4,980 Occupancy expense, net 732 618 488 Equipment expense 832 701 579 Operational loss (Note 22) 860 Death benefit expense (Note 8) 379 Legal and professional services expense 594 220 133 FDIC assessments 26 4 209 State business and occupation tax 328 279 251 Other operating expense 1,635 1,230 1,395 ------------ ------------ ------------ TOTAL NONINTEREST EXPENSE 10,628 9,872 8,414 ------------ ------------ ------------ INCOME BEFORE INCOME TAX EXPENSE 7,117 4,675 5,076 FEDERAL INCOME TAX EXPENSE (Note 9) 2,253 1,513 1,325 ------------ ------------ ------------ NET INCOME $ 4,864 $ 3,162 $ 3,751 ============ ============ ============ Basic earnings per common share (Notes 1, 3 and 21) $ 1.20 $ 0.78 $ 1.09 Diluted earnings per common share (Notes 1, 3 and 21) $ 1.19 $ 0.78 $ 1.09 Weighted average shares outstanding (Note 13) 4,051,961 4,042,811 3,441,502
The accompanying notes are an integral part of these statements. 35 36 UNITED SECURITY BANCORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995 ($ in thousands)
NET UNREALIZED COMMON STOCK RETAINED GAINS ESOP SHARES AMOUNT EARNINGS (LOSSES) GUARANTEE TOTAL --------- --------- --------- --------- --------- --------- Balances, January 1, 1995 1,604,880 $ 10,202 $ 2,552 $ (548) $ (20) $ 12,186 Initial public offering of common stock on May 5 and June 4, 1995 1,150,000 8,455 8,455 10% stock dividend on August 23, 1995 274,974 2,189 (2,189) 0 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 13) 302,456 --------- --------- --------- --------- --------- --------- Balances, December 31, 1995 3,332,310 20,837 4,114 (88) 0 24,863 Common stock issued for options exercised (Note 16) 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 13) 334,311 --------- --------- --------- --------- --------- --------- Balances, December 31, 1996 3,682,341 21,001 7,276 (264) 0 28,013 Common stock issued for options exercised (Note 16) 2,000 20 20 Redemption of fractional shares (7) (7) Net change in unrealized loss on available-for-sale securities, net of taxes 199 199 Net income for 1997 4,864 4,864 10% stock dividend on February 10, 1998 (Note 13) 368,434 7,369 (7,369) 0 --------- --------- --------- --------- --------- --------- Balances, December 31, 1997 4,052,775 $ 28,383 $ 4,771 ($ 65) $ 0 $ 33,089 ========= ========= ========= ========= ========= =========
The accompanying notes are an integral part of these statements. 36 37 UNITED SECURITY BANCORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995 ($ in thousands)
1997 1996 1995 CASH FLOWS FROM OPERATING ACTIVITIES Net Income $ 4,864 $ 3,162 $ 3,751 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 752 1,006 317 Depreciation and amortization 516 507 462 Deferred income taxes 372 144 34 Gain on sale of other real estate (35) (Increase) decrease in assets: Accrued interest receivable (30) (473) (156) Life insurance and salary continuation assets (201) 4 (402) Other assets 406 92 (24) Increase/(decrease) in liabilities: Accrued interest payable 102 50 226 Other liabilities (598) 188 1,105 -------- -------- -------- NET CASH FROM OPERATING ACTIVITIES 6,183 4,680 5,278 -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Securities available-for-sale: Maturities 7,686 8,446 3,586 Sales 12,050 7,215 11,745 Purchases (49,326) (8,898) (13,570) Securities held-to-maturity: Maturities 1,181 25 10 Purchases (1,665) (266) (340) Net increase in loans and leases (20,607) (35,731) (21,391) Purchase of Bank of Pullman (5,297) Cash received from Wells Fargo branch acquisition 30,356 Purchases of premises and equipment (950) (241) (1,777) Proceeds from sale of premises and equipment 28 Proceeds from foreclosed real estate sales 688 365 191 -------- -------- -------- NET CASH FROM INVESTING ACTIVITIES (25,884) (29,085) (21,518) -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Net increase in deposits 22,442 33,608 17,162 Federal funds purchased (2,725) Proceeds from notes payable 8,704 2,529 Principal payments on notes payable (4,938) (38) (485) Principal payments on capital lease obligations (19) (16) (38) Proceeds from issuance of capital stock 20 171 8,455 Cash paid for redemption of fractional shares (7) (7) (9) -------- -------- -------- NET CASH FROM FINANCING ACTIVITIES 26,202 36,247 22,360 -------- -------- -------- NET INCREASE IN CASH AND CASH EQUIVALENTS 6,501 11,842 6,120 Cash and cash equivalents at January 1 27,423 15,581 9,461 -------- -------- -------- Cash and cash equivalents at December 31 $ 33,924 $ 27,423 $ 15,581 ======== ======== ======== Interest paid $ 9,712 $ 8,242 $ 6,788 Income taxes paid $ 1,922 $ 1,633 $ 1,168 Supplemental Schedule of Noncash Investing and Financing Activities Foreclosed real estate acquired in settlement of loans $ 1,372 $ 210 $ 326 Transfers from securities at cost to securities at fair value $ 111 Purchase of Bank of Pullman Fair value of assets acquired $ 65,813 Cash paid for the capital stock $(11,955) -------- Liabilities assumed $ 53,858 ========
The accompanying notes are an integral part of these statements. 37 38 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, Home Security Bank, and Bank of Pullman after eliminating all significant intercompany balances and transactions. NATURE OF BUSINESS: United Security Bank and Home Security Bank are state chartered commercial banks under the laws of the State of Washington, and provide banking services primarily throughout eastern and central Washington. Bank of Pullman is a banking corporation originally organized under the laws of the state of Washington. In 1997, Bank of Pullman relocated its charter to the State of Idaho. 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 and the accompanying notes. Actual results could differ, either positively or negatively, from those estimates. Material estimates that are particularly susceptible to significant change in the near-term relate to the determination of the allowance for loan losses and the valuation of real estate acquired in connection with foreclosures or in the satisfaction of loans. In connection with the determination of the allowance for loan losses and other real estate owned, management obtains independent appraisals for significant properties. Management believes that the allowances for loan losses and other real estate owned are adequate. While management uses currently available information to recognize losses on loans and other real estate owned, future additions to the allowances may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the 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. 38 39 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 over the period to maturity. Securities held-to-maturity for which the Bank has the positive intent and ability to hold to maturity are reported at cost, adjusted for amortization of premiums and discounts that are recognized in interest income using the effective interest method over the period to maturity. LOANS AND ALLOWANCES FOR LOAN LOSSES: Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their outstanding unpaid principal balances reduced by any charge-offs or specific valuation accounts and net of any deferred fees or costs on originated loans, or unamortized premiums or discounts on purchased loans. Net deferred fees or costs are amortized using the interest method over the life of the loan. The accrual of interest on impaired loans is discontinued when, in management's opinion, the borrower may be unable to meet payments as they become due. When interest accrual is discontinued, all unpaid interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received. An allowance for probable losses on loans is maintained at a level deemed by management to be adequate to provide for potential loan losses through charges to operating expense. The allowance is based upon a continuing review of loans, which includes consideration of actual net loan loss experience, changes in the size and character of the loan portfolio, identification of individual problem situations which may affect the borrower's ability to repay, the estimated value of any underlying collateral, and evaluation of current economic conditions. Loan losses are recognized through charges to the allowance. FORECLOSED REAL ESTATE: Real estate properties acquired through, or in lieu of, loan foreclosure are to be sold and are initially recorded at fair value at the date of foreclosure establishing a new cost basis. After foreclosure, 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, 1997, 1996 and 1995. 39 40 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, and core deposits purchased are being amortized using the straight-line method over five to twenty five 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 split-ups and stock dividends. The Corporation is following Statement of Financial Accounting (SFAS) No. 128, Earnings Per Share, requiring the disclosure of basic and diluted earnings per share. CASH EQUIVALENTS: For the purposes of presentation in the consolidated financial statements of cash flows, cash and cash equivalents include cash on hand, amounts due from banks, certificates of deposit and bankers acceptances with original maturities of 90 days or less, federal funds sold and overnight deposits with other banks. Generally, federal funds are purchased and sold for one-day periods. STOCK OPTIONS: Employee stock options are accounted for under Accounting 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 option 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 16). 40 41 UNITED SECURITY BANCORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) OTHER OFF-STATEMENT OF CONDITION INSTRUMENTS: In the ordinary course of business the Corporation has entered into off-statement of condition financial instruments consisting of commitments to extend credit, commitments under credit-card arrangements, commercial letters of credit, and standby letters of credit. Such financial instruments are recorded in the financial statements when they are funded or related fees are incurred or received. RECLASSIFICATIONS: Certain reclassifications of December 31, 1996 and 1995 balances have been made to conform with the December 31, 1997 presentation; there was no impact on net income, earnings per share or stockholders' equity as previously reported. NOTE 2. ACQUISITIONS: FIVE BRANCHES: On July 18, 1997 the Corporation purchased five branches from a commercial bank. Home Security Bank purchased three branches located in Mabton, Naches, and Walla Walla, Washington. United Security Bank purchased two branches located in Davenport and Moses Lake, Washington. These branches are located in the identified market place for the Banks. The acquisitions increased deposits by approximately $35 million, premises and equipment by $1.9 million, and intangible assets by $2.1 million primarily for the core deposit acquisition cost. BANK OF PULLMAN: Effective October 1, 1997 the Corporation acquired Bank of Pullman for $11,955,000. Pullman is located in the commercial center for the Palouse, the winter wheat growing region in Eastern Washington, and home of Washington State University. It has seven branches, six in Washington and one in Idaho. The Corporation initially purchased Community Ban Corporation, and its wholly-owned subsidiary Bank of Pullman. Shortly following the acquisition Community Ban Corporation was dissolved, and Bank of Pullman became a wholly-owned subsidiary of United Security Bancorporation. The acquisition was accounted for as a purchase transaction. Accordingly, the results of operations of Bank of Pullman are included with the Corporation for periods subsequent to the date of acquisition. Intangible assets increased by $4.8 million. Goodwill is amortized using the straight-line method over 25 years. The following unaudited pro forma combined summary of income gives effect to the combination as if the acquisition was effective January 1, 1996. Unaudited Pro Forma Combined Financial Data ($ in thousands, except per share data)
YEAR ENDED DECEMBER 31, 1997 1996 SUMMARY OF INCOME Net interest income $17,084 $15,549 Provision for loan losses 759 1,006 Noninterest income 3,963 3,360 Noninterest expense 12,364 12,054 ------- ------- Net income $ 5,485 $ 4,016 ======= ======= Basic earnings per common share $ 1.35 $ 0.99 Diluted earnings per common share $ 1.34 $ 0.99
41 42 UNITED SECURITY BANCORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3. ACCOUNTING CHANGES 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. In 1997, the Corporation formally adopted SFAS 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. In 1997, the Corporation formally adopted SFAS No. 128, Earnings Per Share, which established new standards for computing and presenting earnings per share. This statement requires the dual presentation of basic and diluted earnings per share. The Corporation has previously disclosed basic earnings per share. Diluted earnings per share as calculated under SFAS No. 128 is not materially different from basic earnings per share. NOTE 4. CASH AND CASH EQUIVALENTS The Banks are required to maintain cash reserves with the Federal Reserve Bank. Cash reserve requirements are computed by applying prescribed percentages to various types of deposits. When the Bank's cash reserves are in excess of that required, it may lend the excess to other banks on a daily basis. Conversely, when cash reserves are less than required, the Banks borrow funds on a daily basis. Such reserve requirements at December 31, 1997 and 1996 were approximately $1,731,000 and $245,000, respectively. The average amounts of federal funds sold and overnight interest bearing deposits with other banks for the years ended December 31, 1997 and 1996, were $17,713,000 and $13,395,000, respectively. Similarly, averages of federal funds purchased were $11,000 and $105,000, for 1997 and 1996, respectively. The balance of federal funds purchased at December 31, 1997 and 1996 was $0. 42 43 UNITED SECURITY BANCORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 5. SECURITIES Debt and equity securities have been classified according to management's intent. The amortized cost of securities and their fair values at December 31 were as follows:
DECEMBER 31, 1997 Gross Gross ($ in thousands) Amortized Unrealized Unrealized Fair Financial Cost Gains Losses Value Statements SECURITIES AVAILABLE-FOR-SALE: U.S. Treasury securities $ 3,775 $ 10 $ 3,785 $ 3,785 Obligations of federal government agencies 30,269 65 (24) 30,310 30,310 Obligations of states, municipalities and political subdivisions 5,358 58 (6) 5,410 5,410 Mortgage backed securities 21,379 35 (52) 21,362 21,362 Other securities 4,774 3 (186) 4,591 4,591 -------- -------- -------- -------- -------- 65,555 171 (268) 65,458 65,458 SECURITIES HELD-TO-MATURITY: Obligations of states, municipalities and political subdivisions 1,312 20 1,332 1,312 -------- -------- -------- -------- -------- Total $ 66,867 $ 191 $ (268) $ 66,790 $ 66,770 ======== ======== ======== ======== ========
DECEMBER 31, 1996 Gross Gross ($ in thousands) Amortized Unrealized Unrealized Fair Financial Cost Gains Losses Value Statements 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 ======== ======== ======== ======== ========
43 44 UNITED SECURITY BANCORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 5. SECURITIES (CONTINUED) Securities taxable interest income was $1,696,000, $951,000, and $1,567,000 for 1997, 1996 and 1995, respectively. Securities nontaxable interest income was $275,000, $208,000 and $13,000 for 1997, 1996, and 1995, respectively. Dividend income was $94,000, $87,000, and $67,000 for 1997, 1996, and 1995, respectively. Securities with an amortized cost of $4,122,000 and $3,645,000 at December 31, 1997 and 1996, respectively, were pledged to secure public deposits for purposes required or permitted by law. Market value of these securities was $4,120,000 and $3,596,000 at December 31, 1997 and 1996, respectively. Included in other securities are marketable equity securities with amortized costs totaling $2,450,000 and $2,292,000, and market values of $2,266,000 and $2,091,000 at December 31, 1997 and 1996, respectively. Also included in other securities is $1,290,000 in 1997 and $1,167,000 in 1996 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 sales of securities available for sale were $24,000, $54,000, and $93,000 for 1997, 1996, and 1995, respectively. Gross realized losses were $45,000, $1,000, and $40,000 for 1997, 1996, and 1995, respectively. The contractual scheduled maturity of securities held-to-maturity and securities available-for-sale at December 31, 1997 were as follows:
Available-for-Sale Held-to-Maturity Amortized Fair Amortized Fair ($ in thousands) Cost Value Cost Value Due in one year or less $ 5,168 $ 4,981 $ 560 $ 561 Due from one year to five years 18,132 18,176 134 138 Due from five to ten years 17,915 17,956 350 360 Due after ten years 2,961 2,983 268 273 Mortgage backed securities 21,379 21,362 ------- ------- ------ ------ $65,555 $65,458 $1,312 $1,332 ======= ======= ====== ======
Expected maturities will differ from contractual maturities because the issues of certain debt securities have the right to call or prepay their obligations without any penalties. 44 45 UNITED SECURITY BANCORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 6. LOANS AND ALLOWANCE FOR LOAN LOSSES Loan categories as of December 31, 1997 and 1996 were as follows:
($ in thousands) 1997 1996 Commercial and industrial $ 122,482 $ 97,086 Agricultural 33,787 25,621 Real estate mortgage 42,884 29,318 Real estate construction 8,440 9,954 Installment 12,666 10,527 Lease financing 5,209 3,038 Bank cards and other 4,541 3,384 --------- --------- Total loans 230,009 178,928 Allowance for loan losses (2,613) (2,034) Deferred loan fees, net of deferred costs (661) (508) --------- --------- Net loans $ 226,735 $ 176,386 ========= =========
Variable rate loans were $108,854,000 and $78,683,000 as of December 31, 1997 and 1996, respectively. Remaining loans were fixed rate loans. Changes in the allowance for loan losses are as follows:
($ in thousands) 1997 1996 1995 Balance, beginning of year $ 2,034 $ 1,391 $ 1,246 Allowance acquired through acquisition 700 Provision charged to operations 752 1,006 317 Loans charged-off (990) (372) (190) Recoveries 117 9 18 ------- ------- ------- Balance, end of year $ 2,613 $ 2,034 $ 1,391 ======= ======= =======
45 46 UNITED SECURITY BANCORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 6. LOANS AND ALLOWANCE FOR LOAN LOSSES (CONTINUED) A summary of loans by contractual maturity as of December 31, 1997 and 1996 is as follows:
($ in thousands) 1997 1996 Maturity within one year $ 95,729 $ 66,703 One to five years 70,953 69,390 Over five years 63,327 42,835 -------- -------- $230,009 $178,928 ======== ========
Impaired loan information as of December 31, 1997, 1996 and 1995 is as follows:
($ in thousands) 1997 1996 1995 Impaired loans with specific allowance for loan losses $ 287 $ 987 $ 176 Impaired loans without a specific allowance for loan losses 2,614 1,513 1,178 -------- -------- -------- Total impaired loans $ 2,901 $ 2,500 $ 1,354 ======== ======== ======== Impaired loans allowance for loan losses $ 118 $ 234 $ 104 Average impaired loans 2,574 1,409 956 Interest income recognized for impaired loans 138 182 31
NOTE 7. PREMISES AND EQUIPMENT Major classifications of premises and equipment are summarized as of December 31, 1997 and 1996 as follows:
($ in thousands) 1997 1996 Premises, including premises under capital lease, 1997 and 1996 $802 (Note 12) $ 7,066 $ 4,466 Furniture, fixtures, and equipment 4,179 2,583 Leasehold improvements 441 46 -------- -------- 11,686 7,095 Less accumulated depreciation, including accumulated amortization on assets under capital lease, 1997 $457; 1996 $241 (4,738) (3,005) -------- -------- 6,948 4,090 Land 2,251 2,027 -------- -------- Premises and equipment, net $ 9,199 $ 6,117 ======== ========
46 47 UNITED SECURITY BANCORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 8. 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 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, 1997 and 1996:
($ in thousands) 1997 1996 Cash surrender value $2,512 $2,311 Present value at age 65 of all participants after full vesting is obtained 1,640 1,653 Present value at age 65 of the current fully vested participants 597 597 Recorded liability for future benefit obligation 302 216
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 officer's beneficiary as part of the salary continuation program. The unpaid portion of the death benefit expense was $218,000 and $248,000 as of December 31, 1997 and 1996, respectively. These amounts and the recorded liability for the future benefit obligation disclosed above have been accrued and are included with other liabilities on the statements of condition. 47 48 UNITED SECURITY BANCORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 9. FEDERAL INCOME TAXES The components of federal income tax expense for the years presented are as follows:
($ in thousands) 1997 1996 1995 Current expense $ 1,881 $ 1,369 $ 1,291 Deferred tax expense 372 144 34 -------- -------- -------- Federal income tax expense $ 2,253 $ 1,513 $ 1,325 ======== ======== ========
The effective tax rate differs from the statutory federal tax rate as follows:
($ in thousands) 1997 1996 1995 Federal Income tax at statutory rates $ 2,420 $ 1,590 $ 1,726 Effect of tax-exempt life insurance proceeds (357) Effect of tax-exempt interest income (99) (76) (13) Effect of nondeductible expenses and other (68) (1) (31) -------- -------- -------- Federal income tax expense $ 2,253 $ 1,513 $ 1,325 ======== ======== ========
The following are the significant components of deferred tax assets and liabilities. The net amount is classified with other liabilities in 1997 and other assets in 1996 in the consolidated financial statements:
($ in thousands) 1997 1996 Deferred tax assets: Allowance for loan losses $ 612 $ 441 Unrealized losses on available-for-sale securities 33 136 Deferred compensation expense 74 84 Other 88 ------ ------ Total deferred tax assets 807 661 ------ ------ Deferred tax liabilities: Deferred loan fees 408 306 Lease financing 242 166 FHLB stock dividend income 137 105 Other 167 79 ------ ------ Total deferred tax liabilities 954 656 ------ ------ Net deferred tax assets/(liabilities) ($ 147) $ 5 ====== ======
The applicable tax (benefit)/expense, net for securities gains and losses was ($7,000), $18,000, and $18,000 for 1997, 1996, and 1995, respectively. 48 49 UNITED SECURITY BANCORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 10. TIME DEPOSIT MATURITIES At December 31, 1997, the scheduled maturities of time deposits were as follows:
($ in thousands) 1998 $100,266 1999 11,394 2000 727 2001 524 2002 223 Later years 55 -------- Total $113,189 ========
NOTE 11. NOTES PAYABLE Notes payable consisted of the following at year-end:
($ in thousands) 1997 1996 Parent Company, prime plus .25%, note due 2001 $2,445 $2,491 Parent Company, at prime, revolving note due 2002 2,943 USB Leasing, prime plus 1.00% notes due 2000 and 2001 766 Bank of Pullman treasury tax note 103 ------ ------ $6,257 $2,491 ====== ======
At December 31, 1997, the scheduled maturities of notes payable were as follows:
($ in thousands) 1998 $1,038 1999 948 2000 1,366 2001 2,905 ------ Total $6,257 ======
The Parent Company notes payable consist of borrowings to finance the purchase of real estate from its Bank subsidiaries and to acquire the Bank of Pullman. The debt reprices annually. The USB Leasing notes are to fund its commercial equipment leasing program. NOTE 12. 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 49 50 UNITED SECURITY BANCORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 12. COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED) continues to operate the branches at these same sites. The leases have been treated as capital leases (Note 7). 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, 1997 and 1996, the deferred gain net of amortization was $242,000 and $261,000, respectively. Amortization of capital leases is included in depreciation expense. The minimum annual rental commitments on capital and operating leases at December 31, 1997, exclusive of taxes and other charges, are summarized as follows:
($ in thousands) 1998 $ 385 1999 369 2000 308 2001 303 2002 309 Later years 2,866 ------ Total minimum payments due 4,540 Less: Amount representing interest (615) ------ Present value of net minimum lease payments $3,925 ======
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 a certain Director. Total rental expense on operating leases amounted to $80,000, $80,000, and $32,000 for 1997, 1996, and 1995, respectively (Note 18). Other commitments and contingent liabilities: The Corporation is a party to financial instruments with off-statement of condition risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit and financial guarantees. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the statement of condition. The contract or notional amounts of those instruments reflect the extent of involvement the Corporation has in particular classes of financial instruments. The Corporation's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit and financial guarantees written is represented by the contractual notional amount of those instruments. The Corporation uses the same credit policies in making commitments and conditional obligations as it does for statement of condition instruments. Unless noted otherwise, the Corporation does not require collateral or other security to support financial instruments with credit risk. 50 51 UNITED SECURITY BANCORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 12. COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
Contract or Notional Amount ($ in thousands) 1997 1996 Financial instruments whose contract amounts represent credit risk: Commitments to extend credit $ 41,419 $ 28,239 Standby letters of credit and financial guarantees written 2,246 1,989 Unused commitments on bankcards 7,219 4,648 -------- -------- TOTAL $ 50,884 $ 34,876 ======== ========
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 Banks ability to collect loans. Substantially all such customers are depositors of the Banks. The concentrations of credit by type of loan are set forth in Note 6. The Corporation's related party loans and deposits are disclosed in Note 18. The Banks, as a matter of policy, do not extend credit to any single borrower in excess of $2,500,000, $1,000,000 and $1,400,000 for United Security Bank, Home Security Bank and Bank of Pullman, respectively. As of December 31, 1997 and 1996, the Banks had unused lines of credit of $47,040,000 and $34,618,000, respectively. The lines were available for short-term and long-term borrowings. 51 52 UNITED SECURITY BANCORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 13. CAPITAL STOCK STOCK SPLIT-UPS, AND STOCK DIVIDENDS: In January, 1998 the Board of Directors declared a 10% common stock dividend. The Corporation recorded a transfer from retained earnings to common stock for the market value of the additional shares issued. In January, 1996 and 1997 the Board of Directors declared 10% common stock dividends in the form of split-ups. The intent of the stock split-ups was to obtain a reduction in the unit market price of shares and to obtain wider distribution and improved marketability of the stock. No transfers from retained earnings to capital stock were recorded. Per share amounts and weighted average shares outstanding have been retroactively adjusted to reflect the stock dividend and split-ups. NOTE 14. 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, 1997, the amount of retained earnings of United Security Bank, Home Security Bank and Bank of Pullman available for dividends, amounted to $4,362,000, $1,751,000, and $225,000 respectively. At December 31, 1996, the amount of retained earnings of United Security Bank and Home Security Bank available for dividends, amounted to $5,762,000 and $426,000, respectively. United Security Bancorporation has the full amount of retained earnings available for dividends. Certain loans to any person, including liabilities of a firm or association, cannot exceed twenty percent of the capital and surplus of the Bank. Loans that are secured or covered by guarantees, or by commitments or agreements to take over or to purchase the same, made by any federal reserve bank or by the United States, including any corporation wholly owned directly or indirectly by the United States, are not subject to these restrictions. No loans can be made unless the Bank has more than the minimum available funds required by law. NOTE 15. EMPLOYEE STOCK OWNERSHIP PLAN (ESOP) AND PROFIT SHARING 401(k) PLAN 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 $206,000, $185,000 and $146,000 for 1997, 1996 and 1995, 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 1997, 1996 and 1995 to the plan. 52 53 UNITED SECURITY BANCORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 16. STOCK OPTION PLAN The Corporation's Board of Directors adopted a stock option plan, known as the Incentive Stock Option Plan. The plan provides for the issuance of incentive stock options to key individuals of the Corporation and its subsidiaries, including directors and executive officers. 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 1995, 83,840 common stock options were granted to identified directors and executive officers. The options were granted for a five year term from the date of option and may be exercised anytime prior to that date, subject to conditions prescribed in the Proxy Statement of the May 24, 1995 Annual Meeting of United Security Bancorporation. In 1997, 53,035 common stock options were granted for a five year term with a vesting schedule increasing 20% per year until the options are fully vested at the end of five years. Options were granted at the average price between the high and low on the NASDAQ Exchange on the last day of the preceding month, before the date of option. The granted option price is adjusted giving retroactive effect for stock dividends and split-ups. The status of the Plan as of December 31, 1997, 1996 and 1995 is as follows:
1997 1996 1995 WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE NUMBER PRICE NUMBER PRICE NUMBER PRICE Outstanding at beginning of year 57,344 9.82 83,840 10.91 Granted 53,035 13.10 83,840 12.12 Exercised (2,000) 9.82 (15,720) 10.91 Forfeited (10,776) 10.91 -------- -------- -------- Outstanding at year-end 108,379 11.01 57,344 9.82 83,840 10.91 ======== ======== ======== Exercisable at year-end 72,072 11.01 57,344 9.82 83,840 10.91 Weighted average fair value of options granted during the year 8.93 5.02
The following table summarizes information about stock options outstanding at December 31, 1997:
OPTIONS OUTSTANDING WEIGHTED OPTIONS EXERCISABLE AVERAGE WEIGHTED WEIGHTED RANGE OF REMAINING AVERAGE AVERAGE EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE $8.84 55,344 2.8 years $ 8.84 55,344 $ 8.84 $11.29 - $10.33 30,605 3.6 years $10.83 12,242 $10.83 $16.70 -$16.48 22,430 4.8 years $16.61 4,486 $16.61
53 54 UNITED SECURITY BANCORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 16. STOCK OPTION PLAN (CONTINUED) If the fair value based method of accounting per SFAS No. 123 had been used for 1997, 1996 and 1995 the results and related assumptions would have been as follows:
($ in thousands, except per share) 1997 1996 1995 Results using fair value based method of accounting: Net income $4,551 $3,198 $3,473 Basic earnings per common share $ 1.12 $ 0.79 $ 1.01 Diluted earnings per common share $ 1.12 $ 0.79 $ 1.01 Assumptions used to make the fair value calculation: Risk free interest rate 5.40% 5.60% 5.60% Expected volatility 28.28% 29.97% 29.97% Expected cash dividends 0% 0% 0% Expected stock option life 4.2 years 4.8 years 4.8 years
NOTE 17. PARENT COMPANY ONLY STATEMENTS The following are the condensed statements of condition, income, and cash flows for the parent company only, United Security Bancorporation. These statements are presented using the equity method of accounting; therefore, accounts of the subsidiaries have not been included. Intercompany transactions and balances have not been eliminated. The following information should be read in conjunction with the other notes to the consolidated financial statements. Condensed Statements of Condition ($ in thousands)
DECEMBER 31, 1997 1996 Cash $ 64 $ 2,470 Investment in and advances to: Bank subsidiaries 29,766 20,323 Nonbank subsidiaries 3,444 3,322 Premises and equipment 5,185 4,596 Other assets 187 67 -------- -------- TOTAL ASSETS $ 38,646 $ 30,778 ======== ======== Notes payable (Note 11) $ 5,388 $ 2,491 Accrued expenses and other liabilities 169 274 Stockholders' equity 33,089 28,013 -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 38,646 $ 30,778 ======== ========
54 55 UNITED SECURITY BANCORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 17. PARENT COMPANY ONLY STATEMENTS (CONTINUED) Condensed Statements of Income ($ in thousands, except per share)
YEARS ENDED DECEMBER 31, 1997 1996 1995 Income: Dividends: Bank subsidiaries $ 702 $ 647 $ 667 Rent income 483 470 8 Other income 150 200 191 -------- -------- -------- 1,335 1,317 866 -------- -------- -------- Expenses: Salaries and benefits 790 701 513 Interest expense 331 216 Depreciation 183 169 12 Other operating expenses 501 277 151 -------- -------- -------- 1,805 1,363 676 -------- -------- -------- Income/(loss) before tax benefit and equity in undistributed net income of subsidiaries (470) (46) 190 Income tax benefit 425 241 155 -------- -------- -------- Income/(loss) before equity in undistributed net income of subsidiaries (45) 195 345 Equity in undistributed net income (loss) of: Bank subsidiaries 4,638 2,751 3,446 Nonbank subsidiaries 271 216 (40) -------- -------- -------- Net income $ 4,864 $ 3,162 $ 3,751 ======== ======== ========
55 56 UNITED SECURITY BANCORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 17. PARENT COMPANY ONLY STATEMENTS (CONTINUED) Condensed Statements of Cash Flows ($ in thousands)
YEARS ENDED DECEMBER 31, 1997 1996 1995 CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 4,864 $ 3,162 $ 3,751 Adjustments to reconcile net income to cash provided by operating activities: Equity in undistributed net income of subsidiaries (4,909) (2,967) (3,406) Depreciation 183 169 12 (Increase) decrease in other assets (54) 46 42 Increase (decrease) in other liabilities (173) 196 (150) -------- -------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES (89) 606 249 -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Investment in and advances to subsidiaries (750) (1,109) (3,941) Return of investment in subsidiaries 8,250 Bank of Pullman acquisition (11,955) Purchase of investment securities (1,204) Sale of investment securities 803 401 Purchase of premises and equipment (772) (3,860) (736) -------- -------- -------- NET CASH (USED) BY INVESTING ACTIVITIES (5,227) (4,166) (5,480) -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Issuance of capital stock 20 171 8,455 Proceeds from notes payable 7,835 2,529 Principal payments on notes payable (4,938) (38) Cash paid for redemption of fractional shares (7) (7) (9) -------- -------- -------- NET CASH PROVIDED BY FINANCING ACTIVITIES 2,910 2,655 8,446 -------- -------- -------- NET INCREASE (DECREASE) IN CASH (2,406) (905) 3,215 CASH, beginning of year 2,470 3,375 160 -------- -------- -------- CASH, end of year $ 64 $ 2,470 $ 3,375 ======== ======== ========
56 57 UNITED SECURITY BANCORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 18. 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 $8,219,000 and $9,525,000 at December 31, 1997 and 1996, respectively. During 1997 and 1996, $5,094,000 and $8,814,000, respectively of new or renewed related party loans were made and repayments and adjustments totaled $6,400,000 and $7,265,000, respectively. DEPOSITS FROM RELATED PARTIES: Deposits from related parties totaled $3,200,000 and $5,351,000 at December 31, 1997 and 1996, respectively. PAYMENTS TO RELATED PARTIES: Fees paid to a Director for professional services totaled $31,000, $10,000, and $11,000 for the years ended December 31, 1997, 1996, and 1995, respectively. Building lease rent of $80,000 in 1997 and 1996 and $32,000 in 1995 was paid to a Partnership partially owned by a Director. 57 58 UNITED SECURITY BANCORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 19. FAIR VALUE OF FINANCIAL INSTRUMENTS The Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments" (SFAS 107), requires disclosure of fair value information about financial instruments, which it is practicable to estimate fair value. As defined by SFAS 107, financial instruments include the categories listed below. It does not include the value of property, plant and equipment and intangible assets such as customer relationships and core deposit intangibles. Fair values of off-statement of condition lending commitments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties' credit standing. The fair value of the fees at December 31, 1997 and 1996, were insignificant. See Note 12 for the notional amount of the commitments to extend credit. The following table summarizes carrying amounts, estimated fair values, and assumptions used by the Corporation to estimate fair value as of December 31, 1997 and 1996:
ESTIMATED AS OF DECEMBER 31, 1997: ASSUMPTIONS USED IN CARRYING FAIR ($ in thousands) ESTIMATING FAIR VALUE AMOUNT VALUE FINANCIAL ASSETS: Cash and due from banks Equal to carrying value $ 19,058 $ 19,058 Overnight interest bearing deposits with other banks Equal to carrying value 9,656 9,656 Federal funds sold Equal to carrying value 5,210 5,210 Securities Quoted market prices 66,770 66,790 Loans Fixed-rate loans: Discounted expected future cash flows, variable-rate loans: equal to carrying value, net of allowance for loan losses 226,735 231,454 FINANCIAL LIABILITIES: Deposits Fixed-rate certificates of deposit: Discounted expected future cash flows All other deposits: Equal to carrying value 307,586 307,681 Notes payable Variable rate, equal to carrying value 6,257 6,257 AS OF DECEMBER 31, 1996: FINANCIAL ASSETS: Cash and due from banks Equal to carrying value $ 10,430 $ 10,430 Overnight interest bearing deposits with other banks Equal to carrying value 6,223 6,223 Federal funds sold Equal to carrying value 10,770 10,770 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
58 59 UNITED SECURITY BANCORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 20. REGULATORY MATTERS The Banks are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory actions by regulators that, if undertaken, could have a direct material effect on the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Banks must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off-statement of condition items. The Banks capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Banks to maintain minimum amounts and ratios set forth in the table below of total and Tier I capital to risk-weighted and average assets.
ACTUAL ADEQUATELY CAPITALIZED WELL CAPITALIZED ($ IN THOUSANDS) AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO AS OF DECEMBER 31, 1997: Total capital to risk weighted assets: Consolidated $28,762 11.61% > $19,826 8.00% > $24,783 10.00% United Security Bank 13,740 10.34% > 10,632 8.00% > 13,290 10.00% Home Security Bank 7,175 10.16% > 5,650 8.00% > 7,063 10.00% Bank of Pullman 4,412 10.97% > 3,218 8.00% > 4,023 10.00% Tier I capital to risk weighted assets: Consolidated 26,149 10.55% > 9,913 4.00% > 14,870 6.00% United Security Bank 12,443 9.36% > 5,316 4.00% > 7,974 6.00% Home Security Bank 6,661 10.86% > 2,825 4.00% > 4,238 6.00% Bank of Pullman 3,906 9.71% > 1,609 4.00% > 2,414 6.00% Leverage capital, Tier I capital to average assets: Consolidated 26,149 8.08% > 12,949 4.00% > 16,186 5.00% United Security Bank 12,443 7.01% > 7,100 4.00% > 8,875 5.00% Home Security Bank 6,661 6.68% > 3,988 4.00% > 4,986 5.00% Bank of Pullman 3,906 6.63% > 2,358 4.00% > 2,948 5.00% AS OF DECEMBER 31, 1996: Total capital to risk weighted assets: Consolidated $30,129 16.43% > $14,659 8.00% > $18,327 10.00% United Security Bank 16,576 13.41% > 9,878 8.00% > 12,349 10.00% Home Security Bank 5,984 10.75% > 4,449 8.00% > 5,562 10.00% Tier I capital to risk weighted assets: Consolidated 28,092 15.32% > 7,325 4.00% > 10,992 6.00% United Security Bank 15,129 12.24% > 4,936 4.00% > 7,407 6.00% Home Security Bank 5,431 10.02% > 2,223 4.00% > 3,336 6.00% Leverage capital, Tier I capital to average assets: Consolidated 28,092 12.23% > 9,175 4.00% > 11,472 5.00% United Security Bank 15,129 10.54% > 5,733 4.00% > 7,168 5.00% Home Security Bank 5,431 7.31% > 2,968 4.00% > 3,711 5.00%
As of December 31, 1997 United Security Bancorporation and subsidiaries, United Security Bank, Home Security Bank, and Bank of Pullman were considered well capitalized based on regulatory capital standards. 59 60 UNITED SECURITY BANCORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 21. EARNINGS PER SHARE The following is a reconciliation of the numerators and denominators for basic and diluted per-share computations for income from continuing operations for 1997, 1996 and 1995:
($ in thousands, except per share) 1997 1996 1995 Numerator: Net income $ 4,864 $ 3,162 $ 3,751 Denominator: Weighted-average number of common shares outstanding 4,051,961 4,042,811 3,441,502 Incremental shares assumed for stock options 28,426 11,148 0 ---------- ---------- ---------- Total 4,080,387 4,053,959 3,441,502 ========== ========== ========== Basic earnings per common share $ 1.20 $ 0.78 $ 1.09 Diluted earnings per common share $ 1.19 $ 0.78 $ 1.09
NOTE 22. INSURANCE RECOVERY In 1997, the Corporation recovered from its insurance provider $796,000 for a defalcation by a former employee of its bank subsidiary, Home Security Bank. The insurance proceeds is a full recovery of the reconciled loss except for a $50,000 insurance policy deductible. In 1996, the Corporation detected and recorded as an operational loss the estimated loss of $860,000. QUARTERLY FINANCIAL DATA CONDENSED CONSOLIDATED STATEMENT OF INCOME-QUARTERLY ($ IN THOUSANDS, EXCEPT PER SHARE) UNAUDITED
1997, Quarter Ended 1996, Quarter Ended Dec. 31 Sept. 30 June 30 Mar. 31 Dec. 31 Sept. 30 June 30 Mar. 31 Interest income $ 7,636 $ 6,224 $ 5,493 $ 5,322 $ 5,580 $ 5,337 $ 5,035 $ 4,767 Interest expense 3,187 2,429 2,167 2,112 2,137 2,111 1,977 1,922 -------- -------- -------- -------- -------- -------- -------- -------- Net Interest Income 4,449 3,795 3,326 3,210 3,443 3,226 3,058 2,845 Provision for loan losses 204 227 168 153 603 136 121 146 -------- -------- -------- -------- -------- -------- -------- -------- Net interest income after provision for loan losses 4,245 3,568 3,158 3,057 2,840 3,090 2,937 2,699 Insurance proceeds 796 Other noninterest income 723 814 752 632 696 804 736 745 Operational loss 860 Other noninterest expense 3,354 2,662 2,388 2,224 2,250 2,283 2,337 2,142 -------- -------- -------- -------- -------- -------- -------- -------- Income before income taxes 1,614 2,516 1,522 1,465 426 1,611 1,336 1,302 Income tax 430 806 541 476 171 483 396 463 -------- -------- -------- -------- -------- -------- -------- -------- Net income $ 1,184 $ 1,710 $ 981 $ 989 $ 255 $ 1,128 $ 940 $ 839 ======== ======== ======== ======== ======== ======== ======== ======== Basic earnings per common share $ 0.29 $ 0.42 $ 0.24 $ 0.25 $ 0.06 $ 0.28 $ 0.23 $ 0.21 Diluted earnings per common share $ 0.28 $ 0.42 $ 0.24 $ 0.25 $ 0.06 $ 0.28 $ 0.23 $ 0.21 Average common shares outstanding (in thousands) 4,053 4,053 4,052 4,051 4,051 4,051 4,038 4,032
60 EX-10.1 2 1995 INCENTIVE STOCK OPTION PLAN 1 UNITED SECURITY BANCORPORATION Exhibit 10.1 United Security Bancorporation 1995 Incentive Stock Option Plan Article I. Purpose The purpose of this 1995 Incentive Stock Option Plan (the "Plan"), adopted on the 14th day of March, 1995, is to enable directors, executive officers, key employees and consultants of United Security Bancorporation and its subsidiaries (collectively, the "Company") to acquire a proprietary interest in the success of the Company. The Plan is intended to provide incentives for maximum effort in the successful operation of the Company, through the grant of options constituting either incentive stock options within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code") or non-qualified options. Article II. Administration The Plan will be administered by a compensation committee of the board of directors (the "Compensation Committee"), which has authority with respect to the grant of Options under the Plan. The Compensation Committee will at all times consist of at least three directors of the Company appointed by the Company's board of directors. Members of the Compensation Committee may receive options under the Plan, provided such options are awarded strictly in accordance with the provisions applicable to such members set forth in the Article II. Under no circumstances may members of the Compensation Committee receive options under the Plan on a discretionary or other basis during the period they are a member of the committee or for a period of one prior year to becoming a member. Any purported grant of an option to a member of the Compensation Committee other than as provided in Article II shall be void and of no force or effect. A majority of the members of the Compensation Committee shall constitute a quorum, and acts of a majority of the members present at any meeting of the Compensation Committee at which a quorum is present, or acts approved in writing by all members of the Committee, shall be deemed to be valid acts of the Committee. The Compensation Committee shall select one of its members to serve as chairman, and shall appoint one of its members a secretary, who shall maintain a record of its actions and decisions. The Compensation Committee shall, within the confines of its authority: (a) determine which of the eligible participants in the Plan shall be granted options, when such options shall be granted and the number of shares and terms with respect to each such option; (b) prescribe rules and regulations for administering the Plan; and (c) decide any questions arising as to the interpretation or application of any provision under the Plan. Grants of options under the Plan to members of the Compensation Committee shall be determined exclusively by an executive remuneration committee (the "Executive Remuneration Committee") comprised of persons who at the time, and for a period of two years prior thereto, are or were not directors or executive officers of the Company or any of its affiliates, or otherwise employed by the Company or any of such affiliates other than in the capacity of an outside attorney, accountant or other professional. The Executive Remuneration Committee. In determining grants of options under the Plan to executive officers of the Company and to directors and executive officers of the Company's subsidiaries who, in each case, are not also directors of the Company, the Compensation Committee shall consider the then-current cash and non-cash compensation of such director or executive officer, the value of such person's unexercised in-the-money options granted pursuant to the Plan or any other equity-based compensation plan of the Company, such person's position with the Company, the tenure of such person's employment by the Company (or the tenure of his or her service as a director, if not 61 2 UNITED SECURITY BANCORPORATION employed by the Company), the degree to which such person has met the objectives established for it by the board of directors. In determining grants of options to eligible participants in the Plan who are not also directors or executive officers of the Company, the Compensation Committee shall consider such person's position with the Company, the tenure of such person's employment by the Company, and the degree to which such person has met the objectives established for him or her by the Company. The Executive Remuneration Committee shall have full discretion in determining the amount and terms of options to be granted to members of the Compensation Committee, and shall not be bound to consider the recommendations of management of the Company or the extent to which options have been awarded to other eligible participants in the Plan by the Compensation Committee. The determination of the Compensation Committee or the Executive Remuneration Committee, as the case may be, as to any of these matters shall be final and binding upon all persons whosoever and shall be reported to the board of directors at its next ensuing meeting. The Compensation Committee and the Executive Remuneration Committee shall hold meetings from time to time, as they may determine, provided, however, that so long as options remain available for issuance pursuant to the Plan, the Compensation Committee (but not the Executive Remuneration Committee) shall convene a meeting at least quarterly. Members of the Compensation Committee and the Executive Remuneration Committee shall receive cash compensation for each meeting of the committee at which they are present, in such amounts as shall be determined by the Company's board of directors. Such amount may be adjusted from time-to-time, or at any time, by the board of directors of the Company, however no such adjustment shall be retroactive. Article III. Eligibility. The persons who shall be eligible to receive grants of options pursuant to the Plan shall be such of the directors, executive officers, key employees and consultants of the Company as may be selected from time-to-time by the Compensation Committee. Options granted pursuant to the Plan shall either be incentive stock options within the meaning of Section 422 of the Code or non-qualified options. A grantee of an option under the Plan may hold more than one option hereunder, but only on the terms and conditions hereinafter set forth. Notwithstanding any of the other provisions of the Plan, incentive stock options shall not be granted hereunder to an individual who then owns stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company, or of a parent or of a subsidiary corporation (as those terms are defined in Section 425 of the Code) of the Company, with such ownership to be determined by application of the attribution rules under the Code. This limitation shall not preclude the granting of non-qualified options to persons holding more than ten percent of the Company's stock. Article IV. Stock to Be Issued Under The Plan. The stock to be issued upon the exercise of options granted under the Plan shall be shares of the common stock, without par value, of the Company (the "Common Stock"), which may either be authorized and unissued shares or issued shares held in or hereafter acquired for the treasury of the Company. The aggregate number of shares of Common Stock which may be issued under options granted hereunder shall not exceed eight percent (8%) of the Common Stock then outstanding or deemed outstanding, or 200,000 shares, whichever is less. In the event that any outstanding option under the Plan expires or is terminated, the shares of Common Stock allocable to the unexercised portion of such option may again be subject to an option under the Plan. The Company shall not be required to issue or deliver any certificate for shares of Common Stock purchased upon the exercise of all or any portion of an option granted under the Plan 62 3 UNITED SECURITY BANCORPORATION unless such issuance is made (i) pursuant to an effective registration statement under the Securities Act of 1933, as amended (the "Securities Act") or an exemption from the registration requirements of the Securities Act, and (ii) upon completion of any registration or other qualification of such shares, or upon procurement of an exemption therefrom, under any other state, federal or provincial law or ruling or regulation of any governmental regulatory body or stock exchange that the Company shall, in its sole discretion, determine to be necessary or advisable. Article V. Terms and Conditions of Options. Each option granted under the Plan shall be evidenced by an agreement in writing which shall be subject to such amendment and modification as the Compensation Committee from time-to-time, or at any time, shall deem necessary to comply with applicable law or regulation, and which shall contain, in such form and with such other provisions as the Compensation Committee shall from time-to-time determine, provisions which comply with the following terms and conditions: (a) The Number of Shares. Each option shall state the number of shares of Common Stock to which it pertains. (b) Option Price. Each option shall state the option price per share of Common Stock, which shall be equal to the fair market value of one share of Common Stock on the date the option is granted. The Committee shall have full authority to determine the fair market value of a share of Common Stock; provided, however, that so long as the Common Stock is traded on the Nasdaq Stock Market, such fair market value shall be deemed to be the arithmetical mean between the closing bid and asked prices as reported by such market. (c) Medium and Time of Payment. The option price shall be payable in United States dollars upon exercise of the option, unless the Compensation Committee determines otherwise, and the exercise of any option and the delivery of the option shares shall be contingent upon receipt by the Company of the full purchase price paid in cash or by check. The foregoing notwithstanding, the Company may from time-to- time or at any time advance funds to the holder of an option granted under the Plan for the sole purpose of enabling such holder to exercise such option; provided, however, that such advance is evidenced by a writing, matures by its terms in no more than thirty (30) days and is secured by a pledge of the Common Stock (and the proceeds of the sale thereof) to be received upon the exercise of the option. (d) Term and Exercise of Options. Each option shall state the period of time during which the option may be exercise; provided, however, that, anything contained herein to the contrary notwithstanding, no option granted hereunder shall be exercisable after the expiration of ten years from the date of grant of such option. Subject to the terms of the Plan, any option may be exercised, in whole or in part, from time to time, as to one or more whole shares of Common Stock covered by the option. (e) Maximum Value of Stock with Respect to Which Options Are Exercisable for First Time in Any Calendar Year. In the event the aggregate fair market value (determined at the time the option is granted) of Common Stock with respect to which options are exercisable hereunder for the first time by any eligible employee during any one calendar year (under the Plan and all other stock option plans of the Company or any parent or subsidiary corporation) shall exceed one hundred thousand dollars ($100,000), such options shall be treated as options which are not incentive stock options, taking options into account in the order in which they were granted. In the case of an option that is to be treated in part as an incentive stock option and in part as a non-qualified stock option, the Company may designate the shares of Common Stock that are to be treated as stock acquired pursuant to exercise of an incentive stock 63 4 UNITED SECURITY BANCORPORATION option by issuing a separate certificate for such shares and identifying the certificate as incentive stock option shares in the Company's stock transfer records. (f) Transfer of Option. Neither the whole nor any part of any option shall be transferable by the optionee or by operation of law during such optionee's lifetime, and at such optionee's death an option or any part thereof shall only be transferable by such optionee's will or by the laws of descent and distribution. An option may be exercised during the lifetime of the optionee only by the optionee. Any option, and any and all rights granted to an optionee thereunder, to the extent not therefore effectively exercised, shall automatically terminate and expire upon any sale, transfer or hypothecation, or any attempted sale, transfer or hypothecation of such option or rights, or upon the bankruptcy or insolvency of the optionee. (g) Termination of Employment. No option intended to qualify as an incentive stock option may be exercised after the termination of the employment of the optionee with the Company except as hereinafter provided, specifically subject, however, to the provisions of paragraph (d) of this Article V: (1) Retirement. Options granted under the Plan may be exercised within six (6) months after the Retirement (as hereinafter defined) of the optionee, and the options shall be exercisable for all of the shares covered thereby. For purposes of the Plan, "Retirement" shall mean any termination of employment with the Company occurring after the completion of ten (10) years of service with the Company and the attainment of age sixty (60) by the optionee. (2) Disability. Options granted under the Plan may be exercised within one (1) year after the termination of the employment of the optionee by reason of the Disability (as hereinafter defined) of the optionee, and the options shall be exercisable for all of the shares covered thereby. For purposes of the Plan, an optionee shall be deemed have incurred a "Disability" if a disinterested duly licensed medical doctor appointed by the Company determines that the optionee is totally and permanently prevented, as a result of physical or mental infirmity, injury or disease, either occupational or nonoccupational in cause, from holding the job or position with the Company or engaging in the employment activity, or a comparable job or employment activity with the Company, which the optionee held or customarily engaged in prior to the occurrence of the disability (provided, however, that disability hereunder shall not include any disability incurred or resulting from the optionee's having engaged in a criminal act or enterprise, or any disability consisting of or resulting from the optionee's chronic alcoholism, addiction to narcotics or an intentionally self-inflicted injury). (3) Death. (i) If an optionee shall die while employed by the Company or within three (3) months after termination of employment with the Company by reason of Retirement or Disability, the options granted under the Plan to such deceased optionee shall be exercisable within one (1) year after the date of the optionee's death, and the options shall be exercisable for all of the shares covered thereby. (ii) The legal representative, if any, of the deceased optionee's estate, otherwise the appropriate legatees or distributees of the deceased optionee's estate, may exercise the option on behalf of such a deceased optionee. (4) Involuntary Termination of Employment. Options granted under the Plan may be exercised within thirty (30) days after the Involuntary 64 5 UNITED SECURITY BANCORPORATION Termination of Employment (as hereinafter defined) of the optionee with the Company, but the options may not be exercised for more than the number of shares, if any, as to which the options were exercisable by the optionee immediately prior to such termination of employment, as determined by reference to the terms and conditions specified at the time such options were granted. For purposes of the Plan, "Involuntary Termination of Employment" shall mean any termination of an optionee's employment with the Company by reason of discharge, firing or other involuntary termination of an optionee's employment by action of the Company other than an involuntary termination for cause as described in subparagraph (6) of this subparagraph (g). (5) Voluntary Termination of Employment. Options granted under the Plan may be exercised within thirty (30) days after the Voluntary Termination of Employment (as hereinafter define) of the optionee with the Company, but the options may not be exercised for more than the number of shares, if any, as to which the options were exercisable by the optionee immediately prior to such termination of employment, as determined by reference to the terms and conditions specified at the time such options were granted. For purposes of the Plan "Voluntary Termination of Employment" shall mean any voluntary termination of employment with the Company by reason of the optionee's quitting or otherwise voluntarily leaving the Company's employ other than a voluntary termination of employment by reason of Retirement or voluntary termination of employment constituting a termination for cause as described in subparagraph (6) of this subparagraph (g). (6) Termination for Cause. Anything contained herein to the contrary notwithstanding, if the termination of an optionee's employment with the Company is as a result of or caused by the optionee's theft or embezzlement from the Company, the violation of a material term or condition of his or her employment, the disclosure by the optionee of confidential information of the Company, conviction of the optionee of a crime of moral turpitude, the optionee's stealing trade secrets or intellectual property owned by the Company, any act by the optionee in competition with the Company, or any other act, activity or conduct of the optionee which in the opinion of the board of directors is adverse to the best interests of the Company, then any options and any and all rights granted to such optionee thereunder, to the extent not yet effectively exercised, shall become null and void effective as of the date of the occurrence of the event which results in the optionee ceasing to be an employee of the Company, and any purported exercise of an option by or on behalf of said optionee shall following such date shall be of no effect. (h) Modification of Exercise Period upon Termination of Employment. The provisions of paragraph (g), above, to the contrary notwithstanding, the Compensation Committee may, for good cause and in its discretion, extend the period of time within which options held by such optionee may be exercised; provided, however, that in no event shall any such extension exceed by a factor of two the amount of time otherwise provided in paragraph (g) for the exercise of such options and provided, further, that no such extension may be granted to an optionee whose employment with the Company is terminated for cause. (i) Acceleration. The Compensation Committee may, in the case of merger, consolidation, dissolution or liquidation of the Company, accelerate the exercise date of any option for any or all of the Common Stock covered thereby (but still giving optionees a reasonable period of time to exercise any outstanding options prior to the accelerated expiration date) and 65 6 7 UNITED SECURITY BANCORPORATION may, in the case of merger, consolidation, dissolution or liquidation of the Company, or in any other case in which it feels it is in the Company's best interest, accelerate the date or dates on which any option or any part of any option shall be exercisable for any or all of the shares covered thereby. (j) Rights as a Shareholder. An optionee shall have no rights as a shareholder with respect to any Common Stock covered by any of said optionee's options until the date the Company receives payment in full for the purchase of said shares (or, in instances where the exercise price of the options has been advanced by the Company, upon repayment in full of such advance, together with interest) pursuant to the effective exercise of said option. No adjustment shall be made for dividends or distributions or other rights for which the record date is prior to the date such payment is received by the Company, except as provided in Article VII. (k) Documents to be Delivered to Optionees. Upon the grant of an option hereunder to an optionee, there shall be delivered to the optionee written information describing the options granted hereunder and the Common Stock covered by the options, together with such other information or documents as the Company or the Compensation Committee shall deem necessary or advisable. (l) Compliance with Securities Act. Notwithstanding anything herein to the contrary, options shall always be granted and exercised in such a manner as to conform to the requirements of the Securities Act and the rules and regulations promulgated thereunder. (m) Other provisions. The option agreements authorized under the Plan shall contain such other provisions, including, without limitation, restrictions upon the exercise of options, as the Compensation Committee shall deem advisable and, in any event, all such option agreements shall contain such limitations and restrictions upon the exercise of options as shall be necessary in order that such options will be incentive stock options as defined in Section 422A of the Code, or to conform to any change in the law. Article VI. Notice of Intent to Exercise Options. An optionee desiring to exercise an option granted hereunder as to all or a portion of the Common Stock covered thereby must, in order to so exercise the option, notify the Company in writing to that effect, specifying the number of shares of Common Stock to be purchased, in a form satisfactory to the Compensation Committee. Article VII. Stock Dividend-Recapitalization-Consolidation. If any stock dividend shall be declared upon the Common Stock or if the Common Stock shall hereafter be subdivided, consolidated or changed into other securities of the Company or a successor corporation to the Company, then, in each such event, shares of Common Stock which would be delivered pursuant to exercise of any options shall, for the purpose of adjusting the number and kind thereof, be treated as though outstanding immediately prior to the occurrence of such event, and the purchase price to be paid therefor shall be appropriately adjusted to give effect thereto. The grant of an option pursuant to the Plan shall not affect in any way the right or power of the Company to make adjustments, reclassifications, reorganizations or changes of its capital or business structure, or to merge or to consolidate, or to dissolve, liquidate, sell or transfer all or any part of its business and assets. 66 8 UNITED SECURITY BANCORPORATION VIII. Expiration and Termination of Plan. Options may be granted pursuant to the Plan only within ten (10) days following the later to occur of the date on which the Plan is adopted by the board of directors and the date on which the Plan is approved by the shareholders of the Company. Options may be granted under the Plan at any time until the Plan is terminated by the Board of Directors or until such earlier date when termination of the Plan shall be required by applicable law. If not sooner terminated, the Plan shall terminate automatically on May 23, 2005, which is ten (10) years from the date on which the Plan was approved by the shareholders of the Company. Article IX. Amendment of the Plan. The board of directors may, insofar as permitted by law, including the provisions of Rule 16b-3 promulgated under the Securities Exchange Act of 1934 (the "Exchange Act"), from time-to-time, with respect to any shares of Common Stock at the time not subject to outstanding options, suspend or discontinue the Plan or revise or amend it in any respect whatsoever, except that, without approval of the holders of a majority of the Common Stock of the Company, no such revision or amendment shall: change the number of shares of Common Stock subject to the Plan (except as may occur as a result of an occurrence described in Article VII); remove the administration of the Plan from the Compensation Committee; or render any member of the Compensation Committee eligible to receive an option under the Plan while serving thereon or for a period of one year prior thereto. Furthermore, the Plan may not, without the approval of the holders of a majority of the Common Stock of the Company, be amended in any manner that will cause options issued under it, other than non-qualified options, to fail to meet the requirements of incentive stock options as defined in Section 422A of the Code or which would result in a failure to comply with any applicable requirements of the Securities Act or rules or regulations adopted thereunder. Article X. Basis for Awards The granting of any option under the Plan shall be entirely in the discretion of the Compensation Committee and nothing herein contained shall be construed to give any employee any right to participate under the Plan or to receive any option under it. Neither the adoption and maintenance of the Plan nor the granting of an option pursuant to this Plan shall be deemed to constitute a contract of employment between the Company and any employee, or to be a condition of the employment of any person. Nothing herein contained shall be deemed to give any employee the right to be retained in the employ of the Company, interfere with the right of the Company to discharge or retire any employee at any time, be deemed to give to the Company the right to require an employee to remain in its employ, or interfere with the employee's right to terminate his or her employment at any time. Similarly, nothing in the Plan shall be deemed to limit or override the right of the shareholders to remove or replace a director of the Company, or to give rise to a claim by any director for options awarded after the termination of his or her service as a director. The granting of an option shall impose no duty upon the optionee to exercise such option. Article XI. Government Regulations. The Plan and the granting and exercise of any option hereunder, and the obligations of the Company to sell and deliver Common Stock under any such option, shall be subject to all applicable laws, rules and regulations, and to such approvals by any governmental agencies as may be required. Article XII. Proceeds from Sale of Stock. Proceeds received by the Company from the sale of Common Stock issued upon the exercise of an option shall be for the general business purposes of the Company. 67 9 UNITED SECURITY BANCORPORATION Article XIII. Reporting Requirements. The Compensation Committee shall furnish each optionee hereunder with such information relating to the exercise of any option granted hereunder to said optionee as is required under the Code and applicable state and federal Securities laws. Article XIV. Approval of Shareholders. No option granted hereunder shall be exercisable until the Plan is approved by the holders of a majority of the outstanding shares of the Common Stock of the Company. The Plan was approved by the board of directors of the Company on March 14, 1995. The Plan was also approved by holders of a majority of the outstanding shares of the Common Stock of the Company on May 24, 1995 solely for purposes of conforming the Plan to the requirements of the Code and Rule 16b-3 of the Exchange Act. Article XV. Interpretations. The terms of the Plan are subject to all present and future regulations and rulings of the Secretary of the Treasury or his delegate relating to the qualification of incentive stock options under Section 422 of the Code. If any provision of the Plan conflicts with any such regulation or ruling, that provision of the Plan shall be null and void. UNITED SECURITY BANCORPORATION /s/ William C. Dashiell William C. Dashiell, its President 68 10 UNITED SECURITY BANCORPORATION Form of 1995 Incentive Stock Option Plan Agreement UNITED SECURITY BANCORPORATION INCENTIVE STOCK OPTION AGREEMENT THIS AGREEMENT is entered into by and between United Security Bancorporation (the "Company") and _________________________ ("Employee/Director"). The Company and Employee/Director agree as follows: Pursuant to the Company's Incentive Stock Option Plan as presently in effect (the "Plan"), the Company hereby grants to Employee/Director an irrevocable incentive stock option to purchase _____ shares of common stock of the Company at an option price of $______ per share, payable in cash. Adjustments for dividends: the option price for the common shares under option to the Employee/Director will be adjusted with any stock dividend, by the percentage amount of that dividend (i.e., a five percent [5%] stock dividend would decrease the option price five percent [5%] by multiplying the option price by 95% to obtain the adjusted option price). The original number of shares optioned does not change with the declaration of a stock dividend). The date of grant of this option is ___________________________. This option shall terminate on ___________________________ unless sooner terminated by reason of death, disability or other termination of status as an Employee/Director, as provided in the Plan. This option shall become exercisable (i.e., vest) as follows: 20% of the total option upon the signing of this agreement, with an additional 20% per year on each anniversary of the Option Date. From the date this option (or any portion thereof) first becomes exercisable through the date of its termination, Employee/Director may exercise it, in whole or in part at any time and from time to time. This option may only be exercised if it is exercised in the manner provided by the plan. Exercise must be by actual delivery to the company of a written notice of exercise signed by Employee/Director specifying the number of shares and option price and accompanied by payment of the full amount of the option price. All of the terms and conditions of the Plan are incorporated by this reference as part of this Agreement as if such terms and conditions had been included in this Agreement. EXECUTED as of _____________________________. EMPLOYEE/DIRECTOR: _______________________________ UNITED SECURITY BANCORPORATION _______________________________ Richard C. Emery, President/COO 69 EX-10.2 3 FORM OF SALARY CONTINUATION AGREEMENT 1 UNITED SECURITY BANCORPORATION Exhibit 10.2 Form of Salary Continuation Program Agreement EXECUTIVE SALARY CONTINUATION AGREEMENT THIS AGREEMENT, made and entered into this ________________________ , by and between ______________________ a corporation organized and existing under the laws of the State of Washington, (hereinafter called the Corporation) and _______________________________ (hereinafter called the Executive). WITNESSETH: WHEREAS, the Executive is in the employ of the Corporation, serving as its _____________________________ ; and WHEREAS, the experience of the Executive, his or her knowledge of the affairs of the Corporation, his or her reputation and contacts in the industry are so valuable that assurance of his or her continued service is essential for the future growth and profits of the Corporation and it is in the best interests of the Corporation to arrange terms of continued employment for the Executive so as to reasonably assure his or her remaining in the Corporation's employment during his or her lifetime or until the age of retirement; and WHEREAS, it is the desire of the Corporation that his or her services be retained as herein provided; and WHEREAS, the Executive is willing to continue in the employ of the Corporation provided the Corporation agrees to pay him or her or his or her beneficiaries certain benefits in accordance with the terms and conditions hereinafter set forth; NOW, THEREFORE, in consideration of the services to be performed in the future as well as the mutual promises and covenants herein contained, it is agreed as follows: ARTICLE 1. 1.1) Beneficiary - The term Beneficiary shall mean the person or persons whom the Executive shall designate in writing to receive the benefits provided hereunder. 1.2) Disability - The term Disability shall mean an inability to substantially perform the usual and regular duties performed by the Executive as an employee of the Corporation. Such disability may be caused by either illness or injury and includes mental disabilities. For purposes of this Agreement the determination of the Executive's disability shall be made solely by the Board of Directors of the Corporation without participation by the alleged disabled Executive. Such a determination by the Board of Directors shall be final and conclusive on all parties hereto. 1.3) Named Fiduciary and Plan Administrator - The Named Fiduciary and Plan Administrator of this plan shall be the Corporation. ARTICLE 2. 2.1) Employment - The Corporation agrees to employ the Executive in such capacity as the Corporation may from time to time determine. The Executive will continue in the employ of the Corporation in such capacity and with such duties and responsibilities as may be assigned to him or her, and with such compensation as may be determined from time to time by the Board of Directors of the Corporation. 2.2) Full Efforts - The Executive agrees to devote his or her full time and attention exclusively to the business and affairs of the Corporation, except during vacation periods, and to use his or her best efforts to furnish faithful and satisfactory services to the Corporation. The Director agrees to devote his or her time as requested by the Corporation and to use his or her best efforts to furnish faithful and satisfactory services to the Corporation. 2.3) Fringe Benefit - The salary continuation benefits provided by this Agreement are granted by the Corporation as a fringe benefit to the Executive and are not part of any salary reduction plan or any arrangement deferring a bonus or a salary increase. The Executive has no option to take any current payment or bonus in lieu of these salary continuation benefits. ARTICLE 3. 3.1) Retirement - If the Executive shall continue in the employment of the Corporation until he or she attains the age of sixty-five (65), he or she may retire from active daily employment as of the first day of the month next following attainment of age sixty-five (65) or upon such later date as may be mutually agreed upon by the Executive and the Corporation. 01) The Executive shall have the right to negotiate with the Corporation an early retirement, provided the Executive has satisfied the vesting requirements. 70 2 UNITED SECURITY BANCORPORATION 3.2) Payment - The Corporation agrees that upon such retirement it will pay to the Executive the annual sum of _______________________ (____________), payable monthly on the first day of each month following such retirement for a period of one hundred twenty (120) months; subject to the conditions and limitations hereinafter set forth. The ____________________________ ( ____________________ ) annual payment amount may be adjusted as of the first year in which it is to be paid to reflect changes in the federally determined cost-of-living index. However, the Corporation is not obligated hereunder to make any such adjustment. Also, it should be noted that under 3.1 (01) this amount could be renegotiated under early retirement provisions. 3.3) Death After Retirement - The Corporation agrees that if the Executive shall so retire, but shall die before receiving the full amount of monthly payments to which he or she is entitled hereunder, it will continue to make such monthly payments to the Executive's designated Beneficiary for the remaining period. If a valid Beneficiary Designation is not in effect, the payments shall be made to the Executive's surviving spouse or, if none, said payments shall be made to the duly qualified personal representative, executor or administrator of his or her estate. ARTICLE 4. 4.1) Death Prior to Retirement - In the event the Executive should die while actively employed by the Corporation at any time after the date of this Agreement, but prior to his or her attaining the age of sixty-five (65) years, the Corporation will pay the annual sum of __________________ (________________ ) per year to the Executive's designated Beneficiary in equal monthly installments for a period of one hundred twenty (120) months. If a valid Beneficiary Designation is not in effect, the payments shall be made to the Executive's surviving spouse or, if none, said payments shall be made to the duly qualified personal representative, executor or administrator of his or her estate The said monthly payments shall begin the first day of the month following the month of the decease of the Executive. Provided, however, that anything hereinabove to the contrary notwithstanding, no death benefit shall be payable hereunder if it is determined that the Executive's death was caused by suicide on or before February 1, 1999. 4.2) Disability Prior to Retirement - In the event the Executive should become disabled while actively employed by the Corporation at any time after the date of this Agreement but prior to his or her attaining the age of sixty-five (65) years, the Executive will be considered to be one hundred percent (100%) vested in the amount set forth in Schedule A attached hereto and made a part hereof. Said amount shall be paid to the Executive in accordance with the ten-year payment schedule attached to begin at age sixty-five (65) or earlier, as agreed by the disabled executive and the Corporation. However, the Corporation is not obligated to change the terms of the original agreement. Said payment shall be in lieu of any other retirement or death benefit under this Agreement. ARTICLE 5. 5.1) Termination of Employment - The Corporation reserves the right to terminate the employment of the Executive at any time prior to retirement. IF THE EXECUTIVE IS INVOLUNTARILY TERMINATED BY THE CORPORATION FOR REASONABLE CAUSE (I.E. ACTS OF DISHONESTY, DISLOYALTY, ILLEGALITY OR MORAL TURPITUDE ADVERSELY AFFECTING THE CORPORATION OR REPEATED FAILURE OR REFUSAL TO FOLLOW REASONABLE DIRECTIONS FROM THE BOARD FOLLOWING A WRITTEN WARNING), THE AGREEMENT SHALL TERMINATE UPON THE DATE OF SUCH TERMINATION OF EMPLOYMENT. IN THE EVENT THE EXECUTIVE VOLUNTARILY TERMINATES EMPLOYMENT WITH THE CORPORATION PRIOR TO HIS OR HER ATTAINING AGE SIXTY-FIVE (65), OTHER THAN BY REASON OF HIS OR HER DISABILITY OR HIS OR HER DEATH, THEN THIS AGREEMENT SHALL TERMINATE UPON THE DATE OF SUCH TERMINATION OF EMPLOYMENT. Provided, however, that the Executive shall be entitled to the following benefits under the following circumstances: (01) If the Executive has been employed by the Corporation for a period of at least six (6) continuous years from date of employment at the time this agreement was entered into, the Executive will be considered to be vested in twenty percent (20%) of the amount set out in Schedule A attached hereto and made apart hereof and shall become vested in an additional twenty percent (20%) of said amount for each succeeding year thereafter until he or she becomes one hundred percent (100%) vested. If the Executive has been employed by the Corporation for a period of less than six (6) continuous years from and after the time this Agreement was entered into, the Executive will not be 71 3 UNITED SECURITY BANCORPORATION considered to be vested in any benefit hereunder and shall be entitled to no benefits under this Agreement. If the Executive has been employed by the Corporation for a period of at least ten (10) continuous years from date of employment, the Executive will be one hundred percent (100%) vested. If the Executive's employment is terminated under the provisions of this Section 5.1, the Corporation will pay the Executive's vested amount upon such terms and conditions and commencing no later than age sixty-five (65), subject to the conditions of Article 10 of this agreement. (02) Anything hereinabove to the contrary notwithstanding, if the Executive is not fully vested in the amount set forth in Schedule A, he or she will become fully vested in the amount in the event of a transfer in the controlling ownership or sale of the Corporation or its parent corporation and shall be entitled to the full amount set forth in Schedule A, upon the terms and conditions hereof. ARTICLE 6. 6.1) Termination of Agreement by Reason of Changes in Law - The Corporation is entering into this Agreement upon the assumption that certain existing tax laws will continue in effect in substantially their current form. In the event of any changes in such federal laws the Corporation shall have an option to terminate or modify this Agreement. Provided, however, that the Executive shall be entitled to at least the same amount as he would have been entitled to under Section 4.2 relating to disability. The payment of said amount shall be made upon such terms and conditions and at such time as the Corporation shall determine, but in no event commencing later than age sixty-five (65). ARTICLE 7. 7.1) Nonassignable - Neither the Executive, his or her spouse, nor any other beneficiary under this Agreement shall have any power or right to transfer, assign, anticipate, hypothecate, mortgage, commit, modify, or otherwise encumber in advance any of the benefits payable hereunder, nor shall any of said benefits be subject to seizure for the payment of any debts, judgments, alimony or separate maintenance, owed by the Executive or his or her beneficiary or any of them, or be transferable by operation of law in the event of bankruptcy, insolvency or otherwise. ARTICLE 8. 8.1) Claims Procedure - The Corporation shall make all determinations as to the rights to benefits under this Agreement. Any decision by the Corporation denying a claim by the Executive or his or her beneficiary for benefits under this Agreement shall be stated in writing and delivered or mailed to the Executive or such beneficiary. Such decision shall set forth the specific reasons for the denial, written to the best of the Corporation's ability in a manner calculated to be understood without legal or actuarial counsel. In addition, the Corporation shall provide a reasonable opportunity to the Executive or such beneficiary for full and fair review of the decision denying such claim. ARTICLE 9. 9.1) Unsecured General Creditor - The Executive and his or her beneficiary shall have no legal right or equitable rights, interests, or claims in or to any property or assets of the Corporation. No assets of the Corporation shall be held under any trust for the benefit of the Executive or his or her beneficiaries or held in any way as security for the fulfilling of the obligations of the Corporation under this plan. All of the Corporation's assets shall be and remain the general, unpledged, unrestricted assets of the Corporation. The Corporation's obligation under this plan shall be that of an unfunded and unsecured promise to pay money in the future. Executives and their beneficiaries shall be unsecured general creditors with respect to any benefits hereunder. 72 4 UNITED SECURITY BANCORPORATION ARTICLE 10. 10.1) Reorganization - The Corporation shall not merge or consolidate into or with another Corporation, or reorganize, or sell substantially all of its assets to another corporation, firm, or person unless and until such succeeding or continuing corporation, firm, or person agrees to assume and discharge the obligations of the Corporation under this Agreement. Upon the occurrence of such event, the term "Corporation" as used in this Agreement shall be deemed to refer to such successor or survivor corporation. ARTICLE 11. 11.1) Benefits and Burdens - This Agreement shall be binding upon and inure to the benefit of the Executive and his or her personal representatives, and the Corporation and any successor organization which shall succeed to substantially all of its assets and business. ARTICLE 12. 12.1) Not a Contract of Employment - This Agreement shall not be deemed to constitute a contract of employment between the parties hereto, nor shall any provision hereof restrict the right of the Corporation to discharge the Executive, or restrict the right of the Executive to terminate his or her employment. Nothing contained herein shall be construed as a modification or amendment of the employee handbook of United Security Bancorporation, as the same may be amended from time to time. All provisions contained herein shall be construed consistent with the provisions of said employee handbook, and in the event of any inconsistencies, the handbook shall govern. IN WITNESS WHEREOF, the Corporation has caused this Agreement to be duly executed by its proper officer and the Executive has hereunto set his hand at , the day and year first above written. By: William C. Dashiell Its: Chairman EXECUTIVE: _____________________________ BENEFICIARY DESIGNATION NOTICE To the Plan Administrator of the United Security Bank Executive Salary Continuation Agreement: Pursuant to the Provisions of my Executive Salary Continuation Agreement with United Security Bank permitting the designation of a beneficiary or beneficiaries by a participant, I hereby designate the following persons and entities as primary and secondary beneficiaries of any benefit under said Agreement payable by reason of my death. Primary Beneficiary: Name Address _____________________________ Relationship Contingent Beneficiary: Name Address _____________________________ Relationship THE RIGHT TO REVOKE OR CHANGE ANY BENEFICIARY DESIGNATION IS HEREBY RESERVED. ALL PRIOR DESIGNATIONS, IF ANY, OF BENEFICIARIES AND SECONDARY BENEFICIARIES ARE HEREBY REVOKED. The Plan Administrator shall pay all sums payable under the Agreement by reason of my death to the Primary Beneficiary, if he or she survives me, and if no Primary Beneficiary shall survive me, then to the Secondary Beneficiary, and if no named beneficiary survives me, then the Plan Administrator shall pay all amounts in accordance with the terms of the Executive Salary Continuation Agreement. In the event that a named beneficiary survives me and dies prior to receiving the entire benefit payable under said Agreement, then and in that event the remaining unpaid benefit, payable according to the terms of the Agreement, shall be payable to the personal representative of the estate of said deceased beneficiary, who survive me, but die prior to receiving the total benefit. ___________________ Date of Designation Signature of Executive 73 5 UNITED SECURITY BANCORPORATION
Form of Salary Continuation Program Agreement Exhibit A of Agreement for William C. Dashiell Plan Year Amount in Which Vesting Occurs - --------- ------------------------------ 65 $39,600.00 66 $39,600.00 67 $39,600.00 68 $39,600.00 69 $39,600.00 70 $39,600.00 71 $39,600.00 72 $39,600.00 73 $39,600.00 74 $39,600.00 Exhibit A of Agreement for Daniel P. Murray Plan Year Amount in Which Vesting Occurs - --------- ------------------------------ 65 $40,800.00 66 $40,800.00 67 $40,800.00 68 $40,800.00 69 $40,800.00 70 $40,800.00 71 $40,800.00 72 $40,800.00 73 $40,800.00 74 $40,800.00 Exhibit A of Agreement for Duane L. Brandenburg Plan Year Amount in Which Vesting Occurs - --------- ------------------------------ 65 $51,745.00 66 $51,745.00 67 $51,745.00 68 $51,745.00 69 $51,745.00 70 $51,745.00 71 $51,745.00 72 $51,745.00 73 $51,745.00 74 $51,745.00
74 EX-27 4 FINANCIAL DATA SCHEDULE
9 1,000 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 19,058 9,656 5,210 0 65,458 1,312 1,332 229,348 2,613 350,479 307,586 0 2,815 6,989 0 0 28,383 4,706 350,479 21,501 2,065 1,109 24,675 9,463 9,895 14,780 752 (21) 10,628 7,117 7,117 0 0 4,864 1.20 1.19 6.06 2,181 764 0 0 2,034 990 117 2,613 2,613 0 0
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