<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
Current Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (date of earliest event reported): May 8, 2000
PremierWest Bancorp *
(Exact Name of Registrant as specified in its charter)
Oregon 93-1282171
- --------------- ------------------------ -------------------
(State or other (Commission File Number) (IRS Employer
jurisdiction of Identification No.)
incorporation
1455 East McAndrews Road, Medford, Oregon 97504
--------------------------
Address of Principal Executive Office Zip Code
Registrant's telephone number including area code: (541) 776-7480
(Former name or former address, if changed since last report): Bank of Southern
Oregon (see Item 5)
- -----------
* PremierWest Bancorp is the successor registrant to Bank of Southern Oregon
under Rule 12g-3(a).
<PAGE> 2
Item 5. OTHER EVENTS
As of the close of business on May 8, 2000, Bank of Southern Oregon
completed its holding company reorganization under an Agreement and Plan of
Merger and Share Exchange dated October 7, 1999, amended as of December 14,
1999. As a result, Bank of Southern Oregon has become a wholly owned subsidiary
of PremierWest Bancorp (the registrant).
Before the reorganization was completed, Bank of Southern Oregon's
common stock was registered under Section 12(g) of the Securities Exchange Act
of 1934. Bank of Southern Oregon filed reports under Section 13 of the
Securities Exchange Act of 1934 with the Federal Deposit Insurance Corporation.
All information filed by Bank of Southern Oregon with the FDIC under the
Securities Exchange Act of 1934 is available for inspection at:
Registration, Disclosure, and Securities Operations Unit
Division of Supervision
Federal Deposit Insurance Corporation
550 17th Street, N.W.
Washington, D.C. 20429
Statements of beneficial ownership filed with the FDIC by directors and
executive officers of Bank of Southern Oregon under Section 16(a) of the
Securities Exchange Act of 1934 (FDIC Forms F-7, F-8 and F-8A), and beneficial
ownership reports filed under Section 13(d) of the Securities Exchange Act of
1934 by owners of more than 5% of Bank of Southern Oregon's shares, are also
available for inspection at that FDIC address in Washington.
Under the terms of the Agreement and Plan of Merger and Share Exchange,
each outstanding share of Bank of Southern Oregon common stock was acquired by
PremierWest Bancorp in exchange for one newly issued share of PremierWest
Bancorp's common stock. The shares of PremierWest Bancorp common stock held by
Bank of Southern Oregon were cancelled as part of the reorganization.
Accordingly, PremierWest Bancorp has become the sole shareholder of Bank of
Southern Oregon, and shareholders of Bank of Southern Oregon have become
shareholders of PremierWest Bancorp. PremierWest Bancorp is the successor issuer
under Rule 12g-3(a). The common stock of PremierWest Bancorp is deemed to be
registered under Section 12(g) of the Securities Exchange Act of 1934.
PremierWest Bancorp has assumed Bank of Southern Oregon's reporting obligations
under the Securities Exchange Act of 1934. PremierWest Bancorp will henceforth
file reports and proxy information with the Securities and Exchange Commission.
At the same time the holding company reorganization of Bank of Southern
Oregon was completed, United Bancorp merged into PremierWest Bancorp.
PremierWest Bancorp was the surviving corporation in that merger. Nondissenting
shareholders of United Bancorp have also become shareholders of PremierWest
Bancorp. That merger was also accomplished under the Agreement and Plan of
Merger and Share Exchange.
The holding company reorganization of Bank of Southern Oregon, the
merger of United Bancorp into PremierWest Bancorp and the issuance of
PremierWest Bancorp common stock to shareholders of Bank of Southern Oregon and
shareholders of United Bancorp are described in detail in PremierWest Bancorp's
Form S-4 Registration Statement filed with the Securities and Exchange
Commission (SEC File No. 333-96209).
Item 7. Financial Statements and Exhibits
(a) FINANCIAL STATEMENTS OF BUSINESS ACQUIRED
Not applicable
(b) EXHIBITS
The following exhibits are filed herewith or incorporated by
reference herein:
NUMBER DESCRIPTION
2. Agreement and Plan of Merger and Share Exchange dated
as of October 7, 1999, amended as of December 14,
1999, by and among Bank of Southern Oregon,
PremierWest Bancorp, United Bancorp and Douglas
National Bank (included as Appendix A of the
prospectus/joint proxy statement contained in
PremierWest Bancorp's Form S-4 Registration
Statement, SEC File No. 333-96209, and incorporated
herein by this reference)
3.1 Articles of Incorporation of PremierWest Bancorp
(included as Appendix G of the prospectus/joint proxy
statement contained in PremierWest Bancorp's Form S-4
Registration Statement, SEC File No. 333-96209, and
incorporated herein by this reference)
3.2 Bylaws of PremierWest Bancorp (included as Appendix H
of the prospectus/joint proxy statement contained in
PremierWest Bancorp's Form S-4 Registration
Statement, SEC File No. 333-96209, and incorporated
herein by this reference)
4 Specimen certificate for common stock of PremierWest
Bancorp (included as Exhibit 4 in Amendment No. 1 of
PremierWest Bancorp's Form S-4 Registration
Statement, SEC File No. 333-96209, filed with the
Securities and Exchange Commission on March 17,
<PAGE> 3
2000, and incorporated herein by this reference)
99.1 Form 15 deregistration filed by Bank of Southern
Oregon on or about May 10, 2000 with the Federal
Deposit Insurance Corporation
99.2 Form 10-KSB Annual Report of Bank of Southern Oregon
for the year ended December 31, 1999, as filed on
March 30, 2000 with the Federal Deposit Insurance
Corporation
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
PREMIERWEST BANCORP
(Registrant)
By: /s/ John L. Anhorn
------------------
John L. Anhorn, President and Chief Executive Officer
Date: May 9, 2000
<PAGE> 1
EXHIBIT 99.1
[Bank of Southern Oregon's
Form 15 Deregistration
filed with the Federal Deposit Insurance Corporation]
<PAGE> 2
<TABLE>
-----------------------------
OMB APPROVAL
-----------------------------
<S> <C>
FEDERAL DEPOSIT INSURANCE CORPORATION OMB Number: 3235-0167
REGISTRATION, DISCLOSURE AND SECURITIES OPERATIONS UNIT Expires: October 31, 2001
DIVISION OF SUPERVISION Estimated average burden
550 17TH STREET N.W. hours per response......1.50
WASHINGTON, D.C. 20429
-----------------------------
</TABLE>
FORM 15
CERTIFICATION AND NOTICE OF TERMINATION OF REGISTRATION UNDER SECTION
12(g) OF THE SECURITIES EXCHANGE ACT OF 1934 OR SUSPENSION OF DUTY TO FILE
REPORTS UNDER SECTIONS 13 AND 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934.
FDIC CERTIFICATE NUMBER: 32975
Bank of Southern Oregon
- --------------------------------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
1455 East McAndrews Road, Medford, Oregon 97504
- --------------------------------------------------------------------------------
(ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
Common Stock, no par value
- --------------------------------------------------------------------------------
(TITLE OF EACH CLASS OF SECURITIES COVERED BY THIS FORM)
None
- --------------------------------------------------------------------------------
(TITLES OF ALL OTHER CLASSES OF SECURITIES FOR WHICH A DUTY TO FILE REPORTS
UNDER SECTION 13(a) OR 15(d) REMAINS)
Please place an X in the box(es) to designate the appropriate rule
provision(s) relied upon to terminate or suspend the duty to file reports:
Rule 12g-4(a)(1)(i) [X] Rule 12h-3(b)(1)(ii) [_]
Rule 12g-4(a)(1)(ii) [_] Rule 12h-3(b)(2)(i) [_]
Rule 12g-4(a)(2)(i) [_] Rule 12h-3(b)(2)(ii) [_]
Rule 12g-4(a)(2)(ii) [_] Rule 15d-6 [_]
Rule 12h-3(b)(1)(i) [X]
APPROXIMATE NUMBER OF HOLDERS OF RECORD AS OF THE CERTIFICATION OR
NOTICE DATE: One
Pursuant to the requirements of the Securities Exchange Act of 1934,
Bank of Southern Oregon has caused this certification/notice to be signed on its
behalf by the undersigned duly authorized person.
Dated: May 8, 2000 By: /s/ John L. Anhorn
--------------------------------------
Name: John L. Anhorn
Title: President and Chief Executive
Officer of Bank of Southern Oregon
<PAGE> 1
EXHIBIT 99.2
[Bank of Southern Oregon Form 10-KSB
for the year ended December 31, 1999
filed with the Federal Deposit Insurance Corporation]
<PAGE> 2
EXHIBIT 99.2
FEDERAL DEPOSIT INSURANCE CORPORATION
Registration, Disclosure and Securities Operations Unit
Division of Supervision
550 17th Street, N.W.
Washington, D.C. 20429
FORM 10-KSB
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
FDIC CERTIFICATE NUMBER: 32975
BANK OF SOUTHERN OREGON
(Exact name of registrant as specified in its charter)
OREGON 93-1007653
(State of Incorporation) (IRS Employer Identification No)
1455 East McAndrews Road
Medford, Oregon 97504
(Address of principal executive offices)
(541) 776-7480
(Registrant's telephone number)
Securities registered pursuant to 12(b) of the Act: None
Securities registered pursuant to 12(g) of the Act: Common Stock, no par value
Check whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days.
Yes X No ___
Check if there is no disclosure of delinquent filers in response to item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this form 10-KSB or any
amendment to this Form 10-KSB. ( )
The issuer's revenues for its most recent fiscal year were $12,608,000.
The aggregate market value of the voting stock held by non-affiliates was
$27,867,658, based on the closing price at March 17, 2000 of $6.75.
The number of shares outstanding of each of the registrant's classes of common
stock, as of March 17, 2000 was 4,857,540 shares of Common Stock, without par
value.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
1
<PAGE> 3
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This annual report includes forward-looking statements within the
meaning of the "safe-harbor" provisions of the Private Securities Litigation
Reform Act of 1995. Such forward-looking statements are based on the beliefs of
the Bank's management and on assumptions made by and information currently
available to management. All statements other than statements of historical
fact, regarding the Bank's financial position, business strategy and plans and
objectives of management for future operations of the Bank are forward-looking
statements. When used herein, the words "anticipate," "believe," "estimate,"
"expect," and "intend" and words or phrases of similar meaning, as they relate
to the Bank or management, are intended to identify forward-looking statements.
Examples of forward-looking statements include, but are not limited to (i)
projections of revenues, income or expenses, earnings per share, capital
expenditures, dividends, capital structure and other financial items, (ii)
statements of the plans and objectives of the Bank or its management, or Board
of Directors, including the introduction of new products or services, plans for
expansion, acquisitions or future growth, or estimates or predictions of actions
by customers, vendors, competitors or regulatory authorities, (iii) statements
of future economic performance, and (iv) statements of assumptions underlying
other statements about the Bank and its business. Although the Bank believes
that the expectations reflected in such forward-looking statements are
reasonable, it can give no assurance that such expectations will prove to have
been correct. Forward-looking statements are subject to certain risks and
uncertainties, which could cause actual results to differ materially from those
indicated by the forward-looking statements. These risks and uncertainties
include the Bank's ability to maintain or expand its market share, net interest
margins, or implement its marketing and growth strategies. Further, actual
results may be affected by the Bank's ability to compete on price and other
factors with other financial institutions; customer acceptance of new products
and services; general trends in the banking industry and the regulatory
environment, as they relate to the Bank's cost of funds and returns on assets.
In addition, there are risks inherent in the banking industry relating to
collectibility of loans and changes in interest rates. The reader is advised
that this list of risks is not exhaustive and should not be construed as any
prediction by the Bank as to which risks would cause actual results to differ
materially from those indicated by the forward-looking statements.
2
<PAGE> 4
INFORMATION REQUIRED IN REGISTRATION STATEMENT
PART I
Note: the Registrant has elected to use the disclosure format called
for by Alternative 2 for Part I of Form 10-KSB which calls for the information
required by Items 6-11 of Model B of Form 1-A.
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Bank of Southern Oregon (the "Bank") is an Oregon state-chartered bank
which began operations in June 1990. The Bank's deposits are insured by the FDIC
up to applicable maximums. The Bank offers its customers a broad range of
banking services, including checking, savings and negotiable order of withdrawal
(NOW) accounts; money market accounts; time certificates of deposit, commercial
loans, real estate loans and various types of consumer loans; safe deposit
facilities and travelers' checks.
The Bank engages in a general commercial banking business in southern
Oregon, offering commercial banking services principally to small and
medium-sized businesses, professional and retail customers. The Bank has
developed and continues to monitor and update a marketing program to attract and
retain consumer accounts, and to offer banking services and facilities
compatible with the needs of its customers. With population and income levels in
the Bank's primary trade area expected to grow, management believes that
consumer lending will represent an increasingly significant lending opportunity
for the Bank, and it intends to pursue this opportunity aggressively.
The Bank's loan services include operational and working capital loans;
loans to finance capital purchases; term business loans; residential
construction loans; selected guaranteed or subsidized loan programs for small
businesses; professional loans; consumer installment loans to purchase
automobiles, boats, aircraft and for home improvement and other personal
expenditures. Although the Bank has made agricultural loans, it currently has no
significant agricultural loans.
The Bank is a state-chartered bank organized under Oregon law in 1989,
and engages in commercial banking activities through its main office located at
1455 E. McAndrews Road, Medford, Oregon and through its branch offices at 2600
E. Barnett Road, Medford, Oregon and 300 East Pine, Central Point, Oregon and
its loan production office located at 503 Airport Road, Medford, Oregon. The
Bank offers its customers a broad range of banking services, including checking,
savings and negotiable order of withdrawal ("NOW") accounts; money market
accounts; time certificates of deposit; commercial loans, real estate loans and
various types of consumer loans; safe deposit facilities and traveler's checks.
The trade area from which the Bank obtains its customers is generally
within 30 miles from the Bank's offices in Medford, including the communities of
Ashland, Central Point, Eagle Point, Jacksonville, White City, Phoenix and
Talent. Medford is the fourth largest city in the state of Oregon and is the
center for commerce, medicine and transportation in southwestern Oregon.
3
<PAGE> 5
MARKET AREA
The Bank's trade area is those portions of Jackson and Josephine
Counties that are within approximately 30 miles of the Bank's Medford
headquarters, including the communities of Ashland, Central Point, Eagle Point,
Jacksonville, White City, Phoenix and Talent. Medford is the fourth largest city
in the state of Oregon and is the center for commerce, medicine and
transportation in southwestern Oregon. The principal industries in the area
include lumber and wood products, manufacturing and agriculture. Other
manufacturing segments include electrical equipment and supplies, computing
equipment, printing and publishing, fabricated metal products and machinery, and
stone and concrete products. In the non-manufacturing sector, significant
industries include the recreation, wholesale and retail trades, as well as
medical care, particularly in connection with the growing retirement community
in the Medford area.
INDUSTRY OVERVIEW
The commercial banking industry continues to undergo increased
competition, consolidation and change. Non-insured financial service companies
such as mutual funds, brokerage firms, insurance companies, mortgage companies
and leasing companies are offering alternative investment opportunities for
customers' funds or lending sources for their needs. Banks have been granted
extended powers to better compete including the limited right to sell insurance
and securities products, but the percentage of financial transactions handled by
commercial banks has dropped steadily. Although the amount of deposits in banks
is remaining steady, such deposits represent less than 20% of household
financial assets compared to over 35% twenty-five years ago. This trend
represents a continuing shift to stocks, bonds, mutual funds and retirement
accounts.
Nonetheless, commercial banks are reducing costs by consolidation and
exploring alternative ways of providing bank products. Although new community
banks continue to be organized, bank mergers substantially outstrip formations.
In the last dozen years, the number of commercial banks has dropped from 14,000
to 9,500, and this trend is expected to continue.
To more effectively and efficiently deliver its products, banks are
opening in-store branches, installing more automated teller machines ("ATMs")
and investing in technology to permit telephone, personal computer and internet
banking. While all banks are experiencing the effects of the changing
environment, the manner in which banks choose to compete is increasing the gap
between larger super-regional banks, committed to becoming national or regional
"brand names" providing a broad selection of products at low cost and with
advanced technology, and community banks which provide most of the same products
but with a commitment to personal service and with local ties to the customers
and communities they serve.
BUSINESS PLAN
The Bank engages in a general commercial banking business in Southern
Oregon offering commercial banking services principally to small and
medium-sized businesses, professional and retail customers. The Bank has
developed and continues to monitor and update a marketing program to attract and
retain consumer accounts, and to offer banking services and facilities
compatible with the needs of such customers. Given the anticipated increases in
population and income within the Bank's primary trade area, there appears to be
market potential in the consumer lending area. The Bank also intends to provide
long-term real estate financing for owner-occupied residential real estate to be
marketed on the secondary market.
4
<PAGE> 6
The Bank lends to applicants whose demands for funds falls within the
Bank's lending limit. Loan services include: operational and working capital
loans; loans to finance capital purchases; term business loans; residential
construction and long-term loans; agricultural loans; selected guaranteed or
subsidized loan programs for small businesses; professional loans; consumer
installment loans to purchase automobiles, boats, aircraft and for home
improvement and other personal expenditures.
PRODUCTS AND SERVICES
The Bank offers a full array of financial products to meet the banking
needs of its market area and targeted customers. To ensure the ongoing viability
of its product offerings, the Bank regularly examines the desirability and
profitability of existing and potential new products.
Deposit Products. The Bank has a traditional array of deposit products,
including non-interest checking accounts, interest-bearing checking and savings
accounts, money market accounts and certificates of deposit. These accounts earn
interest at rates established by management based on competitive market factors
and management's desire to increase certain types or maturities of deposit
liabilities.
Commercial Loans. The Bank offers specialized loans for its business
and commercial customers, including equipment and inventory financing, real
estate construction loans and SBA loans for qualified businesses. Commercial
lending is the primary focus of the Bank's lending activities and a significant
portion of the loan portfolio. For regulatory reporting purposes, a substantial
portion of the Bank's commercial loans are designated as real estate loans since
they are secured by mortgages and trust deeds on real property. Such loans may
be made for purpose of financing commercial activities, such as accounts
receivable, equipment purchases and leasing. One of the Bank's objectives is to
diversify its loan portfolio with additional focus on accounts receivable and
working capital loans.
Real Estate Loans. Real estate loans are available for construction of
residential owner-occupied and rental properties. Borrowers can choose from a
variety of fixed and adjustable rate options and terms. Real estate loans
reflected in the loan portfolio are in large part loans made to commercial
customers that are secured by real property.
Consumer Loans. The Bank provides loans on a secured or unsecured basis
to individual borrowers for a variety of purposes, including personal, home
improvements, revolving credit lines, autos, boats, and recreational vehicles.
5
<PAGE> 7
COMPETITION
There are many bank, savings bank, savings association and credit union
offices located within the Bank's primary market area. Many of the competitor
institutions are branches of larger institutions headquartered outside of the
Medford area. In addition to banks, savings banks, savings associations and
credit unions, the Bank competes with finance companies, insurance companies,
mortgage companies, securities brokerage firms, money market funds and other
providers of financial services. Many competitors are larger and have
substantially greater resources than the Bank, which offer those competitors
advantages such as the ability to price services at lower, more attractive
levels and the ability to provide larger credit facilities than the Bank is able
to provide. Many of these competitors are more geographically diversified than
the Bank and are therefore less vulnerable than the Bank to adverse changes in
the local economy. Some competitors also offer products and services that are
not offered by the Bank. And some of the competitors are not subject to the same
kind and amount of regulatory restrictions and supervision to which the Bank is
subject. Because the Bank is a community bank that is considerably smaller than
other commercial lenders, the Bank's legal lending limit does not allow it to
make commercial loans in amounts many competitors can offer. The Bank may from
time to time accommodate loan volumes in excess of its lending limit through the
sale of participations in loans to other banks.
The banking industry has been changing for many reasons. Industry
consolidation through mergers and acquisitions has increased the level of
competition among financial institutions and other financial service
organizations. Additionally, recent legislative and regulatory changes could
have the effect of increasing competition even more. For example, Congress'
recent elimination of many restrictions on interstate branching could have the
effect of increasing competition from large banks headquartered outside of
southwestern Oregon. Congress' even more recent repeal of the Glass-Steagall Act
(which had separated the commercial and investment banking industries) and
elimination of the barriers between the banking and insurance industries can be
expected to make competition even more intense. See, "SUPERVISION AND
REGULATION." Additionally, the percentage of household financial assets held in
the form of deposits has been shrinking. Banking customers have been investing a
growing portion of their financial assets in stocks, bonds, mutual funds and
retirement accounts.
To more effectively and efficiently deliver banking products and
services, banks are opening in-store branches, installing more automated teller
machines (ATMs) and investing in technology to permit telephone, personal
computer and internet banking. While all banks are experiencing the effects of
the changing environment, the manner in which banks choose to compete is
increasing the gap between large super-regional and national banks, on one hand,
and community banks on the other. Large institutions are committed to becoming
national or regional "brand names," providing a broad selection of products at
low cost and with advanced technology, while community banks provide most of the
same products but with a commitment to personal service and with local ties to
the customers and communities they serve. The Bank seeks to take competitive
advantage of its local orientation and community banking profile. It competes
for loans principally through responsiveness to customers and its ability to
communicate effectively with them and understand and address their needs. The
Bank competes for deposits principally by offering customers personal attention,
a variety of banking services, attractive rates and strategically located
banking facilities. The Bank seeks to provide high quality banking service to
professionals and small and mid-sized businesses, as well as individuals,
emphasizing quick and flexible responses to customer demands.
6
<PAGE> 8
EMPLOYEES
As of December 31, 1999, the Bank had a total of 71 full-time
equivalent employees. None of the employees are subject to a collective
bargaining agreement. The Bank considers its relationship with its employees to
be good.
YEAR 2000 IMPACT
The Bank addressed Year 2000 issues following the guidelines
established by the Federal Financial Institutions Examination Council ("FFIEC").
FFIEC guidelines required the Bank to assess risks and analyze those systems,
software and services provided by third-party vendors. The Bank's project plan
successfully addressed the five phases FFIEC identified as critical to Year 2000
readiness.
The Banks Year 2000 Task Force consisted of members from the Board of
Directors, in addition to senior bank officers. The Task Force met monthly to
review progress and reported monthly to the Board of Directors. During 1998, the
Bank spent approximately $12,000 and during 1999 spent an additional $100,000 in
preparation for Year 2000.
The Bank experienced no adverse affects due to the change of dates from
1999 to 2000. The Bank expects no complications in the future due to significant
date changes.
LENDING
LOAN PORTFOLIO COMPOSITION AND ACTIVITY. The Bank makes commercial
loans, construction loans for residential owner-occupied and rental properties,
and secured and unsecured consumer installment loans. Commercial and real
estate-based lending has been the primary focus of the Bank's lending
activities. One of the Bank's objectives is to diversify its commercial loan
portfolio with additional focus on accounts receivable and working capital
loans, and to expand its consumer loan portfolio.
The Bank offers specialized loans for business and commercial
customers, including equipment and inventory financing, real estate construction
loans and Small Business Administration loans for qualified businesses. A
substantial portion of the Bank's commercial loans are designated as real estate
loans for regulatory reporting purposes because they are secured by mortgages
and trust deeds on real property. Loans of that type may be made for purpose of
financing commercial activities, such as accounts receivable, equipment
purchases and leasing, but they are secured by real estate to provide the Bank
with an extra measure of security. Although these loans may be secured in whole
or in part by real estate, they are treated in the discussions to follow as
commercial loans. The Bank's consumer installment loans include secured or
unsecured loans to individual borrowers for a variety of purposes, including
personal, home improvements, revolving credit lines, autos, boats, and
recreational vehicles.
7
<PAGE> 9
The following tables sets forth the composition of the loan portfolio
in dollar amounts and in percentages at December 31, 1999, 1998 and 1997, along
with a reconciliation to loans receivable, net.
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------------------------
(Dollars in thousands) 1999 1998 1997
---------------- ------------- --------------
<S> <C> <C> <C>
Type of loan:
Commercial...................... $ 22,303 $ 30,599 $ 25,557
Real estate construction........ 25,416 24,879 26,308
Real estate - other............. 60,758 39,037 35,987
Installment..................... 4,033 5,002 4,586
------------- ------------ ------------
Total loans........................ 112,510 99,517 92,438
Less:
Deferred loan fees.............. 485 466 359
Reserve for loan losses......... 2,396 2,278 1,079
------------ ------------ ------------
Net loans.......................... $ 109,629 $ 96,773 $ 91,000
============ ============ ============
Net loans as a percent of total assets 68.1% 65.9% 68.6%
</TABLE>
The following table presents maturity information for the loan
portfolio at December 31, 1999. The table does not include prepayments or
scheduled principal repayments.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1999
------------------------------------------------------------------------------
REAL REAL
ESTATE ESTATE -
(Dollars in thousands) COMMERCIAL CONSTRUCTION OTHER INSTALLMENT TOTAL
--------------- ------------ ------------ ----------- ------------
Amount due:
<S> <C> <C> <C> <C> <C>
In one year or less *.......... $ 16,453 $ 16,414 $ 23,586 $ 1,631 $ 58,083
After one year through five years 3,754 5,017 21,843 2,117 32,731
After five years............... 2,097 3,984 15,330 285 21,696
------------- ------------- ------------- ------------ -----------
Total amount due...... $ 22,303 $ 25,416 $ 60,758 $ 4,033 $ 112,510
============= ============= ============= ============ ===========
</TABLE>
* Loans due on demand and overdrafts are included in the amount due in
one year or less. The Bank has no loans without a stated schedule of
repayment or a stated maturity.
The following table shows the dollar amount of all loans due after
December 31, 1999 that have pre-determined interest rates and the dollar amount
of all loans due after December 31, 1999 that have variable
<TABLE>
<CAPTION>
(Dollars in thousands) FIXED RATES VARIABLE RATES TOTAL
--------------- ----------------- -------------
<S> <C> <C> <C>
Commercial............................. $ 8,829 $ 13,475 $ 22,303
Real estate construction............... 15,875 9,541 25,416
Real estate - other.................... 29,009 31,749 60,758
Installment............................ 3,510 524 4,033
------------ -------------- ------------
Total....................... $ 57,222 $ 55,288 $ 112,510
============ ============== ============
</TABLE>
COMMERCIAL LOANS AND COMMERCIAL REAL ESTATE LOANS. The Bank's
commercial loan services include accounts receivable, inventory and working
capital loans; renewable operating lines of credit; loans to finance capital
equipment; term business loans; short-term notes; selected guaranteed or
subsidized loan programs for small businesses; loans to professionals; and
commercial real estate loans.
Although a risk of nonpayment exists for all loans, certain specific
types of risks are associated with various types of loans. One of the primary
risks associated with commercial loans is the risk that the commercial borrower
might not generate sufficient income to repay the loan. To control this risk,
the Bank attempts to assess carefully the quality of the borrower's management.
The Bank also does not lend to start-up businesses, and the Bank generally
requires personal guarantees and secondary sources of repayment, such as real
estate collateral. In the process of considering a commercial loan application,
the
8
<PAGE> 10
Bank reviews the financial statements of the commercial borrower, appraisals of
the collateral and other documentation in order to determine
- whether there will be sufficient income to cover
payments on the proposed loan as well as other
existing debt of the commercial loan applicant,
- whether the collateral is of adequate liquidation
value, and
- whether the applicant has a good payment history and
is capable of performing the requirements of the
loan.
Other reviews and analyses are undertaken as appropriate, depending
upon the complexity of the credit request.
Real estate is commonly a material component of collateral for the
Bank's loans, including commercial loans. Although the expected source of
repayment of these loans is generally the operations of the borrower's business
or personal income, real estate collateral provides an additional measure of
security. Risks associated with loans secured by real estate include fluctuating
land values, changing local economic conditions, changes in tax policies, and a
concentration of loans within a limited geographic area.
Commercial real estate loans primarily include owner-occupied
commercial properties occupied by the proprietor of the business conducted on
the premises, and income producing or farm properties. Although the Bank has
made agricultural loans, it currently has no significant agricultural loans. The
primary risks of commercial real estate loans is loss of income of the owner or
occupier of the property and the inability of the market to sustain rent levels.
The Bank mitigates commercial real estate risk by making the majority of
commercial real estate loans on owner-occupied properties. The Bank's
underwriting standards also require a minimum of 3 consecutive years of income
equal to or greater than 1.2 times combined debt service, insurance and taxes
from the owner or occupier or from rental income. In addition, the maximum
loan-to-value ratio is 75%.
The Bank's commercial real estate loans are priced in relation to the
prime rate. These loans generally have note terms of 5 to 15 years, amortizing
over a term of 15 to 20 years. Although commercial and commercial real estate
loans generally bear somewhat more risk than single-family residential mortgage
loans, commercial and commercial real estate loans tend to be higher yielding,
tend to have shorter terms and generally provide for interest-rate adjustments
as prevailing rates change. Accordingly, commercial and commercial real estate
loans enhance a lender's interest rate risk management and, in management's
opinion, promote more rapid asset and income growth than a loan portfolio
comprised strictly of residential real estate mortgage loans.
At December 31, 1999, commercial loans that were more than 90 days
delinquent or nonaccruing totaled $1,729,000 in aggregate outstanding balances,
or 7.8% of the commercial loan portfolio. At December 31, 1999, real estate
loans that were more than 90 days delinquent or nonaccruing totaled $88,000 in
aggregate outstanding balances, or 0.1% of the real estate loan portfolio.
REAL ESTATE CONSTRUCTION. The Bank originates several different types
of loans that it categorizes as construction loans, including
- residential construction loans to borrowers who will
occupy the premises upon completion of construction,
- residential construction loans to builders,
9
<PAGE> 11
- commercial construction loans, and
- real estate acquisition and development loans.
Because of the complex nature of construction lending, these loans are
generally recognized as having a higher degree of risk than other forms of real
estate lending. The Bank mitigates its risk on construction loans by generally
lending funds to customers who have been pre-qualified for long-term financing
and who are using contractors acceptable to the Bank. The Bank's fixed-rate and
adjustable-rate construction loans provide for the same interest rate terms on
the construction loan and on the permanent mortgage loan that follows completion
of the construction phase, provided that the borrower pays at origination of the
loan an additional one percentage point of the total loan amount in the case of
fixed-rate construction loans, and one-half percentage point in the case of
adjustable-rate construction loans.
The Bank makes construction loans for single-family residences to
borrowers who will occupy the home following completion of construction, or
"owner-built" construction. These loans are typically made with a six- to
nine-month construction term. Upon completion of construction, the loans convert
to permanent mortgage loans with regularly amortizing principal and interest
payments, usually over a fifteen- to thirty-year term. These owner-built
construction loans are made with both fixed and adjustable interest rates.
The Bank also lends to builders for the construction of single-family
residences as models or under contract for sale. Builder construction loans are
typically six to nine months in duration, and are usually made with adjustable
interest rates from one to one and one-half percent above the Bank's prime rate.
Loans for the acquisition and development of residential and commercial acreage
are made with adjustable rates that are one to two percentage points above the
Bank's prime rate. Acquisition and development loans are typically made with
terms of one to two years.
The Bank makes construction loans to individuals and businesses for the
purpose of constructing commercial properties. These loans are ordinarily made
with a 6- to 12-month construction term. Upon completion of the project,
commercial construction loans convert to permanent commercial loans with
regularly amortizing principal and interest payments, generally on the same
terms as a commercial real estate loan. Adjustable-rate commercial construction
loans generally are made with interest rates that adjust every three to five
years. Variable-rate commercial construction loans generally are made with
interest rates that vary according to changes in the Bank's prime rate, with
interest rates ranging generally from one-half to one point over prime.
At December 31, 1999, real estate construction loans with outstanding
balances more than 90 days delinquent or nonaccruing amounted to $996,000, or
3.9% of the real estate construction loan portfolio.
INSTALLMENT LOANS. The Bank's installment loans include secured or
unsecured loans to individual borrowers for a variety of purposes, including
personal, home improvements, revolving credit lines, autos, boats, and
recreational vehicles. The Bank does not currently do any indirect lending.
Unsecured consumer loans carry significantly higher interest rates than secured
loans. The Bank maintains a higher loss reserve for consumer loans, while
maintaining strict credit guidelines when considering consumer loan
applications.
The Bank's home equity loan policy generally allows for a loan of up to
80% of a property's appraised value less the principal balance of the
outstanding first mortgage loan. The interest rate
10
<PAGE> 12
generally ranges from prime to one and one-half percentage points over the prime
rate, depending on the size of the loan. Home equity loans are repayable
monthly, with the monthly payment calculated as one and one-half percent of the
outstanding balance. The Bank's home equity loans generally have terms of ten to
fifteen years, with borrowing permitted in the first five to ten years,
respectively, and the last five years being dedicated solely to repayment of the
loan.
In addition to home equity loans, the Bank also offers installment
loans for the purchase of automobiles and for other consumer purposes.
Automobile loans are made with fixed interest rates with a term of two to five
years. Installment loans are made for other consumer purposes, generally on a
secured basis, with fixed interest rates and terms ranging from one to ten
years. The Bank also provides overdraft protection to checking account
depositors, but only if the checking account is linked to another account from
which the Bank may debit funds to pay the overdraft.
The Bank underwrites consumer installment loans in a manner designed to
assure compliance with applicable regulations and the Bank's underwriting
standards. Payment history on applicants is very important on these smaller
loans, and is checked through in-house records as well as credit bureaus. On
automobile loans, the value of the collateral is checked through the N.A.D.A.
book (the "blue book") or another valuation service. The borrower's income must
be adequate to cover all of his or her debt payments and other monthly payment
obligations, including the proposed loan.
At December 31, 1999, the Bank had approximately $4.0 million in its
installment loan portfolio, representing 3.7% of total loans. Installment loans
totaling approximately $15,000 were over 90 days delinquent or nonaccruing on
that date, representing 0.4% of the installment loan portfolio.
LOAN SOLICITATION AND PROCESSING. Loan originations are developed from
a number of sources, including continuing business with depositors, other
borrowers and real estate developers, solicitations by the Bank personnel and
walk-in customers.
When a loan request is made, the Bank reviews the application, as well
as credit bureau reports, appraisals, financial information, verifications of
income, and other documentation concerning the creditworthiness of the borrower,
as applicable to each loan type. The Bank's underwriting guidelines are set by
senior management. Loan applications are generally processed and underwritten by
designated loan officers. Residential real estate loans are underwritten
consistent with FNMA and FHLMC standards, but exceptions are made on a
case-by-case basis.
At the time of an application for a residential mortgage loan, an
appraisal of the property and a borrower credit report are ordered. In addition,
the borrower's employment, income and financial information are obtained and
verified. When all of the necessary information is received, the information is
reviewed and analyzed with reference to the Bank's underwriting worksheet, which
includes pertinent data such as debt-to-income ratios, the loan-to-value ratio,
credit history highlights and details concerning funds available for down
payment and closing costs.
At the time of application for a commercial loan, a commercial loan
officer obtains financial information of the borrower, including business
financial statements and, as appropriate, personal financial statements and
income tax records. In those circumstances in which real estate will serve as
collateral for the commercial loan, an appraisal is ordered as well. Credit
reports are obtained for individual borrowers, and Dun and Bradstreet reports
are ordered for business borrowers. If the borrower has had previous borrowings
from or deposit accounts with the Bank, payment and balance histories are
reviewed as well. The commercial loan officer analyzes the financial information
and assesses the
11
<PAGE> 13
borrower's ability to repay the proposed loan. The commercial loan officer will
also generally visit the business location or, in the case of real estate,
inspect the property. Individual officers have authority to approve loans in
amounts up to specified lending limits without the approval of the Loan
Committee or Executive Committee. Applications for loans in excess of the
officers' lending limits require approval of the Loan Committee or Executive
Committee.
INCOME FROM LENDING ACTIVITIES. The Bank earns interest and fee income
from its lending activities. The Bank receives fees for originating loans, which
fees, net of origination costs, are amortized over the life of the respective
loan. The Bank also receives loan fees related to existing loans, including late
charges. Income from loan origination and commitment fees and discounts varies
with the volume and type of loans and commitments made and with competitive and
economic conditions. Note 1 to the Consolidated Financial Statements included
herein contains a discussion of the manner in which loan fees and income are
recognized for financial reporting purposes.
NONPERFORMING LOANS
A loan is considered by the Bank to be nonperforming when it is 90 days
or more delinquent or, if sooner, when the Bank has determined that repayment of
the loan in full is unlikely. Generally, unless loan collateral is a one- to
four-family residential dwelling, interest accrual ceases in 90 days (but no
later than the date of acquisition by foreclosure, voluntary deed or other
means) and the loan is classified as nonperforming. A loan placed on nonaccrual
status may or may not be contractually past due at the time the determination is
made to place the loan on nonaccrual status, and it may or may not be secured.
When a loan is placed on nonaccrual status, it is the Bank's policy to reverse
interest previously accrued but uncollected and charge it against current
income. Interest later collected on the nonaccrual loan is credited to loan
principal if, in management's opinion, full collectibility of principal is
doubtful.
The procedures for addressing delinquencies in commercial loans can
vary from one loan to the next, depending on a variety of factors. Late charges
generally do not apply to commercial loans. With payments generally due on the
first of each month, a commercial borrower will be contacted if a loan payment
has not been received by the tenth day of the month. Late charges on consumer
installment loans are assessed if a payment is not received by the 10th day
following the due date. Immediately thereafter, any borrower whose payment was
not received by this time is mailed a past due notice. Credit card statement
processing is undertaken by a third party under contract with the Bank. Past due
notices are generated automatically, depending on the stage of delinquency of
the cardholder, with charge-off occurring after 120 days. As of December 31,
1999 no credit card loans were nonperforming. Late charges on residential
mortgages are assessed if a payment is not received by the 15th day after the
due date. Immediately thereafter, any borrower whose payment was not received by
this time is mailed a past due notice. The borrower will be contacted by
telephone if the delinquency continues to the 30th day. When an advanced stage
of delinquency appears on a single-family loan (generally about the 60th day of
delinquency) and if repayment cannot be expected within a reasonable amount of
time or a repayment agreement has not been entered into, the Bank contacts an
attorney and requests that the required notice of foreclosure or repossession
proceedings be prepared and delivered to the borrower in order that, if
necessary, foreclosure proceedings may be initiated promptly.
When the Bank acquires real estate through foreclosure, voluntary deed,
or similar means, it is classified as "other real estate owned" until it is
sold. On December 31, 1999, other real estate owned amounted to $1,209,000. When
property is acquired in this manner, it is recorded at the lower of cost (the
unpaid principal balance at the date of acquisition) or fair value. Any
resulting write-down is charged to expense. All costs incurred from the date of
acquisition to maintain the property are expensed. "Other
12
<PAGE> 14
real estate owned" is appraised during the foreclosure process, before
acquisition. Losses are recognized for the amount by which the book value of the
related mortgage loan exceeds the estimated net realizable value of the
property.
Certain potential problem loans that management believes are adequately
secured and for which no material loss is expected are not categorized as
nonperforming loans. Loans of this type are considered problem loans because
certain circumstances known to management could cause the borrowers to be unable
to comply with the existing loan repayment terms at some future date. At
December 31, 1999 potential problem loans totaled approximately $2,828,000.
The Bank had nonaccrual loans of $2,772,000 at December 31, 1999,
$4,946,000 at December 31, 1998 and $2,246,000 at December 31, 1997. Interest
income that would have been recognized on nonaccrual loans if such loans had
performed in accordance with contractual terms totaled $410,000 in 1999,
$720,000 for the year ended December 31, 1998, and $250,000 for the year ended
December 31, 1997. Interest income recognized on such loans during all of the
periods was insignificant.
The following table summarizes nonperforming assets by category.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------
(Dollars in thousands) 1999 1998 1997
--------------- -------------- -------------
<S> <C> <C> <C>
Commercial:
Nonaccrual...................................... $ 1,682 $ 2,311 $ 1,324
Past due 90 days or more(1) .................... 47 -- 1,511
Real estate construction:
Nonaccrual ..................................... 996 1,159 --
Past due 90 days or more(1) .................... -- -- 213
Real estate - other:
Nonaccrual ..................................... 88 1,468 922
Past due 90 days or more(1) .................... -- -- 175
Installment:
Nonaccrual ..................................... 6 8 --
Past due 90 days or more(1) .................... 9 0 4
-------------- ----------- ------------
Total nonperforming loans ................... 2,828 -- --
Other real estate owned ........................... 1,209 4,946 4,149
-------------- ----------- ------------
Total nonperforming assets .................. $ 4,037 73 257
============= =========== ============
Loans outstanding, net............................. $ 109,629 $ 5,019 $ 4,406
Nonperforming loans to total net loans............. 2.6% $ 96,773 $ 91,000
Nonperforming assets to total assets .............. 2.5% 5.1% 4.6%
Reserve for loan losses to total loans............. 2.13% 3.4% 3.3%
Reserve for loan losses to nonperforming loans .... 84.7% 2.29% 1.17%
46.1% 26.0%
</TABLE>
(1) Represents accruing loans delinquent greater than 90 days that are
considered by management to be well secured and that are in the process
of collection.
13
<PAGE> 15
Impaired loans include all nonaccrual and restructured commercial and
real estate loans. Loan impairment is measured as the present value of expected
future cash flows discounted at the loan's initial interest rate, the fair value
of the collateral of an impaired collateral-dependent loan or an observable
market price. Interest income on impaired loans is recognized on a cash-basis
method. The investment in loans for which impairment had been recognized totaled
$2,772,000 as of December 31, 1999 and $4,946,000 as of December 31, 1998. At
December 31, 1999, the total reserve for loan losses related to impaired loans
was $836,000.
RESERVE FOR LOAN LOSSES. The amount of the reserve for loan losses is based on a
variety of factors, including:
- management's analysis of risks inherent in the
various segments of the loan portfolio;
- management's assessment of known or potential problem
credits that have come to management's attention
during the ongoing analysis of credit quality;
- estimates of the value of underlying collateral and
guaranties;
- legal representation regarding the potential outcome
of pending legal actions for collection of loans and
related guaranties;
- historical loss experience; and
- current economic conditions and other factors.
If actual circumstances and losses differ substantially from
management's assumptions and estimates, the reserve for loan losses might not be
sufficient to absorb all future losses. Net earnings would be adversely affected
if that occurred. Loan loss estimates are reviewed periodically. Adjustments, if
any, are reported in earnings in the period in which they become known. In
addition, the Bank maintains a portion of the loan loss reserve to cover
inherent losses that have not been specifically identified.
Although management believes that it uses the best information
available to make such determinations and that the reserve for loan losses was
adequate at December 31, 1999, future adjustments could be necessary if
circumstances or economic conditions differ substantially from the assumptions
used in making the initial determinations. A downturn in the local Oregon
economy and employment could result in increased levels of nonperforming assets
and charge-offs, increased loan loss provisions and reductions in income.
Additionally, as an integral part of the examination process bank regulatory
agencies periodically review the Bank's reserve for loan losses. The banking
agencies could require the recognition of additions to the loan loss reserve
based on their judgment of information available to them at the time of their
examination.
14
<PAGE> 16
The following is a summary of the Bank's loan loss experience and
selected ratios for the periods presented.
YEAR ENDED DECEMBER 31,
-------------------------------------
(Dollars in thousands) 1999 1998 1997
--------- --------- ---------
Reserve balance, beginning of period . $ 2,278 $ 1,079 $ 936
Loans charged off:
Commercial ........................ (675) (452) (1,388)
Real estate construction .......... 0 0 (4)
Real estate - other ............... (34) (98) (121)
Installment ....................... (31) (9) (103)
--------- --------- ---------
Total loans charged off ........ (740) (559) (1,616)
Recoveries of loans previously charged
off: ................................. 51 106 25
Commercial ........................ 0 0 0
Real estate construction .......... 167 0 0
Real estate - other
Installment ....................... 0 0 2
--------- --------- ---------
Total recoveries ............... 218 106 27
--------- --------- ---------
Net loans charged off ................ 522 453 1,589
Provision charged to operations ...... 640 1,652 1,731
--------- --------- ---------
Reserve balance, end of period ....... $ 2,396 $ 2,278 $ 1,079
========= ========= =========
Loans outstanding:
Average ........................... $ 97,673 $ 100,229 $ 88,611
End of period, net ................ $ 112,510 $ 99,518 $ 92,437
Ratio of reserve for loan losses to
loans ................................ 2.13% 2.29% 1.17%
Outstanding at end of period .. 0.5% 0.5% 1.8%
Net charge-offs to average loans
The following table sets forth the allocation of the Bank's reserve for
loan losses by category and the percent of loans in each category to total loans
at the dates indicated. The Bank allocates its reserve for loan losses to each
loan classification based on relative risk characteristics. Specific allocations
represent losses that are analyzed from current credit circumstances and
available information. Unallocated portions of the reserve are intended to
compensate for the subjective nature of the determination of losses inherent in
the overall loan portfolio. Because the total loan loss reserve is a valuation
reserve applicable to the entire loan portfolio, the portion of the reserve
allocated to each loan category does not represent the total available for
future losses that may occur within that loan category.
15
<PAGE> 17
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------------------------------
1999 1998 1997
----------------------- ----------------------- -----------------------
Percent of Percent of Percent of
Amount Total Loans Amount Total Loans Amount Total Loans
------ ----------- ------ ----------- ------ -----------
<S> <C> <C> <C> <C> <C> <C>
AT THE END OF PERIOD ALLOCATED TO:
Type of loan:
Commercial ................... $ 907 19.8% $ 1,195 30.8% $ 324 27.6%
Real estate construction ..... 552 22.6% 425 25.0% 395 28.5%
Real estate - other .......... 764 54.0% 531 39.2% 228 38.9%
Installment .................. 14 3.6% 16 5.0% 17 5.0%
Unallocated .................. 159 -- % 111 -- % 115 -- %
--------- --------- --------- --------- --------- ---------
Total ............................. $ 2,396 100.0% $ 2,278 100.0% $ 1,079 100.0%
========= ========= ========= ========= ========= =========
</TABLE>
As of December 31, 1999, the Bank's specific allocation of its reserve
for loan losses for commercial and real estate construction loans related
primarily to loans on nonaccrual status. Specific allocation of loan loss
reserves for other real estate loans related to loans for which management
believes the borrower might be unable to comply with loan repayment terms, based
on reasons identified by management, even though the loans are not in nonaccrual
status. In addition, supporting collateral might not be adequate to recover loan
amounts if foreclosure and subsequent sale of collateral become necessary.
CLASSIFIED ASSETS. FDIC regulations governing classification of assets
require nonmember commercial banks -- including the Bank -- to classify their
own assets and to establish appropriate general and specific allowances for
losses, subject to FDIC review. The regulations are designed to encourage
management to evaluate assets on a case-by-case basis and to discourage
automatic classifications. Assets classified as watch, substandard or doubtful
must be evaluated by management to determine a reasonable general loss reserve,
which is included in total capital for purposes of the Bank's risk-based capital
requirement but which is not included in Tier 1 capital or in capital under
generally accepted accounting principles. Assets classified as loss must either
be written off or reserved for by a specific allowance, which is not counted
toward capital for purposes of any of the regulatory capital requirements. As of
December 31, 1999 classified assets were as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------------------
1999 1998 1997
---------------------- ----------------------- ------------------------
Percent of Percent of Percent of
(DOLLARS IN THOUSANDS) Amount Total Loans Amount Total Loans Amount Total Loans
------ ----------- ------ ----------- ------ -----------
<S> <C> <C> <C> <C> <C> <C>
Classified loans:
Watch ............ $ 106 0.1% $ 181 0.2% $ 0 0.0%
Substandard ...... 812 0.7% 331 0.3% 156 0.2%
Doubtful ......... 600 0.5% 19 0.0% 49 0.1%
Specific reserve . 0 0% 973 1.0% 0 0.0%
--------- --------- --------- --------- --------- ---------
Total .... $ 1,518 1.3% $ 1,504 1.5% $ 205 0.3%
--------- ========= ========= ========= ========= =========
</TABLE>
The borrowers on a $1.2 million commercial loan made by the Bank became
insolvent in early 1998. The entire amount of the debt was personally guaranteed
by another individual. The Bank is seeking to enforce the guaranty in state
court. For financial reporting purposes and for regulatory reporting purposes,
$600,000 has been specifically allocated for in the Bank's December 31, 1999
reserve for loan losses. Although the guarantor has raised defenses to the
Bank's attempt to enforce the guaranty, management believes that there is valid
evidence and documentation to enforce this guaranty and is vigorously
prosecuting
16
<PAGE> 18
the claim. However, the Bank can give no assurance that its efforts to enforce
the guaranty will be successful. Management uses the best information available
in reserving for loan losses and believes that the reserve for loan losses is
adequate at December 31, 1999. Future adjustments, however, may be necessary and
net earnings could be negatively affected if circumstances differ substantially
from the assumptions used in making the initial determinations.
INVESTMENTS
Investment securities provide a return on residual funds after lending
activities. Investments may be in interest-bearing deposits, U.S. Government and
agency obligations, state and local government obligations and
government-guaranteed, mortgage-backed securities. The Bank generally does not
invest in securities that are rated less than investment grade by a nationally
recognized statistical rating organization. A goal of the Bank's investment
policy is to limit interest-rate risk.
All securities-related activity is reported to the Board of Directors.
General changes in investment strategy are required to be reviewed and approved
by the Board. Senior management can purchase and sell securities in accordance
with the Bank's stated investment policy.
Management determines the appropriate classification of securities at
the time of purchase. If management has the intent and the Bank has the ability
at the time of purchase to hold a security until maturity or on a long-term
basis, the security is classified as held-to-maturity and is reflected on the
balance sheet at historical cost. Securities to be held for indefinite periods
and not intended to be held to maturity or on a long-term basis are classified
as available-for-sale. Available-for-sale securities are reflected on the
balance sheet at their market value.
17
<PAGE> 19
The following table sets forth the amortized cost and estimated market
value of the Bank's investment portfolio at the dates indicated.
AT DECEMBER 31,
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------
1999 1998
---------------------------------------- ----------------------------------------
GROSS ESTIMATED GROSS ESTIMATED
AMORTIZED UNREALIZED MARKET AMORTIZED UNREALIZED MARKET
(DOLLARS IN THOUSANDS) COST LOSSES VALUE COST GAINS (LOSSES) VALUE
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
AVAILABLE FOR SALE:
U.S. Government securities .. $ 0 $ 0 $ 0 $ 2,378,622 $ 216 $ 2,378,838
U.S. Government agency
securities .................. 22,826,663 (781,464) 22,045,199 3,054,541 (1,337) 3,053,204
Oregon municipal securities . 0 0 0 0 0 0
----------- ----------- ----------- ----------- ----------- -----------
Total ............ 22,826,663 (781,464) 22,045,199 5,433,163 (1,121) 5,432,042
HELD TO MATURITY:
U.S. Government securities .. $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
U.S. Government agency
securities .................. 0 0 0 0 0 0
----------- ----------- ----------- ----------- ----------- -----------
Total ............ 0 0 0 0 0 0
----------- ----------- ----------- ----------- ----------- -----------
TOTAL INVESTMENT SECURITIES . $22,826,663 $ (781,464) $22,045,199 $ 5,433,163 $ (1,121) $ 5,432,042
=========== =========== =========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
---------------------------------------
1997
---------------------------------------
GROSS ESTIMATED
AMORTIZED UNREALIZED MARKET
(DOLLARS IN THOUSANDS) COST GAINS VALUE
----------- ----------- -----------
<S> <C> <C> <C>
AVAILABLE FOR SALE:
U.S. Government securities .. $ 0 $ 0 $ 0
U.S. Government agency
securities .................. 0 0 0
Oregon municipal securities . 497,095 3,025 500,120
----------- ----------- -----------
Total ............ 497,095 3,025 500,120
HELD TO MATURITY:
U.S. Government securities .. $ 4,092,499 $ 36,551 $ 4,129,050
U.S. Government agency
securities .................. 1,997,217 1,183 1,998,400
----------- ----------- -----------
Total ............ 6,089,716 37,734 6,127,450
----------- ----------- -----------
TOTAL INVESTMENT SECURITIES . $ 6,586,811 $ 40,759 $ 6,627,570
=========== =========== ===========
</TABLE>
18
<PAGE> 20
25
The contractual maturities of investment securities at December 31,
1999 is shown below. Expected maturities of investment securities could differ
from contractual maturities because the borrower, or issuer, may have the right
to call or prepay obligations with or without call or prepayment penalties.
WEIGHTED
AMORTIZED MARKET AVERAGE
(Dollars in thousands) COST VALUE YIELD
---------- --------- -----------
U.S. Government Agency securities:
Due after 1 but within 5 years $ 22,827 $ 22,045 6.05%
======= ======= =====
The Bank sold its U.S. Government securities, U.S. Government agency
securities and Oregon municipal securities in 1998, resulting in a realized gain
of $114,719. The Bank had no securities sales in 1999. Government securities may
be pledged from time to time to secure public deposits. At December 31, 1999,
$4,656,000 of government securities classified as available-for-sale were
pledged to secure public deposits.
As of December 31, 1999, the Bank also held 38,807 shares of $100 par
value Federal Home Loan Bank of Seattle stock, which are restricted securities.
FHLB stock represents an equity interest in the FHLB, but it does not have a
readily determinable market value. The stock can be sold at its par value only,
and only to the FHLB or to another member institution. Member institutions are
required to maintain a minimum stock investment in the FHLB, based on total
assets, total mortgages and total mortgage-backed securities. The Bank's minimum
investment in FHLB stock at December 31, 1999 was approximately $483,000.
From time to time, the Bank also holds government securities purchased
under agreements to resell substantially identical securities. Securities
purchased under agreements to resell, or "fed funds," represent short-term loans
and are reflected as a receivable on the balance sheet. The securities
underlying the agreements to resell are book-entry securities. That is, delivery
of the securities consists of an entry in the Bank's account maintained at a
United States bank designated by the Bank under a written custodial agreement
explicitly recognizing the Bank's interest in the securities. All securities
purchased under agreements to resell that were outstanding on December 31, 1999,
1998 and 1997 matured overnight. Securities purchased under agreements to resell
averaged $1,986,000 in 1999, $1,361,000 in 1998 and $599,380 in 1997. The
maximum amount outstanding at any month end in those years was $4,986,000 in
1999, $6,501,000 in 1998 and $1,054,964 in 1997.
SOURCE OF FUNDS
DEPOSIT ACCOUNTS. Deposit accounts are a major source of funds for the
Bank. The Bank offers a number of deposit products to attract both commercial
and regular consumer checking and savings customers, including regular and money
market savings accounts, NOW accounts, and a variety of fixed-maturity,
fixed-rate certificates with maturities ranging from seven days to 60 months.
These accounts earn interest at rates established by management based on
competitive market factors and management's desire to increase certain types or
maturities of deposit liabilities. The Bank also provides travelers' checks,
official checks, money orders, ATM services and IRA accounts. The Bank does not
solicit or accept brokered deposits.
19
<PAGE> 21
The distribution of deposit accounts by type and rate is set forth in
the following tables as of the
<TABLE>
<CAPTION>
Year Ended
December 31,
---------------------------------------------------------------------------------
1999 1998 1997
---------------------------- ----------------------- ----------------------
Average Average Average
(DOLLARS IN THOUSANDS) Amount Rate Amount Rate Amount Rate
--------------- --------- ----------- -------- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
Demand deposit accounts. $ 23,069 0.00% $ 17,738 0.00% $ 15,209 0.00%
NOW..................... 14,622 2.24% 13,275 2.48% 11,739 2.36%
Money market............ 49,107 3.69% 47,303 4.13% 49,154 4.36%
Savings ................ 3,702 2.94% 2,514 2.94% 2,387 2.97%
Time deposits........... 43,928 5.14% 43,367 5.70% 30,958 5.79%
------------ ---------- ---------
Total deposits.......... $ 134,428 $ 124,197 $ 109,447
============ ========== ==========
</TABLE>
The following table sets forth the amount of time deposits as of
December 31, 1999, including certificates of deposit, by time remaining until
<TABLE>
<CAPTION>
At December 31, 1999
--------------------------------------------------------
Time Deposits of $100,000 All Other Time
(DOLLARS IN THOUSANDS) or More Deposits
------------------------------ ----------------------
Time Remaining to Maturity Amount Percent Amount Percent
------------------------------------- -------------- ------------ ---------- --------
<S> <C> <C> <C> <C>
Three months or less............. $ 5,694 39.12% $ 10,294 34.84%
Over three through 12 months .... 5,717 39.26% 12,949 43.82%
Over 12 months................... 3,149 21.62% 6,305 21.34%
--------- ------ -------- ------
Total ...................... $ 14,560 100.00% $ 29,548 100.00%
========= ======= ======== ======
</TABLE>
BORROWINGS. Deposits and repayment of loan principal are the primary
source of funds for lending activities and other general business purposes.
However, when the supply of lendable funds or funds available for general
business purposes cannot meet the demand for loans or such general business
purposes, the Bank can obtain funds from the FHLB of Seattle. In addition to
borrowing from the FHLB on a term-loan basis, the Bank has a line of credit with
the FHLB that allows the Bank to borrow in an amount up to 10% of the Bank's
total assets. Interest and principal are payable monthly, and the line of credit
is secured by a blanket pledge collateral agreement. The Bank also has
established a secured credit line through the discount window with the Federal
Reserve Bank of San Francisco. At December 31, 1999, the Bank had $5.2 million
FHLB borrowings outstanding. As of December 31, 1999, the Bank could have
borrowed an additional $10.8 million from the FHLB. See "SUPERVISION AND
REGULATION - FEDERAL HOME LOAN BANKS." As of December 31, 1999, the Bank's
FHLB's borrowings were secured by an interest-bearing deposit of $1 million and
$5.1 million bond obligation. The Bank also has arrangements to borrow
additional short-term funds from other commercial banks.
20
<PAGE> 22
SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA
BANK OF SOUTHERN OREGON AND SUBSIDIARY
<TABLE>
<CAPTION>
AS OF OR FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS AND 1999 1998 1997 1996 1995
RATIOS)
---------- --------- ---------- ---------- ----------
INCOME STATEMENT DATA:
<S> <C> <C> <C> <C> <C>
Interest income.................................. $ 12,116 $ 11,726 $ 11,260 $ 10,551 $ 9,277
Interest expense................................. 4,831 4,917 4,287 4,367 3,850
-------- -------- --------- --------- ---------
Net interest income............................ 7,285 6,809 6,973 6,184 5,427
Loan loss provision.............................. 640 1,652 1,731 335 210
-------- -------- --------- ---------- ---------
Net interest income after loan loss provision.... 6,645 5,157 5,242 5,849 5,217
Noninterest income............................... 492 531 402 415 316
Noninterest expense.............................. 5,127 3,758 2,916 2,704 2,535
------- -------- --------- --------- ---------
Income before income taxes....................... 2,009 1,930 2,728 3,560 2,998
Provision for income taxes....................... 768 748 986 1,354 1,065
-------- --------- ---------- --------- ---------
Net income..................................... $ 1,241 $ 1,182 $ 1,742 $ 2,206 $ 1,933
======= ======== ========= ========= ========
BALANCE SHEET DATA:
At period end:
Investment securities............................ $ 22,045 $ 5,432 $ 6,587 $ 8,936 $ 4,917
Loans, net....................................... $ 109,629 $ 96,773 $ 91,000 $ 85,233 $ 75,000
Total deposits................................... $ 139,984 $126,630 $ 119,741 $ 108,406 $ 92,461
FHLB Seattle advances............................ $ 5,245 $ 5,846 $ -- $ -- $ --
Total shareholders' equity....................... $ 14,757 $ 13,843 $ 12,226 $ 10,448 $ 8,216
Total assets..................................... $ 160,984 $146,850 $ 132,586 $ 119,668 $ 101,555
PER COMMON SHARE DATA: (1)
Basic net income................................. $ 0.26 $ 0.25 $ 0.37 $ 1.41 $ 1.23
Diluted net income............................... $ 0.25 $ 0.24 $ 0.36 $ 1.41 $ 1.23
Book value....................................... $ 3.05 $ 2.89 $ 2.60 $ 6.66 $ 5.27
WEIGHTED AVERAGE NUMBER OF SHARES:
Basic............................................ 4,816,000 4,748,000 4,698,000 1,566,000 1,559,000
Diluted.......................................... 4,965,000 4,986,000 4,896,000 1,569,000 1,576,000
SELECTED RATIOS:
Return on average total shareholders' equity..... 8.62% 8.64% 15.36% 23.64% 26.78%
Return on average total assets................... 0.80% 0.84% 1.44% 1.99% 2.14%
Net interest spread.............................. 4.18% 4.43% 5.40% 5.12% 5.06%
Net interest margin.............................. 4.99% 5.14% 6.16% 5.94% 6.24%
Efficiency ratio (2)............................. 65.9% 51.2% 39.6% 40.98% 44.14%
ASSET QUALITY RATIOS:
Reserve for loan losses to ending total loans.... 2.13% 2.29% 1.17% 1.08% 0.98%
Nonperforming assets to ending total assets (3).. 2.5% 3.4% 3.3% 0.47% 2.41%
Net loan charge-offs to average loans............ 0.5% 0.5% 1.8% 0.17% 0.03%
CAPITAL RATIOS:
Average shareholders' equity to average assets... 9.29% 9.77% 9.34% 8.44% 7.98%
Leverage ratio (4)............................... 9.5% 9.90% 9.40% 10.60% 10.20%
Total risk-based capital ratio (4)............... 13.1% 13.20% 13.00% 11.60% 11.20%
</TABLE>
21
<PAGE> 23
(1) Per share amounts are adjusted for 10% stock dividends declared in 1995
and 1996, a 2-for-1 stock split in 1997 and a 3-for-1 stock split in
1998.
(2) Efficiency ratio is noninterest expense divided by the sum of net
interest income plus noninterest income minus nonrecurring items.
(3) Nonperforming assets consist of nonaccrual loans, loans contractually
past due 90 days or more and other real estate owned.
(4) Computed in accordance with Federal Reserve Board and FDIC guidelines
MANAGEMENT'S DISCUSSION AND ANALYSIS AND RESULTS OF OPERATIONS
The Bank conducts a general commercial banking business, gathering
deposits from the general public and applying those funds to the origination of
loans for commercial, real estate and consumer loans and investments.
The Bank's profitability depends primarily on net interest income,
which is the difference between (a) interest income generated by
interest-earning assets (principally loans and investments) and (b) interest
expense incurred on interest-bearing liabilities (principally customer deposits
and borrowed funds). Net interest income is affected by the difference (the
"interest rate spread") between rates of interest earned on interest-earning
assets and rates of interest paid on interest-bearing liabilities, as well as
the relative amounts of interest-earning assets and interest-bearing
liabilities. Financial institutions have traditionally used interest rate
spreads as a measure of net interest income. Another indication of an
institution's net interest income is its "net yield on interest-earning assets"
or "net interest margin," which is net interest income divided by average
interest-earning assets.
To a lesser extent, the Bank's profitability is also affected by such
factors as the level of noninterest income and expenses, the provision for loan
losses, and the provision for income taxes. Noninterest income consists
primarily of service charges on deposit accounts. Noninterest expense consists
primarily of salaries and employee benefits, professional fees, equipment,
occupancy-related expenses, data processing, advertising and other operating
expenses.
The Bank's management's discussion and analysis of financial condition
and results of operations is presented herein to assist investors in
understanding the consolidated financial condition and results of operations of
the Bank for the fiscal years ended December 31, 1999, 1998 and 1997. This
discussion should be read in conjunction with the consolidated financial
statements and related footnotes presented elsewhere herein.
RESULTS OF OPERATIONS
Net income of $1.24 million in 1999 represents an increase of 5% over
1998. Net income of $1.18 million in 1998 represents a decrease of 32% as
compared to 1997. The increase in net income in 1999 is primarily due to a
$476,000 increase in net interest income and a $1 million decrease in the loan
loss provision, offset by a $1.37 million increase in noninterest expense. The
decrease in net income in 1998 is primarily due to a $164,000 decrease in net
interest income and a $841,000 increase in noninterest expense, offset by a
reduced loan loss provision, higher noninterest income and a reduced provision
for income taxes. A new management team joined the Bank in mid-1998, including
the Bank's President and Chief Executive Officer, its Executive Vice President
and Chief Operating Officer and its Chief Financial Officer. The Bank also began
the process of reorganizing into a holding company structure in 1998, although
that was later deferred to allow new management more time to familiarize itself
with the Bank's operations and to address the Bank's asset-quality issues. These
factors contributed to the Bank's decreased loan loss provision in 1999 and the
increases in noninterest expense in 1999 and 1998.
22
<PAGE> 24
NET INTEREST INCOME
1999 Compared to 1998. Net interest income for 1999 was $7.29 million,
an increase of $476,000, or 7%, over 1998. Interest income of $12.1 million in
1999 represents an increase of $390,000, or 3.3%, over 1998. Interest expense of
$4.8 million in 1999 decreased by $86,000, or 1.7%, over 1998. The increase in
net interest income is attributable primarily to an increase in the volume of
average earning assets of $13.5 million, outpacing growth in the volume of
average interest-bearing liabilities of $8.7 million and increases in rates
paid. Average loans decreased by $2.6 million, while average federal funds sold
grew by $18.1 million. As a result of the change in asset mix, the Bank's
interest rate spread declined to 4.18% in 1999 from 4.32% in 1998, and the
Bank's net interest margin also declined in 1999 to 4.99% from 5.14% in 1998.
1998 Compared to 1997. Net interest income for 1998 was $6.8 million, a
decrease of $164,000, or 2.3%, over 1997. Interest income of $11.7 million in
1998 represents an increase of $467,000, or 4.1%, over 1997. Interest expense of
$4.9 million for 1998 increased by $630,000, or 14.7%, over 1997. The decrease
in net interest income was caused primarily by a narrower interest rate spread.
The volume of average earning assets increased by $18.1 million, or 15.9%, in
1998 in comparison to 1997, while the average yield decreased by 94 basis
points. Over the same period, the volume of average interest-bearing liabilities
increased by $14.2 million, or 15.0%, while average rates paid stayed relatively
the same. Accordingly, the Bank's interest rate spread decreased to 4.32% in
1998 from 5.31% in 1997. The Bank's net interest margin also decreased in 1998
to 5.14% from 6.11% in 1997.
NONINTEREST INCOME
1999 Compared to 1998. Total noninterest income was $492,000 in 1999, a
decrease of $40,000, or 7%, over 1998. The principal change was a $115,000
decrease in gains on sale of investment securities.
As a result of liquidity needs in 1998 and a stable interest rate
environment, the Bank sold approximately $11.6 million of available-for-sale
securities and recognized a $115,000 gain. Due to a rising interest rate market
in 1999 and the consequential unrealized losses on securities
available-for-sale, the Bank did not sell any securities in 1999.
1998 Compared to 1997. Total noninterest income was $531,000 in 1998,
an increase of $129,000, or 32%, over 1997. The increase was attributable
principally to gains on sales of investment securities as described above.
Transaction deposit accounts and related service charges remained
relatively constant in 1999, 1998 and 1997. In general, management prices
deposits at rates competitive with rates offered by the leading commercial banks
in The Bank's market area, which rates tend to be somewhat lower than rates
offered by thrift institutions and credit unions. The Bank generally has not
imposed service charges and fees to the same extent as other local institutions.
Although a wider range of service charges and fees and higher service charges
and fees would yield more income for each dollar of deposits, imposing service
charges and fees on a basis equivalent to those imposed by many other area
commercial banks might adversely affect deposit growth. To promote deposit
growth and provide cross-selling opportunities to customers, the Bank has not
adopted an aggressive fee structure. Deposit growth has been generated by
developing strong customer relationships and cross-selling deposit relationships
to loan customers, and to a lesser extent from the Bank's new branch office
opened in 1999. Management intends to continue promoting demand deposit
products, particularly noninterest bearing deposit products, in order to obtain
additional interest-free lendable funds.
NONINTEREST EXPENSE
1999 Compared to 1998. Total noninterest expense was $5,127,000 in
1999, an increase of $1,369,000, or 36.4% over 1998. The largest component of
noninterest expense was salaries and employee benefits, which increased
$870,000,
23
<PAGE> 25
or 45.8%. This increase was the result of the overall growth of the
Bank, a new branch office opened in 1999 and an increase in management and staff
personnel and related benefits. Fees for professional services decreased by
8.2%, due principally to lower legal fees associated with the reduction of
collection efforts needed on problem loans. Equipment costs increased by 17.6%
and occupancy costs increased by 58.2% as a result of added capital
expenditures, such as bank proof and optical reading equipment, computers,
upgraded software, ATM machines and a new full service branch office.
Advertising costs increased by 124% in order to adequately market new Bank
products and promote growth in the Bank's customer base. Other noninterest
expenses increased in 1999 as compared to 1998 primarily due to the general
overall growth of the Bank.
1998 Compared to 1997. Total noninterest expense was $3,758,000 in
1998, an increase of $841,000, or 28.9% over 1997. The larger components of
noninterest expense included salary and employee benefits, which increased
$204,000, or 12%. The increase in salary and employee benefits was due
principally to hiring of a new management team in mid-year, increases in staff,
higher insurance benefit costs and normal merit raises. Professional fees
increased $161,000, or 59%, in 1998, with additional legal expense incurred in
connection with the collection of problem loans and the holding company
reorganization process begun in 1998. Equipment expense increased $122,000, or
74%, in 1998 primarily due to purchase of an initial phase of equipment and
additional maintenance costs. Other noninterest expenses increased in 1998 due
primarily to the general overall growth of the Bank.
Rate/Volume Analysis. The following tables analyze net interest income in terms
of changes in the volume of interest-earning assets and interest-bearing
liabilities, and changes in net interest income that are attributable to changes
in yields earned on interest-earning assets and rates paid on interest-bearing
liabilities. The table reflects the extent to which changes in interest income
and changes in interest expense are attributable to changes in volume (changes
in volume multiplied by the prior year rate) and changes in rate (changes in
rate multiplied by prior year volume). Changes attributable to the combined
impact of volume and rate have been allocated equally.
24
<PAGE> 26
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------
1999 VS. 1998 1998 VS. 1997
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
----------------------------- -----------------------------
(Dollars in thousands) VOLUME RATE TOTAL VOLUME RATE TOTAL
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Interest income attributable to:
Interest and fees on loans ............ $ (254) $ (171) $ (425) $ 1,211 $(1,011) $ 200
Taxable securities .................... (121) 140 19 379 (109) 270
Federal funds sold and interest-bearing
deposits with FHLB ................ 872 (76) 796 16 (20) (4)
------- ------- ------- ------- ------- -------
Total interest income .............. 497 (107) 390 1,606 (1,140) 466
Interest expense attributable to:
Interest on deposits:
Interest-bearing demand and
money ......................... 111 (256) (145) (11) (127) (138)
market accounts .......... 35 0 35 4 (1) 23
Savings ....................... 32 (243) (211) 711 (35) 676
Time .......................... 193 42 235 89 0 89
------- ------- ------- ------- ------- -------
Other borrowings ...................... 371 (457) (86) 793 (163) 630
------- ------- ------- ------- ------- -------
Total interest expense
Increase (decrease) in net interest income $ 126 $ 350 $ 476 $ 813 $ (977) $ (164)
======= ======= ======= ======= ======= =======
</TABLE>
25
<PAGE> 27
LOAN LOSS PROVISION
1999 Compared to 1998. The loan loss provision was $640,000 in 1999,
compared to $1,652,000 in 1998, a decrease of $1,012,000, or 61%. The loan loss
provision is based upon management's assessment of various relevant factors,
including types and amounts of nonperforming loans, historical loss experience,
collectibility of collateral values and guaranties, pending legal action for
collection of loans and related guaranties, and current economic conditions. The
loan loss provision reflects management's judgment of the current period cost of
credit risk inherent in the loan portfolio. Although management believes the
loan loss provision has been sufficient to maintain an adequate reserve for loan
losses, there can be no assurance that actual loan losses will not exceed the
amounts that have been charged to operations. See, " - FINANCIAL CONDITION -
Reserve for Loan Losses." The change in the loan loss provision in 1999 was
principally a result of new management's efforts to improve loan underwriting
and loan collection discipline and to identify, monitor and resolve problem
credits. Accordingly, there was an improvement in asset quality reflected by a
decrease in nonperforming loans from $4.9 million at the end of 1998 to $2.8
million at the end of 1999.
1998 Compared to 1997. The provision for loan losses was $1,652,000 in
1998, compared to $1,731,000 in 1997, a 4.6% decrease. Again, new management's
efforts as discussed above contributed to a decreased loan loss provision in
1998 even though average loans in 1998 increased by $11.6 million over 1997.
The loan loss provision in 1999, 1998 and 1997 was primarily related to
commercial loans that were past-due and not adequately collateralized. As a
result, in 1998 and 1997 the Bank needed to allocate a larger portion of its
reserve related to commercial loans. Subsequently, a portion of these loans was
charged-off. Since late 1998, management has required adherence to stringent
loan policies and procedures and may require real estate to serve as additional
commercial loan collateral, reducing credit risk and, as a consequence, reducing
the need for additional reserve allocations. See, "BUSINESS OF BANK OF SOUTHERN
OREGON - NONPERFORMING LOANS."
NONINTEREST INCOME
1999 Compared to 1998. Total noninterest income was $492,000 in 1999, a
decrease of $40,000, or 7%, over 1998. The principal change was a $115,000
decrease in gains on sale of investment securities.
As a result of liquidity needs in 1998 and a stable interest rate
environment, the Bank sold approximately $11.6 million of available-for-sale
securities and recognized a $115,000 gain. Due to a rising interest rate market
in 1999 and the consequential unrealized losses on securities
available-for-sale, the Bank did not sell any securities in 1999.
1998 Compared to 1997. Total noninterest income was $531,000 in 1998,
an increase of $129,000, or 32%, over 1997. The increase was attributable
principally to gains on sales of investment securities as described above.
Transaction deposit accounts and related service charges remained
relatively constant in 1999, 1998 and 1997. In general, management prices
deposits at rates competitive with rates offered by the leading commercial banks
in the Bank's market area, which rates tend to be somewhat lower than rates
offered by thrift institutions and credit unions. The Bank generally has not
imposed service charges and fees to the same extent as other local institutions.
Although a wider range of service charges and fees and higher service charges
and fees would yield more income for each dollar of deposits, imposing service
charges and fees on a basis equivalent to those imposed by many other area
commercial banks might adversely affect deposit growth. To promote deposit
growth and provide cross-selling opportunities to customers, the Bank has not
adopted an aggressive fee structure. Deposit growth has been generated by
developing strong customer relationships and cross-selling deposit relationships
to loan customers, and to a lesser extent from the Bank's new branch office
opened in 1999. Management intends to continue promoting demand deposit
products, particularly noninterest bearing deposit products, in order to obtain
additional interest-free lendable funds.
26
<PAGE> 28
NONINTEREST EXPENSE
1999 Compared to 1998. Total noninterest expense was $5,127,000 in
1999, an increase of $1,369,000, or 36.4% over 1998. The largest component of
noninterest expense was salaries and employee benefits, which increased
$870,000, or 45.8%. This increase was the result of the overall growth of the
Bank, a new branch office opened in 1999 and an increase in management and staff
personnel and related benefits. Fees for professional services decreased by
8.2%, due principally to lower legal fees associated with the reduction of
collection efforts needed on problem loans. Equipment costs increased by 17.6%
and occupancy costs increased by 58.2% as a result of added capital
expenditures, such as bank proof and optical reading equipment, computers,
upgraded software, ATM machines and a new full service branch office.
Advertising costs increased by 124% in order to adequately market new Bank
products and promote growth in the Bank's customer base. Other noninterest
expenses increased in 1999 as compared to 1998 primarily due to the general
overall growth of the Bank.
1998 Compared to 1997. Total noninterest expense was $3,758,000 in
1998, an increase of $841,000, or 28.9% over 1997. The larger components of
noninterest expense included salary and employee benefits, which increased
$204,000, or 12%. The increase in salary and employee benefits was due
principally to hiring of a new management team in mid-year, increases in staff,
higher insurance benefit costs and normal merit raises. Professional fees
increased $161,000, or 59%, in 1998, with additional legal expense incurred in
connection with the collection of problem loans and the holding company
reorganization process begun in 1998. Equipment expense increased $122,000, or
74%, in 1998 primarily due to purchase of an initial phase of equipment and
additional maintenance costs. Other noninterest expenses increased in 1998 due
primarily to the general overall growth of the Bank.
PROVISION FOR INCOME TAXES
The provision for income taxes fluctuated in 1999, 1998 and 1997
primarily due to the changing level of pre-tax income.
FINANCIAL CONDITION
Assets and Liabilities. The Bank's total assets at December 31, 1999
were $160,984,000, compared to $146,850,000 at December 31, 1998. Cash and cash
equivalents decreased by $15.5 million, investment securities available-for-sale
increased by $16.6 million, net loans increased by $12.9 million and premises
and equipment, net increased by $3.2 million in 1999 as compared to 1998. As of
December 31, 1999 the Bank had decreased its interest-bearing deposits with FHLB
and its federal funds sold to invest in one- and two-year callable U.S.
Government Agency securities maturing in 3 to 5 years. Although loans increased
by $12.9 in 1999, or 13.3%, management seeks to reduce concentrations of credit
in construction real estate loans and this has somewhat slowed loan growth.
The Bank's premises and equipment, net increased by $3.2 million in
1999 primarily due to the new administrative offices purchased in December 1999
and a new branch in Central Point, Oregon, which opened in March 1999. Other
capital expenditures in 1999 included computer equipment acquired to upgrade
banking technology and prepare for the Y2K date conversion.
Asset growth in 1999 was primarily funded by a $13.3 million, or 10.5%,
increase in customer deposits. Specifically, noninterest bearing demand deposits
increased $7.7 million, or 38%, at December 31, 1999 as compared to December 31,
1998.
Reserve for Loan Losses. The loan loss provision represents a charge to
earnings for maintaining the reserve for loan losses at a level management
believes is adequate. The provision charged to operating expense is based on
loan loss experience and other factors that, in management's judgment, should be
recognized to estimate losses. Management
27
<PAGE> 29
monitors the loan portfolio to ensure that the reserve for loan losses remains
adequate to absorb losses identified by the portfolio review process, including
loans on nonaccrual status and current loans whose repayment according to the
loan's repayment plan is considered by management to be in serious doubt. The
Bank takes into account loan growth and the level of delinquent and
nonperforming loans in its review of the portfolio, considering also such
external factors as current economic conditions in the primary market area,
collectibility of collateral values and guaranties and the current status of
legal action for collection of loans and related guaranties.
The Bank's reserve for loan losses totaled $2,396,000 at December 31,
1999 and $2,278,000 at December 31, 1998, representing 2.13% of total loans at
December 31, 1999 and 2.29% of total loans at December 31, 1998. See the
discussion of the allocation of reserves for loan losses in "Description of
BUSINESS - NONPERFORMING Loans." The Bank's loan loss reserve represented 86% of
nonperforming loans at December 31, 1999 and 46% of nonperforming loans at
December 31, 1998. Although management believes that it uses the best
information available in providing for estimated loan losses and believes that
the reserve was adequate at December 31, 1999, future adjustments could be
necessary and net earnings could be negatively affected if circumstances and/or
economic conditions differ substantially from the assumptions used in making the
initial determinations.
CAPITAL
Shareholders' equity was $14,757,000 at December 31, 1999, an increase
of $913,000 or 6.6% from December 31, 1998. As of December 31, 1999, the Bank
was in compliance with applicable regulatory capital requirements,
<TABLE>
<CAPTION>
BANK OF SOUTHERN OREGON MINIMUM NECESSARY TO MINIMUM NECESSARY TO BE
AT DECEMBER 31, 1999 BE WELL CAPITALIZED ADEQUATELY CAPITALIZED
--------------------------- ------------------------ -------------------------
<S> <C> <C> <C>
Total Risk-Based Capital Ratio 13.1% 10.00% 8.00%
Tier 1 Risk-Based Capital
Ratio...................... 11.9% 6.00% 4.00%
Leverage Ratio............. 9.5% 5.00% 4.00%
</TABLE>
Based on capital levels at December 31, 1999, the Bank qualifies as a
"well-capitalized" institution, the highest of five tiers under applicable
regulatory definitions.
LIQUIDITY
Like other financial institutions, the Bank must ensure that sufficient
funds are available to meet deposit withdrawals, loan commitments and expenses.
Control of cash flow requires that the Bank anticipate deposit flows and loan
payments. The primary sources of funds are deposits, principal and interest
payments on loans, proceeds of loan sales, federal funds and FHLB borrowings.
These funds are used principally to originate loans and acquire investment
securities.
At December 31, 1999, certificates of deposit represented 31.5% of
total deposits, while DDA ("demand deposit accounts," or checking accounts)
represented 20.1%, savings accounts 3.0% and interest-bearing demand accounts
45.4%. Of the total $44 million certificates of deposit at December 31, 1999,
certificates totaling $35 million will mature in 2000, and certificates totaling
$8 million mature in 2001. Together, these figures represent 97% of the total
certificates of deposit at December 31, 1999. Management believes that,
consistent with experience, the majority of maturing certificates of deposit
will be renewed at market rates of interest.
The Bank has a line of credit with the FHLB of Seattle, which allows
the Bank to borrow from the FHLB in an amount up to 10% of the Bank's total
assets. Interest and principal are payable monthly, and the line of credit is
secured by a blanket pledge collateral agreement. The Bank also has established
a secured credit line through the discount window with the Federal Reserve Bank
of San Francisco. At December 31, 1999, the Bank had $5.2 million FHLB
28
<PAGE> 30
borrowings outstanding. As of December 31, 1999, the Bank could have borrowed an
additional $10.8 million from the FHLB. See "SUPERVISION AND REGULATION -
FEDERAL HOME LOAN BANKS."
As of December 31, 1999, the Bank had commitments to fund loans of $32
million, compared to commitments at December 31, 1998 to fund $20.8 million of
loans. Included within these commitments are unused commercial lines of credit
and standby letters of credit, consisting of $3.4 million unused commercial
lines of credit and $1.3 million standby letters of credit at December 31, 1999.
At December 31, 1999, the Bank had outstanding commitments of approximately
$12.5 million to extend credit for construction in progress. Those commitments
are included in the $32 million total commitments. Under the terms of the
construction commitments, completion of specified benchmarks must be certified
by the borrower before additional funds will be advanced by the Bank. Finally,
it is typical for a portion of loan commitments to expire or terminate without
funding. Management believes the Bank has adequate resources to meet its normal
funding requirements.
ASSET/LIABILITY MANAGEMENT
Like other financial institutions, the Bank is subject to interest rate
risk. The Bank's interest-earning assets could mature or reprice more rapidly
than, or on a different basis from, its interest-bearing liabilities (primarily
borrowings and deposits with short- and medium-term maturities) in a period of
declining interest rates. Although having assets that mature or reprice more
frequently on average than liabilities will be beneficial in times of rising
interest rates, such an asset/liability structure will result in lower net
interest income during periods of declining interest rates. Interest rate
sensitivity, or interest rate risk, relates to the effect of changing interest
rates on net interest income. Interest-earning assets with interest rates tied
to the prime rate for example, or that mature in relatively short periods of
time, are considered interest-rate sensitive. Interest-bearing liabilities with
interest rates that can be repriced in a discretionary manner, or that mature in
relatively short periods of time, are also considered interest-rate sensitive.
The differences between interest-sensitive assets and interest-sensitive
liabilities over various time horizons are commonly referred to as sensitivity
gaps. As interest rates change, the sensitivity gap will have either a favorable
effect or an adverse effect on net interest income. A negative gap -- with
liabilities repricing more rapidly than assets -- generally should have a
favorable effect when interest rates are falling, and an adverse effect when
rates are rising. A positive gap -- with assets repricing more rapidly than
liabilities -- generally should have the opposite effect: an adverse effect when
rates are falling and a favorable effect when rates are rising.
The Bank monitors its interest rate sensitivity position and attempts
to limit exposure to interest rate risk. The Bank's policy is that the one-year
cumulative interest rate sensitivity gap should generally be within a range of
negative 25% to positive 25%. As the following table illustrates, the one-year
gap was within this range as of December 31, 1999, with a positive one-year gap
of 18%.
29
<PAGE> 31
The following table illustrates the maturities or repricing of the
Bank's assets and liabilities at December 31, 1999, based upon the contractual
maturity or contractual repricing dates of loans and the contractual maturities
of time deposits. Prepayment assumptions have not been applied to fixed-rate
mortgage loans. Demand loans, loans having no stated schedule of repayments and
no stated maturity, and overdrafts are reported as due in one year or less.
Allocation of deposits other than time deposits to the various maturity and
repricing periods is based upon management's best estimate, taking into account,
among other things, the proposed policy statement issued by federal bank
regulators on August 4, 1995.
<TABLE>
<CAPTION>
MATURING OR REPRICING PERIODS
-----------------------------------------------------------------------
WITHIN 3 4 - 12 1 - 5 OVER 5
(Dollars in thousands) MONTHS MONTHS YEARS YEARS TOTAL
------------ ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Commercial loans (1)(2)(3)........... $ 17,409 $ 1,801 $ 4,425 $ 894 $ 24,529
Real estate loans (3)................ 17,700 39,663 11,304 11,473 80,140
Installment loans (1)(2)(3).......... 685 1,076 4,327 1,269 7,356
Securities available for sale........ -- -- 22,827 -- 22,827
FHLB stock........................... -- -- -- 3,881 3,881
Interest-bearing deposit with FHLB... -- 1,000 -- -- 1,000
Federal funds sold, interest-bearing
deposits with FHLB and
securities purchased under
agreements to resell......... 8,250 -- -- -- 8,250
--------- -------- -------- --------- --------
Total interest-earning assets $ 44,044 $ 43,540 $ 42,882 $ 17,516 $ 147,983
========= ======== ======== ========= ========
INTEREST-BEARING LIABILITIES:
Certificates of deposit.............. $ 14,367 $ 20,151 $ 9,590 $ -- $ 44,108
Money market......................... -- 23,394 23,394 -- 46,788
DDA interest-bearing................. -- -- 13,406 3,351 16,757
Savings accounts..................... -- -- 3,318 829 4,147
Borrowings........................... 114 353 2,169 2,609 5,245
--------- -------- -------- --------- --------
Total interest-bearing
liabilities.................. $ 14,481 $ 43,898 $ 51,877 $ 6,789 $ 117,045
========= ======== ======== ========= ========
Interest sensitivity gap................ $ 29,563 $ (358) $ (8,995) $ 10,727 $ 30,937
Cumulative interest sensitivity gap..... $ 29,563 $ 29,205 $ 20,210 $ 30,937 $ 30,937
Cumulative interest sensitivity gap
as a percent of total assets......... 18.4% 18.1% 12.6% 19.2%
</TABLE>
(1) For purposes of the gap analysis, loans are not reduced by the
allowance for loan losses and nonperforming loans.
(2) For purposes of the gap analysis, premiums, unearned discounts and
deferred loan fees are excluded.
(3) Loans have been classified in this schedule based on the purpose of the
loan (regulatory reporting basis) and not on the underlying collateral
(financial statement reporting basis).
This analysis of interest-rate sensitivity has a number of limitations.
The "gap" analysis above is based upon assumptions concerning such matters as
when assets and liabilities will reprice in a changing interest rate
environment. Because these assumptions are no more than estimates, certain
assets and liabilities indicated as maturing or repricing within a stated period
might actually mature or reprice at different times and at different volumes
from those estimated. The actual prepayments and withdrawals experienced by the
Bank after a change in interest rates could deviate
30
<PAGE> 32
significantly from those assumed in calculating the data shown in the table.
Certain assets, adjustable-rate loans for example, commonly have provisions that
limit changes in interest rates each time the interest rate changes and on a
cumulative basis over the life of the loan. Also, the renewal or repricing of
certain assets and liabilities can be discretionary and subject to competitive
and other pressures. The ability of many borrowers to service their debt could
diminish after an interest rate increase. Therefore, the gap table above does
not and cannot necessarily indicate the actual future impact of general interest
movements on net interest income.
In addition to a static gap analysis of interest rate sensitivity, the
Bank also attempts to monitor interest rate risk from the perspective of changes
in the economic value of equity, also referred to as net portfolio value (NPV),
and changes in net interest income. Changes to the Bank's NPV and net interest
income are simulated using instant and permanent rate shocks of plus and minus
200 basis points, in increments of 50 basis points. These results are then
compared to prior periods to determine the effect of previously implemented
strategies. If estimated changes to NPV or net interest income are not within
acceptable limits, the Board may direct management to adjust its asset and
liability mix to bring interest rate risk within acceptable limits. The Bank's
NPV calculations are based on the net present value of discounted cash flows,
using market prepayment assumptions and market rates of interest for each asset
and liability product type based on its characteristics. The theoretical
projected change in NPV and net interest income over a 12-month period under
each of the
CHANGE IN NET
CHANGE IN PORTFOLIO VALUE AT
BASIS POINTS DECEMBER 31, 1999
--------------- -----------------
200 - 2.5%
150 - 1.9%
100 - 1.3%
50 - 0.7%
0 0%
-50 0.8%
- 100 1.6%
- 150 2.2%
- 200 2.0%
The Bank's simulation analysis forecasts net interest income and
earnings given unchanged interest rates (stable rate scenario). The model then
estimates a percentage change from the stable rate scenario under scenarios of
rising and falling market interest rates over various time horizons. The
simulation model estimates that if a decline of 200 basis points occurs,
earnings could be adversely affected up to approximately 13.6%, while a similar
increase in market rates would have a favorable impact of approximately 9.4%.
Because of uncertainties about customer behavior, refinance activity, absolute
and relative loan and deposit pricing levels, competitor pricing and market
behavior, product volumes and mix, and other unexpected changes in economic
events affecting movements and volatility in market rates, there can be no
assurance that simulation results are reliable indicators of earnings under such
conditions.
It is the Bank's policy to manage interest rate risk to maximize
long-term profitability under the range of likely interest-rate scenarios. The
Board of Directors oversees implementation of strategies to control interest
rate risk.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1999, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 137 (SFAS No. 137), "Accounting
for Derivative Instruments and Hedging Activities-Deferral of the Effective Date
of FASB Statement No. 133," an amendment of SFAS No. 133, which establishes
accounting and reporting standards for derivative instruments and hedging
activities and requires that an entity recognize all derivatives as either
assets or liabilities in the balance sheet and measure those instruments at fair
value. SFAS No. 133, as amended by
31
<PAGE> 33
SFAS No. 137, is effective for all quarterly and annual financial statements of
fiscal years beginning after June 15, 2000. The Bank had no significant
derivatives as of December 31, 1999, nor does the Bank engage in any hedging
activities. Accordingly, the Bank does not anticipate that the adoption of SFAS
No. 133, as amended by SFAS No. 137, will have a material effect on its
consolidated financial position or results of operations.
IMPACT OF INFLATION AND CHANGING PRICES
The Bank's consolidated financial statements and related data herein
have been prepared in accordance with generally accepted accounting principles,
which require measurement of financial condition and results of operations in
terms of historical dollars, without considering changes in the relative
purchasing power of money over time due to inflation.
Because the primary assets and liabilities of the Bank are monetary in
nature, changes in the general level of prices for goods and services have a
relatively minor impact on total expenses. Increases in operating expenses such
as salaries and maintenance are in part attributable to inflation. However,
interest rates have a far more significant effect than inflation on the
performance of financial institutions, including the Bank. See " -
ASSET/LIABILITY MANAGEMENT."
PENDING MERGER AND HOLDING COMPANY REORGANIZATION
The holding company reorganization and merger transaction are expected
to be presented to shareholders for their consideration and vote at the Bank's
2000 Annual Meeting, which will be held in late April or in May 2000. See " -
FOOTNOTE 18 OF THE BANK'S FINANCIAL STATEMENTS."
32
<PAGE> 34
AVERAGE BALANCES AND AVERAGE RATES EARNED AND PAID
Average Balances, Interest Rates and Yields. The following tables set
forth certain information relating to the Bank's consolidated average
interest-earning assets and interest-bearing liabilities and reflects the
average yield on assets and average cost of liabilities for the years indicated.
Such yields and costs are derived by dividing income or expense by the average
daily balance of assets or liabilities, respectively, for the periods presented.
During the periods indicated, nonaccruing loans, if any, are included in the net
loan category. The yields and costs include fees, premiums and discounts, which
are considered adjustments to yield.
<TABLE>
<CAPTION>
Average Balances and Interest Rates for the Years Ended December 31,
---------------------------------------- --------------------------------------
1999 1998
---------------------------------------- --------------------------------------
Average Average
Average Income/ Yield or Average Income/ Yield
(Dollars in thousands) Balance Expense Rates Balance Expense or Rates
------------ ---------- ---------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Taxable securities................... $ 22,355 $ 1,436 6.42% $ 24,327 $ 1,417 5.82%
Federal funds sold and interest-bearing
Deposits with FHLB............ 25,852 1,190 4.60% 7,789 394 5.06%
Loans (1), (2)....................... 97,673 9,490 9.72% 100,229 9,915 9.89%
----------- --------- ----------- ---------
Total interest-earnings assets.... 145,880 12,116 8.31% 132,345 11,726 8.86%
Reserve for loan losses.............. (2,420) (1,561)
Cash and due from banks.............. 5,510 5,339
Premises and equipment, net.......... 3,630 2,619
Other assets......................... 2,396 1,270
----------- -----------
Total assets...................... $ 154,996 $ 140,012
=========== ===========
Liabilities and Stockholders' Equity:
Interest-bearing demand deposits..... $ 14,622 328 2.24% $ 13,275 329 2.48%
Money market accounts................ 49,107 1,811 3.69% 47,303 1,955 4.13%
Savings accounts..................... 3,702 109 2.94% 2,514 74 2.94%
Time deposits........................ 43,928 2,259 5.14% 43,367 2,470 5.70%
FHLB borrowings...................... 5,732 324 5.65% 1,948 89 4.57%
----------- --------- ----------- ---------
Total interest-bearing liabilities 117,091 4,831 4.13% 108,407 4,917 4.54%
Non interest-bearing liabilities:
Demand deposits................... 23,069 17,738
Other liabilities................. 440 181
----------- -----------
Total liabilities.................... 23,509 126,326
Stockholders' equity ................ 14,396 13,686
Total liabilities and stockholders' -----------
equity............... $ 154,996 $ 140,012
=========== ===========
Net interest income.................. $ 7,285 $ 6,809
========= =========
Interest rate spread................. 4.18% 4.32%
======= =======
Net interest margin.................. 4.99% 5.14%
======= =======
Ratio of average interest-earning
assets to Average
interest-bearing
liabilities................... 124.59% 122.08%
Return on average assets............. 0.80% 0.84%
Return on average equity............. 8.62% 8.64%
</TABLE>
<TABLE>
<CAPTION>
-------------------------------------------
1997
-------------------------------------------
Average
Average Income/ Yield or
(Dollars in thousands) Balance Expense Rates
------------ ---------- -------------
<S> <C> <C> <C>
Assets:
Taxable securities................... $ 18,102 $ 1,147 6.34%
Federal funds sold and interest-bearing
Deposits with FHLB............ 7,479 398 5.32%
Loans (1), (2)....................... 88,611 9,715 10.96%
----------- ---------
Total interest-earnings assets.... 114,192 11,260 9.86%
Reserve for loan losses.............. (1,072)
Cash and due from banks.............. 4,362
Premises and equipment, net.......... 2,521
Other assets......................... 1,373
-----------
Total assets...................... $ 121,376
===========
Liabilities and Stockholders' Equity:
Interest-bearing demand deposits..... $ 11,739 277 2.36%
Money market accounts................ 49,154 2,145 4.36%
Savings accounts..................... 2,387 71 2.97%
Time deposits........................ 30,958 1,794 5.79%
FHLB borrowings...................... 0 0 0.00%
----------- ---------
Total interest-bearing liabilities 94,238 4,287 4.55%
Non interest-bearing liabilities:
Demand deposits................... 15,209
Other liabilities................. 592
-----------
Total liabilities.................... 110,039
Stockholders' equity ................ 11,337
Total liabilities and stockholders' -----------
equity............... $ 121,376
===========
Net interest income.................. $ 6,973
=========
Interest rate spread................. 5.31%
=======
Net interest margin.................. 6.11%
=======
Ratio of average interest-earning
assets to Average
interest-bearing
liabilities................... 121.17%
Return on average assets............. 1.44%
Return on average equity............. 15.36%
</TABLE>
(1) Average nonaccrual loans included in the computation of average loans
was $4.1 million for 1999, $7.2 million for 1998 and $2.3 million for
1997.
(2) Loan-related fees included in the above yield calculations were
$649,000 in 1999, $579,000 in 1998 and $663,000 in 1997.
33
<PAGE> 35
SUPERVISION AND REGULATION
The following discussion of bank supervision and regulation is
qualified in its entirety by reference to the statutory and regulatory
provisions discussed. Changes in applicable law or in the policies of various
regulatory authorities could have a material effect on the business and
prospects of the Bank.
The Bank is an Oregon-chartered commercial bank. As an FDIC member
institution, the deposits of the Bank are insured to a maximum of $100,000 per
depositor through the Bank Insurance Fund administered by the FDIC. As a
state-chartered, non-member bank, the Bank is primarily regulated by the FDIC
and the Oregon Department of Consumer and Business Services -- Division of
Finance and Corporate Securities.
The Bank is subject to federal banking laws, and also to the Oregon
Bank Act. These federal and state laws are intended to protect depositors, not
shareholders. Federal and state laws applicable to financial institution holding
companies and their financial institution subsidiaries regulate the range of
permissible business activities, investments, reserves against deposits, capital
levels, lending activities and practices, the nature and amount of collateral
for loans, establishment of branches, mergers, dividends and a variety of other
important matters.
The Bank is subject to detailed, complex and sometimes overlapping
federal and state statutes and regulations affecting routine banking operations.
These statutes and regulations include but are not limited to state usury and
consumer credit laws, the Federal Truth-in-Lending Act and Regulation Z, the
Federal Equal Credit Opportunity Act and Regulation B, the Fair Credit Reporting
Act, the Truth in Savings Act and the Community Reinvestment Act. The Bank is
subject to Federal Reserve Board regulations that require depository
institutions to maintain reserves against their transaction accounts
(principally NOW and regular checking accounts). The Bank is in compliance with
this requirement. Because required reserves are commonly maintained in the form
of vault cash or in a noninterest-bearing account (or pass-through account) at a
Federal Reserve Bank, the effect of the reserve requirement is to reduce an
institution's earning assets.
The Federal Deposit Insurance Corporation Improvement Act of 1991
expanded significantly the authority of federal agencies to regulate the
activities of federally chartered and state-chartered financial institutions and
their holding companies. The Federal Reserve Board, Office of the Comptroller of
the Currency (OCC) and the FDIC have extensive authority to prevent and to
remedy unsafe and unsound practices and violations of applicable laws and
regulations by institutions and holding companies. The agencies may assess civil
money penalties, issue cease and desist or removal orders, seek injunctions, and
publicly disclose such actions. In addition, the Director of the Oregon
Department of Consumer and Business Services -- Division of Finance and
Corporate Securities possesses enforcement powers to address violations of
Oregon banking law by Oregon-chartered banks.
FEDERAL DEPOSIT INSURANCE
The FDIC insures deposits of federally insured banks, savings banks and
savings associations and safeguards the safety and soundness of the banking
industry. Two separate insurance funds are maintained and administered by the
FDIC. In general, bank deposits are insured through the Bank Insurance Fund.
Deposits in savings associations are insured through the Savings Association
Insurance Fund.
As a FDIC member institution, deposits in the Bank are insured to a
maximum of $100,000 per depositor. The Bank is required to pay semiannual
deposit insurance premium assessments to the FDIC. In general terms, each
institution is assessed insurance premiums according to how much risk to the
insurance fund the institution represents. Well-capitalized institutions with
few supervisory concerns are assessed lower premiums than other institutions.
The premium range is currently from $0.00, for the highest-rated institutions
(subject to a statutory minimum assessment of $2,000), to $0.27 per $100 of
domestic deposits. The Bank currently pays premiums of $0.0053 per $100 of
deposits.
34
<PAGE> 36
The FDIC may terminate the deposit insurance of any insured depository
institution if the FDIC determines that the institution has engaged or is
engaging in unsafe or unsound practices, is in an unsafe or unsound condition to
continue operations or has violated any applicable law, regulation, order or any
condition imposed in writing by, or written agreement with, the FDIC. The FDIC
may also suspend deposit insurance temporarily during the hearing process for a
permanent termination of insurance if the institution has no tangible capital.
INTERSTATE BANKING AND BRANCHING
In 1994 the Reigle-Neal Interstate Banking and Branching Efficiency Act
eased restrictions on interstate banking. The Riegle-Neal Act allows the Federal
Reserve Board to approve an application by an adequately capitalized and
adequately managed bank holding company to acquire a bank located in a state
other than the acquiring company's home state without regard to whether the
transaction is prohibited by the laws of any state. The Federal Reserve Board
may not approve the acquisition of a bank that has not been in existence for the
minimum time period (up to five years) specified by the statutory law of the
acquired, or "target," bank's state. The Riegle-Neal Act also prohibits the
Federal Reserve Board from approving an application if the applicant (and its
depository institution affiliates) controls or would control more than 10% of
the insured deposits in the United States or 30% or more of the deposits in the
target bank's home state or in any state in which the target bank maintains a
branch. The Riegle-Neal Act does not affect the authority of states to limit the
percentage of total insured deposits in the state that may be held or controlled
by a bank or bank holding company if the limitation does not discriminate
against out-of-state banks or bank holding companies. Individual states may also
waive the 30% statewide concentration limit contained in the Riegle-Neal Act.
Branching between states may be accomplished by merging commonly
controlled banks located in different states into one legal entity. Branching
may also be accomplished by establishing de novo branches or acquiring branches
in another state. A branch of an out-of-state bank operating in another state,
or "host state," is subject to the law of the host state regarding community
reinvestment, fair lending, consumer protection (including usury limits) and
establishment of branches. The Riegle-Neal Act authorizes the FDIC to approve
interstate branching de novo by state-chartered banks solely in states that
specifically allow for such branching. The Oregon Bank Act prohibits de novo
branching in Oregon by an out-of-state bank, but it permits branching by merger
with an Oregon bank, provided the Oregon bank has been conducting business for
at least 3 years. The FDIC has adopted regulations under the Riegle-Neal Act to
prohibit an out-of-state bank from using the new interstate branching authority
primarily for the purpose of deposit production. These regulations include
guidelines to ensure that interstate branches operated by an out-of-state bank
in a host state are reasonably helping to meet the credit needs of the
communities served by the out-of-state bank.
CAPITAL
The Federal Reserve Board, the FDIC and OCC employ similar risk-based
capital guidelines in their examination and regulation of bank holding companies
and financial institutions. If capital falls below the minimum levels
established by the guidelines, the bank holding company, bank or savings bank
may be denied approval to acquire or establish additional banks or non-bank
businesses or to open new facilities. Failure to satisfy applicable capital
guidelines could subject a banking institution to a variety of enforcement
actions by federal regulatory authorities, including the termination of deposit
insurance by the FDIC and a prohibition on the acceptance of "brokered
deposits."
In the calculation of risk-based capital, assets and off-balance sheet
items are assigned to broad risk categories, each with an assigned weighting
(0%, 20%, 50% and 100%). Most loans are assigned to the 100% risk category,
except for first mortgage loans fully secured by residential property, which
carry a 50% rating. Most investment securities are assigned to the 20% category,
except for municipal or state revenue bonds, which have a 50% risk-weight, and
direct obligations of or obligations guaranteed by the United States Treasury or
United States Government agencies, which have a 0% risk-weight. Off-balance
sheet items are also taken into account in the calculation of risk-based
capital, with each
35
<PAGE> 37
class of off-balance sheet item being converted to a balance sheet equivalent
according to established "conversion factors." From these computations, the
total of risk-weighted assets is derived. Risk-based capital ratios therefore
state capital as a percentage of total risk-weighted assets and off-balance
sheet items. The ratios established by guideline are minimums only.
Current risk-based capital guidelines require bank holding companies
and banks to maintain a minimum risk-based total capital ratio equal to 8% and a
Tier 1 capital ratio of 4%. Intangibles other than readily marketable mortgage
servicing rights are generally deducted from capital. Tier 1 capital includes
common shareholders' equity, qualifying perpetual preferred stock (within limits
and subject to certain conditions, particularly if the preferred stock is
cumulative preferred stock), and minority interests in equity accounts of
consolidated subsidiaries, less intangibles. Tier 2 capital includes: (i) the
allowance for loan losses up to 1.25% of risk-weighted assets; (ii) any
qualifying perpetual preferred stock exceeding the amount includable in Tier 1
capital; (iii) hybrid capital instruments; (iv) perpetual debt; (v) mandatory
convertible securities and (vi) subordinated debt and intermediate term
preferred stock of up to 50% of Tier 1 capital. Total capital is the sum of Tier
1 and Tier 2 capital, less reciprocal holdings of other banking organizations,
capital instruments and investments in unconsolidated subsidiaries.
The FDIC has added a market risk component to the capital requirements
of nonmember banks. The market risk component could require additional capital
for general or specific market risk of trading portfolios of debt and equity
securities and other investments or assets. The FDIC's evaluation of an
institution's capital adequacy takes account of a variety of other factors as
well, including interest rate risks to which the institution is subject, the
level and quality of an institution's earnings, loan and investment portfolio
characteristics and risks, risks arising from the conduct of nontraditional
activities and a variety of other factors. Accordingly, the FDIC's final
supervisory judgment concerning an institution's capital adequacy could differ
significantly from the conclusions that might be drawn from the absolute level
of an institution's risk-based capital ratios. Therefore, institutions generally
are expected to maintain risk-based capital ratios that exceed the minimum
ratios discussed above. This is particularly true for institutions contemplating
significant expansion plans and institutions that are subject to high or
inordinate levels of risk. Moreover, although the FDIC does not impose explicit
capital requirements on holding companies of institutions regulated by the FDIC,
the FDIC can take account of the degree of leverage and risks at the holding
company level. If the FDIC determines that the holding company (or another
affiliate of the institution regulated by the FDIC) has an excessive degree of
leverage or is subject to inordinate risks, the FDIC may require the subsidiary
institution(s) to maintain additional capital or the FDIC may impose limitations
on the subsidiary institution's ability to support its weaker affiliates or
holding company.
The banking agencies have also established a minimum leverage ratio of
3%, which represents Tier 1 capital as a percentage of total assets, less
intangibles. However, for bank holding companies and financial institutions
seeking to expand and for all but the most highly rated banks and bank holding
companies, the banking agencies expect an additional cushion of at least 100 to
200 basis points. At December 31, 1999, the Bank was in compliance with all
regulatory capital requirements.
In order to resolve the problems of undercapitalized institutions and
to prevent a recurrence of the banking crisis of the 1980s and early 1990s, the
Federal Deposit Insurance Corporation Improvement Act of 1991 established a
system known as "prompt corrective action." Under the prompt corrective action
provisions and implementing regulations, every institution is classified into
one of five categories, depending on (i) its total risk-based capital ratio,
Tier 1 risk-based capital ratio and leverage ratio and (ii) certain subjective
factors. The categories are: "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" and "critically
undercapitalized." A financial institution's operations can be significantly
affected by its capital classification. For example, an institution that is not
"well capitalized" generally is prohibited from accepting brokered deposits and
offering interest rates on deposits higher than the prevailing rate in its
market, and the holding company of any undercapitalized institution must
guarantee, in part, certain aspects of the institution's capital plan. Financial
institution regulatory agencies generally are required to appoint a receiver or
conservator shortly after an institution enters the category of weakest
capitalization. The Federal Deposit
36
<PAGE> 38
Insurance Corporation Improvement Act of 1991 also authorizes the regulatory
agencies to reclassify an institution from one category into a lower category if
the institution is in an unsafe or unsound condition or engaging in an unsafe or
unsound practice. Undercapitalized institutions are required to take certain
specified actions in order to increase their capital or otherwise decrease the
risks to the federal deposit insurance funds.
The following table illustrates the capital and prompt corrective
action guidelines applicable to the Bank, as well as its total risk-based
capital ratios, Tier 1 capital ratios and leverage ratios as of December 31,
1999.
<TABLE>
<CAPTION>
MINIMUM NECESSARY TO MINIMUM NECESSARY TO BE
AT DECEMBER 31, 1999 BE WELL CAPITALIZED ADEQUATELY CAPITALIZED
--------------------- ------------------------ -------------------------
<S> <C> <C> <C>
BANK OF SOUTHERN OREGON:
Total Risk-Based Capital Ratio... 13.1% 10.00% 8.00%
Tier 1 Risk-Based Capital Ratio.. 11.9% 6.00% 4.00%
Leverage Ratio................... 9.5% 5.00% 4.00%
</TABLE>
LIMITS ON DIVIDENDS AND OTHER PAYMENTS
Under the Oregon Bank Act, an Oregon-chartered bank may not pay a cash
dividend if the amount of the dividend exceeds its net unreserved retained
earnings, after first deducting:
- bad debts, excepting bad debts that have already been
charged against earnings or reserved for, and
excepting bad debts that are fully secured and in the
process of collection;
- all other assets charged off as required by the
Director of the Oregon Department of Consumer and
Business Services or by a state or federal examiner;
and
- all accrued expenses, interest and taxes of the Bank.
For this purpose, "bad debt" means a debt on which interest is past due and
unpaid for at least six months. Additionally, the Director of the Department of
Consumer and Business Services may require an institution to suspend dividends
if the Director determines that payment of dividends would result in remaining
shareholders' equity being inadequate for the safe and sound operation of the
Bank. State-chartered banks' ability to pay dividends may be affected by capital
adequacy guidelines of their primary federal bank regulatory agency as well. See
" - CAPITAL." Moreover, regulatory authorities may prohibit banks and bank
holding companies from paying dividends if payment of dividends would constitute
an unsafe and unsound banking practice.
37
<PAGE> 39
TRANSACTIONS WITH AFFILIATES
Although the Bank is not a member bank of the Federal Reserve System,
it is required by the Federal Deposit Insurance Act to comply with ss.23A and
ss.23B of the Federal Reserve Act (pertaining to transactions with affiliates)
in the same manner and to the same extent as member banks. An affiliate of a
bank is any company or entity that controls, is controlled by or is under common
control with the Bank. Generally, ss.23A and ss.23B of the Federal Reserve Act
(i) limit the extent to which a bank or its subsidiaries may engage in "covered
transactions" with any one affiliate to an amount equal to 10% of such
institution's capital and surplus, limiting the aggregate of covered
transactions with all affiliates to 20% of capital and surplus, and (ii) require
that all such transactions be on terms substantially the same, or at least as
favorable to the institution or subsidiary, as those provided to a
non-affiliate. The term "covered transaction" includes making loans, purchasing
assets, issuing a guarantee and other similar types of transactions.
The Bank's authority to extend credit to executive officers, directors
and greater than 10% shareholders, as well as entities such persons control, is
subject to ss.22(g) and ss.22(h) of the Federal Reserve Act and Regulation O of
the Federal Reserve Board. Among other things, these laws require insider loans
to be made on terms substantially similar to those offered to unaffiliated
individuals, place limits on the amount of loans a bank may make to such persons
based, in part, on the Bank's capital position, and require certain approval
procedures to be followed. Under ss.22(h), loans to an executive officer,
director, or greater than 10% shareholder (a "principal shareholder") of a bank,
and certain affiliated entities of either, together with all other outstanding
loans to such persons and affiliated entities, may not exceed the Bank's
loans-to-one-borrower limit, which in general terms is 15% of tangible capital
but can be higher in certain circumstances. Section 22(h) also prohibits loans
in excess of the greater of 5% of capital or $25,000 to directors, executive
officers and principal shareholders, and their respective affiliates, unless the
loans are approved in advance by a majority of the board of directors, with any
"interested" director not participating in the voting. A violation of these
restrictions could result in the assessment of substantial civil monetary
penalties, the imposition of a cease and desist order or other regulatory
sanctions. Recent regulations now permit executive officers and directors to
receive the same terms through benefit or compensation plans that are available
to other employees, as long as the director or executive officer is not given
preferential treatment compared to the other participating employees.
COMMUNITY REINVESTMENT ACT
Under the Community Reinvestment Act of 1977 and implementing
regulations of the banking agencies, a financial institution has a continuing
and affirmative obligation (consistent with safe and sound operation) to meet
the credit needs of its entire community, including low- and moderate-income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions, nor does it limit an institution's
discretion to develop the types of products and services it believes to be best
suited to its particular community. The CRA requires that bank regulatory
agencies conduct regular CRA examinations and provide written evaluations of
institutions' CRA performance. The CRA also requires that an institution's CRA
performance rating be made public. CRA performance evaluations are based on a
four-tiered rating system: Outstanding, Satisfactory, Needs to Improve and
Substantial Noncompliance.
Following the Bank's CRA examination as of March 29, 1999, the Bank
received a "Satisfactory" rating. Although CRA examinations occur on a regular
basis, CRA performance evaluations have been used principally in the evaluation
of regulatory applications submitted by an institution. CRA performance
evaluations are considered in evaluating applications for such things as
mergers, acquisitions and applications to open branches. Over the 22 years that
the CRA has existed, and particularly in the last few years, institutions have
faced increasingly difficult regulatory obstacles and public interest group
objections in connection with their regulatory applications, including
institutions that have received the highest possible CRA ratings.
A bank holding company cannot elect to be a "financial holding company"
- -- with the expanded securities, insurance and other powers that designation
entails -- unless all of the depository institutions owned by the holding
38
<PAGE> 40
company have a CRA rating of satisfactory or better. The Gramm-Leach-Bliley Act
also provides that any financial institution with total assets of $250 million
or less will be subject to CRA examinations no more frequently than every 5
years if its most recent CRA rating was "outstanding," or every 4 years if its
rating was "satisfactory." Lastly, the Gramm-Leach-Bliley Act requires public
disclosure of private CRA agreements entered into between banking organizations
and other parties, and annual reporting by banking organizations of actions
taken under the private CRA agreements. This last provision of the
Gramm-Leach-Bliley Act addresses the increasingly common practice whereby a bank
or holding company undertaking acquisition of another bank or holding company
would enter into an agreement with parties who might otherwise file with bank
regulators a CRA protest of the acquisition. The details of these agreements
have not been universally disclosed by acquiring institutions in the past.
FEDERAL HOME LOAN BANKS
The Federal Home Loan Banks serve as credit sources for their members.
As a member of the FHLB of Seattle, the Bank is required to maintain an
investment in the capital stock of the FHLB of Seattle in an amount calculated
by reference to the member institution's assets and the amount of loans, or
"advances," from the FHLB. The Bank is in compliance with this requirement, with
an investment in FHLB of Seattle stock of $3,880,700 at December 31, 1999. See,
"DESCRIPTION OF BUSINESS - SOURCE OF FUNDS."
Each FHLB is required to establish standards of community investment or
service that its members must maintain for continued access to long-term
advances from the FHLB. The standards take into account a member's performance
under the Community Reinvestment Act and its record of lending to first-time
home buyers.
STATE BANKING REGULATION
As an Oregon-chartered bank, the Bank is subject to regular examination
by the Oregon Department of Consumer and Business Services -- Division of
Finance and Corporate Securities. State banking regulation affects the internal
organization of the Bank as well as its savings, lending, investment and other
activities. State banking regulation may contain limitations on an institution's
activities that are in addition to limitations imposed under federal banking
law. The Oregon Department of Consumer and Business Services may initiate
supervisory measures or formal enforcement actions, and if the grounds provided
by law exist, the Oregon Department of Consumer and Business Services may take
possession and control of an Oregon-chartered bank.
MONETARY POLICY
The earnings of financial institutions are affected by the policies of
regulatory authorities, including monetary policy of the Federal Reserve Board.
An important function of the Federal Reserve System is regulation of aggregate
national credit and money supply. The Federal Reserve Board accomplishes these
goals with measures such as open market dealings in securities, establishment of
the discount rate on bank borrowings and changes in reserve requirements against
bank deposits. These methods are used in varying combinations to influence
overall growth and distribution of financial institutions' loans, investments
and deposits, and they also affect interest rates charged on loans or paid on
deposits. Monetary policy is influenced by many factors, including inflation,
unemployment, short-term and long-term changes in the international trade
balance and fiscal policies of the United States government. Federal Reserve
Board monetary policy has had a significant effect on the operating results of
financial institutions in the past, and it can be expected to influence
operating results in the future.
RECENT LEGISLATION -- FINANCIAL HOLDING COMPANIES. On November 12, 1999 the
Gramm-Leach-Bliley Act became law, repealing the 1933 Glass-Steagall Act's
separation of the commercial and investment banking industries. The
Gramm-Leach-Bliley Act expands the range of nonbanking activities a bank holding
company may engage in, while preserving existing authority for bank holding
companies to engage in activities that are closely related to banking. The
39
<PAGE> 41
new legislation creates a new category of holding company called a "Financial
Holding Company," a subset of bank holding companies that satisfy the following
criteria:
- all of the depository institution subsidiaries must be well
capitalized and well managed;
- the holding company must file with the Federal Reserve Board a
declaration that it elects to be a financial holding company
to engage in activities that would not have been permissible
before the Gramm-Leach-Bliley Act; and
- all of the depository institution subsidiaries must have a
Community Reinvestment Act rating of "satisfactory" or better.
Financial holding companies may engage in any activity that (i) is financial in
nature or incidental to such financial activity or (ii) is complementary to a
financial activity and does not pose a substantial risk to the safety and
soundness of depository institutions or the financial system generally. The
Gramm-Leach-Bliley Act specifies certain activities that are financial in
nature. These activities include:
- acting as principal, agent or broker for insurance;
- underwriting, dealing in or making a market in
securities; and
- providing financial and investment advice.
The Federal Reserve Board and the Secretary of the Treasury have authority to
decide whether other activities are also financial in nature or incidental to
financial activity, taking into account changes in technology, changes in the
banking marketplace, competition for banking services and so on.
The Gramm-Leach-Bliley Act has only recently become law. Regulations of
the banking agencies implementing the legislative changes can be expected in the
near future. Except for the increase in competitive pressures faced by all
banking organizations that is a likely consequence of the Gramm-Leach-Bliley
Act, the legislation and implementing regulations are likely to have a more
immediate impact on large regional and national institutions than on
community-based institutions engaged principally in traditional banking
activities. Because the legislation permits bank holding companies to engage in
activities previously prohibited altogether or severely restricted because of
the risks they posed to the banking system, implementing regulations can be
expected to impose strict and detailed prudential safeguards on affiliations
among banking and nonbanking companies in a holding company organization.
Additionally, because the legislation allows various affiliates within a single
holding company organization to serve a broader array of customers' financial
goals, including their banking, insurance and investment goals, implementing
regulations can be expected to impose strict safeguards on sharing of customer
information among affiliated entities within an organization.
40
<PAGE> 42
ITEM 2. PROPERTIES
The following table provides information concerning the Bank's banking
offices. Each of the offices is equipped with drive-up teller facilities as well
as ATMs.
<TABLE>
<CAPTION>
LOCATION OWNED/LEASED OTHER INFORMATION
------------------------------ ---------------------------------- -------------------------------------
<S> <C> <C>
MAIN OFFICE:
1455 East McAndrews Road Owned Approximately 6,000 square feet
Medford, Oregon 97504 Opened in 1990
BRANCHES:
Black Oak Branch Owned Approximately 5,000 square feet
2600 East Barnett Road Opened in 1994
Medford, Oregon 97504
Central Point Branch Leased, but Bank of Southern Approximately 5,200 square feet
300 East Pine Street Oregon and the lessor have Opened in March 1999
Central Point, Oregon 97502 agreed that Bank of Southern
Oregon shall purchase the
property after March 1, 2001 for
$550,000
</TABLE>
The Bank's administrative offices were located in a 1,600 square foot
building located next to the main office. The facility is owned by the Bank's
subsidiary, McAndrews Commercial Property, Inc. McAndrews Commercial Property,
Inc. conducts no business and exists solely to hold this real property. The bank
also owns a 3,500 square foot facility in Medford, which is used by the
compliance department and proof department. In December 1999, the Bank acquired
a 13,000 square foot facility in Medford for $1.825 million in cash. The Bank's
administrative functions were relocated to the new facility, including its
executive offices and a loan production department. Approximately one half of
the new administrative office located at 503 Airport Road, Medford has been
leased back to the seller of the property by the Bank for a 2-year term, with an
annual rent of approximately $101,000.
At December 31, 1999 the net book value of the Bank's investment in
premises and equipment totaled $6.1 million.
ITEM 3. DIRECTORS, EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES
The following sets forth certain information regarding the directors
and executive officers of the Bank. Directors serve for a term of one year.
JEFFREY L. CHAMBERLAIN, age 55, is a self-employed private investor and
developer, specializing in the development of healthcare facilities. Mr.
Chamberlain has a Bachelor of Science degree in business administration from
Portland State University. He has served on the Board since April 1990.
JOHN A. DUKE, age 61, is a self-employed investment manager. Mr. Duke
has served as the Chairman of the
41
<PAGE> 43
Bank's Board of Directors since its organization in April 1990. He also served
as the Chairman of the Board of Directors of Jefferson State Bank from the
organization of Jefferson State Bank in 1978 through its sale to First
Interstate Bank of Oregon in May 1989.
DENNIS N. HOFFBUHR, age 51, is the owner and president of Hoffbuhr and
Associates, Inc. a land surveying and land use planning firm. He is a registered
land surveyor certified by the Oregon State Board of Engineering Examiners. Mr.
Hoffbuhr has served on the Board since April 1990.
PATRICK G. HUYCKE, age 50 is an attorney with the firm of Huycke, Boyd
& Maulding LLP. Mr. Huycke received a JD degree from Willamette University, and
has practiced law for 23 years. Mr. Huycke served as a director of Jefferson
State Bank from 1983 to 1989, and has been a director of the Bank since 1994.
RICHARD K. KARCHMER, age 57, is a physician in the practice of medical
oncology and hematology at the Medford Clinic. He has been a director since
April 1990.
JOHN L. ANHORN, age 57, has over 35 years of banking experience and has
served as President and CEO since May 1998. Mr. Anhorn worked for 25 years at
First Interstate Bank of Oregon serving in many capacities. In August of 1989 he
joined Western Bank where he served as President until leaving in April of 1997
after Western Bank's merger with Washington Mutual.
JAMES L. PATTERSON, age 60, recently retired from Pacific Power after
34 years of service in various management assignments. He currently is
self-employed as a business consultant. Mr. Patterson became a director of the
Bank in January 1999.
EXECUTIVE OFFICERS OF THE BANK
Set forth below is information about the executive officers other than
John L. Anhorn, who is listed above. Executive officers serve at the discretion
of the Board of Directors.
RICHARD R. HIEB, age 55, has over 35 years of experience working for
commercial banks. Mr. Hieb has served as Executive Vice President and Chief
Operating Officer since May 1998. Prior to that time, Mr. Hieb served as an
Executive Vice President and Chief Administrative Officer of Western Bank, a
division of Washington Mutual.
BRUCE R. MCKEE, age 49, is a certified public accountant in both Oregon
and California and has been with the Bank as Vice President and Chief Financial
Officer since December 1998. Prior to this position, he spent eleven years with
Grant Thornton International, Management Consultants and Accountants, as a
consultant and auditor for numerous financial institutions, including
independent commercial banks. He also served for six years as Chief Financial
Officer and Director of Finance for a large healthcare company located on the
west coast.
TAMMY D. GLASS, age 40, has 20 years banking experience. She began
employment with Jefferson State Bank as a teller and was the operations officer
of the main branch at the time the Bank was acquired by First Interstate Bank.
She remained with First Interstate Bank in the Operations Department until May
of 1990. She joined the Bank when it opened in June 1990 as the Operations
Officer. She is currently Vice President of Operations/Human Resources and
Marketing.
ROBERT A. JOHNSON, age 61, has been in banking for 39 continuous years;
34 years with First Interstate Bank of Oregon and 5 years with Western Bank, a
division of Washington Mutual. He has served as a regional credit administrator
at both institutions. His last position was that of Team Leader for commercial
lenders. He currently serves as Senior Vice President and Credit Administrator.
42
<PAGE> 44
ITEM 4. REMUNERATION OF DIRECTORS AND OFFICERS
The table below shows the total compensation paid to the President and
each executive officer that received in excess of $100,000 during 1999:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
-------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
---------------------------------------- -------------------------- -------
($) ($) (#)
($) OTHER ANNUAL RESTRICTED SECURITIES ($) ($)
NAME AND SALARY ($) COMPENSATION STOCK UNDERLYING LTIP ALL OTHER
PRINCIPAL POSITION YEAR (1) BONUS (2) AWARDS OPTIONS PAYOUTS COMPENSATION(3)
- --------------------- ----- -------- -------- ---------------- ---------- ------------ ------- ---------------
<S> <C> ,c. <C> <C> <C> <C> <C> <C>
John L. Anhorn, 1999 $152,000 $20,000 $ (2) $ 0 0 $ 0 $ 3,000
President and Chief 1998 $ 98,700 $ 0 $ (2) $ 0 75,000 $ 0 $ 1,500
Executive Officer 1997 N/A (4) N/A N/A N/A N/A N/A N/A
Richard R. Hieb, 1999 $110,000 $15,000 $ (2) $ 0 0 $ 0 $ 2,000
Executive Vice 1998 $58,000 $ 0 $ (2) $ 0 60,000 $ 0 $ 1,000
President, Chief 1997 N/A (4) N/A N/A N/A N/A N/A N/A
Operating Officer
and Secretary
</TABLE>
(1) Includes amounts deferred at the election of the named executive
officers pursuant to the 401(k) Plan of the Bank.
(2) Perquisites and other personal benefits did not exceed the lesser of
$50,000 or 10% of total salary and bonus.
(3) Represents matching contributions of the Bank under its 401(k) plan.
(4) Mr. Anhorn and Mr. Hieb joined the Bank effective May 1, 1998.
In addition to the compensation indicated above, executive officers
receive certain fringe benefits such as health and life insurance coverage and
other customary benefits offered by the Bank. The value of such benefits is less
than $10,000 per executive officer per year.
The incentive compensation plan for executive officers is based on a
structured set of objectives determined by the Board of Directors and the
affected executives each year. Performance is monitored throughout the year and
payment of incentive compensation is conditioned on meeting the established
objectives. Generally, such objectives include specified targets for return on
assets, audit compliance, achievement of Strategic Plan objectives, and overall
management of the Bank. Incentive compensation for other officers and salaried
employees is similarly based on achievement of established objectives, bank
profitability and individual performance.
Directors receive a fee of $1,000 per month, except for the
Vice-chairman, who received a fee of $1,300 per month. In addition, each
director receives $150 for each meeting attended that is not a regularly
scheduled monthly Board meeting.
43
<PAGE> 45
ITEM 5. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table indicates the beneficial ownership of the Bank
common stock as of March 17, 2000:
- by directors and executive officers of the Bank,
- by each person who is known by the Bank to own
beneficially more than 5% of the outstanding shares
of the Bank common stock, which information has been
derived from beneficial ownership reports filed by
those persons with the Federal Deposit Insurance
Corporation under Section 13(d) of the Securities
Exchange Act of 1934, and
- by all directors and executive officers of the Bank
as a group.
Unless otherwise stated, voting and investment power are exercised
solely by the person named or are shared with members of his or her household.
For purposes of the table, a person is considered to own beneficially any shares
for which he or she exercises sole or shared voting or investment power, plus
the number of shares the individual has the right to acquire within 60 days.
Shares deemed to be outstanding are calculated on the basis of 4,857,540 shares
outstanding, plus the number of shares a person or group has the right to
acquire within 60 days.
<TABLE>
<CAPTION>
SHARES OF SHARES PERCENT
COMMON ACQUIRABLE OF
POSITION WITH BANK OF SOUTHERN STOCK WITHIN 60 COMMON
NAME OF BENEFICIAL OWNER OREGON OWNED DAYS STOCK
- ------------------------------ ------------------------------------- ------------ ----------- ----------
<S> <C> <C> <C> <C>
John L. Anhorn............ Director, President and Chief 7,000 0 (1)
Executive Officer
Jeffrey L. Chamberlain.... Director 66,720 31,200 2.0%
John A. Duke.............. Chairman of the Board and Director 467,440 (2) 2,400 9.7%
P.O. Box 430
Rogue River, Oregon
97537 None 356,698 0 7.3%
John C. and Penny D. Esser
1544 Nottingham Circle
Medford, Oregon 97504 Vice President of Operations/Human 10,500 3,726 (1)
Tammy D. Glass............ Resources and Marketing
Director Nominee, Executive Vice 4,000 0 (1)
Richard R. Hieb........... President, Chief Operating Officer
and Secretary 26,368 26,200 1.1%
Dennis N. Hoffbuhr........ Director 103,634 0 2.1%
Patrick G. Huycke......... Vice Chairman and Director 0 0 0.0%
Robert A. Johnson......... Senior Vice President and Credit
Administrator 42,336 31,200 1.5%
Richard K. Karchmer....... 0 0 0.0%
Bruce R. McKee............ Director 1,000 0 (1)
James L. Patterson........ Vice President and Chief Financial
All directors and executive Officer
officers as a group (11 Director 728,998 94,726 16.6%
persons)..................
N/A
</TABLE>
(1) Less than one percent.
(2) Includes 447,440 shares held by the John A. Duke Trust, of which Mr.
Duke is co-trustee. Excludes 77,800 shares held by Mr. Duke's adult
daughters.
The Bank is not aware of any beneficial holder of 5% or more of its common stock
other than as set forth in the table above.
44
<PAGE> 46
ITEM 6. INTERESTS OF MANAGEMENT AND OTHERS IN CERTAIN TRANSACTIONS.
The Bank has deposit and lending relationships with directors and
officers of the Bank, as well as with their affiliates. All loans to directors,
officers and their affiliates were made in the ordinary course of business, on
substantially the same terms (including interest rates and collateral) as those
prevailing at the time for comparable transactions with other persons, and did
not involve more than the normal credit risk or present other unfavorable
features. Refer to Note 12 of Notes to Consolidated Financial Statements of the
Bank.
None of the loans to directors, officers or their affiliates is or has
been nonperforming, nor have any of the loans been restructured or subject to
special mention due to potential credit problems known to the Bank. All of the
loans are current and all required payments thereon have been made. As of
December 31, 1999, the aggregate outstanding amount of all loans to officers and
directors was approximately $4.561 million, which represented 30.9% of the
Bank's shareholders' equity on that date. During 1999, the aggregate
indebtedness of all directors and officers as a group to the Bank exceeded 20%
of the Bank's equity capital, and the indebtedness of Directors Jeffrey L.
Chamberlain and John A. Duke to the Bank exceeded the lesser of $5 million or
10% of the Bank's equity capital. The following table shows the largest
aggregate indebtedness outstanding at any time in 1999 on the part of Messrs.
Chamberlain and Duke and all directors and officers as a group, as well as the
amount outstanding as of December 31, 1999.
<TABLE>
<CAPTION>
PERCENT OF
SHAREHOLDERS' AMOUNT
LARGEST EQUITY AS OF OUTSTANDING AS
AMOUNT DECEMBER 31, OF DECEMBER 31,
OUTSTANDING DATE 1999 1999
-------------- ---------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Mr. Jeffrey L. Chamberlain $ 1,917,000 December 31, 1999 13.0% $ 1,917,000
Mr. John A. Duke.......... $ 1,747,000 January 1, 1999 11.8% $ 1,572,000
All Directors and Officers
as a Group................ $ 4,561,000 December 31, 1999 30.9% $ 4,561,000
</TABLE>
45
<PAGE> 47
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK. Shares of the Bank's common stock are traded on the
OTC Bulletin Board under the symbol "BSOR." The OTC Bulletin Board is an
electronic, screen-based market maintained by the National Association of
Securities Dealers, Inc.'s subsidiary, NASD Regulation, Inc. These
over-the-counter market quotations and the data in the table to follow do not
reflect retail mark-up, mark-down or commissions and do not necessarily
represent actual transactions. The following table shows the high and low
closing prices of Bank of Southern Oregon common stock in 1998 and 1999,
adjusted for stock splits.
BANK OF SOUTHERN OREGON
COMMON STOCK
-------------------------
HIGH LOW
---------- -----------
1998:
First Quarter. $ 7.00 $ 6.67
Second Quarter $ 11.50 $ 7.88
Third Quarter. $ 10.75 $ 8.63
Fourth Quarter $ 9.50 $ 7.50
1999:
First Quarter. $ 8.75 $ 8.25
Second Quarter $ 8.25 $ 7.25
Third Quarter. $ 7.38 $ 7.12
Fourth Quarter $ 8.00 $ 6.50
The Bank split its stock 3-for-1 in June 1998 and 2-for-1 in
July 1997.
DIVIDENDS. The Bank has not paid any cash dividends or made other cash
distributions to its shareholders and does not expect to declare or pay cash
dividends or other cash distributions for the foreseeable future. The ability of
the Bank to pay dividends to its shareholders is subject to bank regulatory
restrictions. See, "SUPERVISION AND REGULATION - LIMITS ON DIVIDENDS AND OTHER
PAYMENTS."
As of March 17, 2000, the common stock was held of record by approximately 248
stockholders.
State and federal banking laws and regulations place restrictions on
the payment of dividends by a bank to its stockholders. See "SUPERVISION AND
REGULATION - DIVIDENDS." The Bank's policy is to review the Bank's financial
performance, capital adequacy, regulatory compliance and cash resources to
determine if it is appropriate for the Bank to declare and pay a cash or stock
dividend to its shareholders. Any such dividends are subject to these
limitations and to the discretion of the Board of Directors.
ITEM 2. LEGAL PROCEEDINGS
From time to time the Bank is involved in various legal proceedings
that are incidental to its business. In the opinion of management, no current
legal proceedings are material to the financial condition of the Bank, either
individually or in the aggregate. Currently, the Bank is a defendant in a case
filed in the U.S. District Court for the District of Oregon. The case involves
collection of a letter of credit totaling $100,000 issued by the Bank for the
benefit of one of its customers. The letter of credit has been provided by the
Bank to a surety company, enabling the customer to obtain a performance bond.
The Bank is not insured for this claim. However, management believes that its
position concerning the claim is reasonable and that the Bank will prevail if
the claim goes to trial.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
None.
46
<PAGE> 48
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 requires Bank of
Southern Oregon's directors and executive officers, as well as persons who own
more than 10% of a registered class of Bank of Southern Oregon's equity
securities, to file initial reports of ownership and later reports of changes in
ownership of Bank of Southern Oregon common stock. Based solely on review of
copies of the reports furnished to Bank of Southern Oregon and written
representations to the bank, to the best of Bank of Southern Oregon's knowledge
all Section 16(a) filing requirements applicable to its executive officers,
directors and greater than 10% beneficial owners were complied with in 1999,
except that Director Huycke reported a stock option exercise in an untimely
manner on one occasion.
PART F/S
The financial statements called for by this Part F/S are listed in the
Index to Financial Statements on Page F-1 (sequential page 25).
47
<PAGE> 49
PART III
ITEM 1. INDEX TO EXHIBITS
The following exhibits are being filed herewith:
<TABLE>
<CAPTION>
Sequential
Exhibit Page Number
- ------- -----------
<S> <C>
2.1 Articles of Incorporation of Bank of Southern Oregon...............................................*
2.2 Restated Bylaws of Bank of Southern Oregon.........................................................*
3.1 Specimen Stock Certificate.........................................................................*
6.1 Employment Agreement, dated April 2, 1998, by and between
Bank of Southern Oregon and John Anhorn............................................................*
6.2 Employment Agreement, dated April 2, 1998, by and between
Bank of Southern Oregon and Rich Hieb..............................................................*
6.3 Lease and Purchase Agreement, dated December 3, 1998, by and between Michael Littrell
and Bank of Southern Oregon........................................................................*
6.4 1992 Combined Incentive and Non-Qualified Stock Option Plan........................................*
6.5 Federal Home Loan Bank of Seattle Advances, Security and Deposit Agreement dated
January 21, 1999.............................................................................50 - 53
* Previously filed on Form 10-SB filed with the FDIC on April 29, 1999.
</TABLE>
48
<PAGE> 50
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on March 29, 2000.
BANK OF SOUTHERN OREGON
(Registrant)
By: /s/ John L. Anhorn
-------------------------------------
President and Chief Executive Officer
In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities indicated on the 29th day of March, 2000.
<TABLE>
<S> <C>
Principal Executive Officer
By /s/ President and Chief Executive Officer and Director
------------------------------
John L. Anhorn
Principal Financial and Accounting Officer
By /s/ Vice President and Chief Financial Officer
------------------------------
Bruce R. McKee
By /s/ Director and Chairman of the Board
------------------------------
John A. Duke
By /s/ Director
------------------------------
Jeffrey L. Chamberlain
By /s/ Director
------------------------------
Dennis N. Hoffbuhr
By /s/ Director
------------------------------
Patrick G. Huycke
By /s/ Director
------------------------------
Richard K. Karchmer
By /s/ Director
------------------------------
James L. Patterson
</TABLE>
49
<PAGE> 51
EXHIBIT 6.5
ADVANCES, SECURITY AND DEPOSIT AGREEMENT
January 21, 1999
This Advances, Security and Deposit Agreement ("Agreement") is made as
of the above date and is between the Federal Home Loan Bank of Seattle,
including its successors ("Seattle Bank"), and Bank of Southern Oregon,
including its successor ("Customer"). Except as to Customers which have not
signed prior Agreements, it renews, amends and restates prior contracts between
the parties or their predecessors entitled "Advances Agreement, Pledge Agreement
and Security Agreement" and "Deposit Account Resolution."
Recitals
--------
A. The Seattle Bank is authorized by the Federal Home Loan Bank Act, as
amended, and related regulations and directives ("Act"), and by the Seattle
Bank's own policies, to make loans to the Customer ("Advances"). The Seattle
Bank is also authorized to provided demand and time deposit accounts to the
Customer ("Accounts") and to perform additional services, all of which may
create obligations from the Customer to the Seattle Bank ("Other Obligations").
Other Obligations may include, without limitation, debts by reason of interest
rate swap agreements, letters of credit, overdrafts, settlements, and wire
transfers.
B. This Agreement, and related polices which are, from time to time, sent
by the Seattle Bank to its Customers, specifies the terms and conditions under
which the Seattle Bank may make Advances available to the Customer; open and use
Accounts; and collateralize such Advances and Other Obligations.
Agreements
----------
1. Prior to or at the time of the execution and delivery of this
Agreement, the Customer has provided the Seattle Bank with a certified copy of a
resolution adopted by the Customer's Board of Directors or other governing body
("Resolution") approving this Agreement and authorizing designated officers or
employees of the Customer to obtain Advances, open and use Accounts, and incur
Other Obligations. The Seattle Bank may rely upon, and the Customer is estopped
from denying, the authority of the persons designated in the Resolution.
2. The Customer may request Advances from the Seattle Bank by applying to
the Seattle Bank in such form as it shall require.
3. Each Advance shall be evidenced by a promissory note ("Note") or by
another confirming document as required by the Seattle Bank. The applicable
terms and conditions of this Agreement are incorporated therein as well as in
other agreements, if any, that relate to Other Obligations.
4. On the first day of each month or at such other times that payments of
principal and/or interest are due, the Customer agrees to pay, or to authorize a
charge to the Customer's Account for the principal and/or interest that is due
on each outstanding Advance, Note or Other Obligation. Interest shall be charged
at the rate set forth in the Note or other instrument evidencing the
Indebtedness. Delinquent principal and/or interest may bear interest, at the
option of the Seattle Bank, equal to the Seattle Bank's then-current Flexible
Balance advance rate.
5. As collateral ("Security") for the payment of all Advances, Notes or
Other Obligations (collectively, "Indebtedness") of the Customer to the Seattle
Bank, the Customer hereby assigns, pledges and grants security interests to the
Seattle Bank ("Security Interest") in the following: (a) its stock in the
Seattle Bank (which cannot be pledged to another
50
<PAGE> 52
entity); (b) its funds on deposit with the Seattle Bank; (c) its notes or other
instruments representing obligations of third parties, including the proceeds
thereof; and any related mortgages or deeds of trust ("Mortgages") securing any
of them and/or any securities representing an interest in such Mortgages; (d)
securities issued, insured or guaranteed by the United States government or by
any agency thereof; (e) other real estate-related collateral; and (f) its
instruments, accounts, general intangibles, inventory, equipment and other
property in which a security interest can be granted by the Customer to the
Seattle Bank. Upon the withdrawal from membership in the Seattle Bank, and as
the final part of the plan of liquidation of the Customer's Indebtedness to the
Seattle Bank, the stock of such Customer may be redeemed and credited upon the
indebtedness of the Customer, in whole or in part, for an amount equal to the
par value of the stock which would otherwise be paid to the Customer by the
Seattle Bank.
6. The Customer agrees that it holds the Security for the benefit of, and
subject to the direction and control of, the Seattle Bank; including limitation,
the following; (a) Security and Security Interests shall include and extend to
after-acquired Security; (b) the Customer may use, commingle or dispose of all
or part of the Security or proceeds thereof if, at all times, it owns and
maintains Security of the types and kinds specified by the Act and as required
to meet the requirements thereof, free and clear of pledges, liens, or other
encumbrances of third parties, in such amount of the outstanding indebtedness as
may be specified by the Seattle Bank from time to time; (c) at its expense and
as soon as possible upon demand by the Seattle Bank, the Customer will assemble,
segregate and/or deliver such portions of the Security as are directed by the
Seattle Bank at or to a location designated by it; will allow the Seattle Bank
to participate in such assembly, segregation or delivery and to verify or audit
such Security, including, without limitations, access to the Customer's premises
and record for such purposes; and will protect and promptly disclose to the
Seattle Bank any material change in value of the Security so assembled,
segregated or delivered; (d) the Customer promptly will make, execute and
deliver to the Seattle Bank such assignments, listings, powers or other
documents as the Seattle Bank may reasonably request concerning the Security;
(e) at it expense, the Customer promptly will provide to the Seattle Bank such
reports, audits and confirmations regarding the Security as the Seattle Bank may
reasonably request; and (f) the Customer shall pay to the Seattle Bank any
reasonable fees associated with the processing, control, and maintenance of such
Security.
7. Upon the occurrence of any one or more of the following events
("Default"), the Seattle Bank may, without notice, declare and thereby cause all
Indebtedness of the Customer to be due and payable immediately; (a) failure of
the Customer to make any payments due on any Indebtedness, or breach of or
failure to perform any other duty as provided herein or in any other agreement
to which the Customer and the Seattle Bank are parties; (b) any taking over of
the Customer or any of its assets by a supervising agency, or an application for
or the appointment of a conservator, receiver, trustee or liquidator for it or
any of its assets; (c) an adjudication of the Customer's bankruptcy or
insolvency; (d) an assignment by the Customer for the benefit of creditors, a
general transfer of its assets for any purpose or any other form of liquidation,
merger, sale of assets or dissolution of or by the Customer; (e) existence of
facts indicating a representation, statement or warranty made or furnished to
the Seattle Bank by or on behalf of the Customer in connection with all or part
of any Indebtedness or other transaction was or is false in any material
respect; (f) damage, loss, sale or encumbrance of any of the Security except as
permitted by the Agreement; (g) any levy, seizure, garnishment (as the debtor),
execution, attachment or other process issued against the Customer; (h) any
event which results in acceleration of the maturity of any debt of the Customer
to others; (i) good faith determination by the Seattle Bank that the Customer's
ability to repay any Indebtedness has become impaired or that a material adverse
change has occurred in the financial condition of the Customer from that
disclosed to the Seattle Bank at the time of creation of any Indebtedness or
subsequently; (j) termination of the Customer's membership in the Seattle Bank;
or (k) good faith determination by the Seattle Bank that there is a reasonable
possibility that the Indebtedness would not be paid in full from the proceeds of
a liquidation of the Security if the Seattle Bank did not declare a Default.
8. At any time after Default, the Customer may not substitute Security
without permission of the Seattle Bank, and the Seattle Bank shall have all of
the rights and remedies of a secured party under the Act, the Uniform Commercial
Code of the State of Washington and/or as otherwise provided by law, by this
Agreement or by any other agreement between the parties ("Default Rights")
including, without limitation, the Seattle Bank's right to take immediate
possession of any or all Security wherever located and to dispose of the
Security in accordance with applicable law. If any notice of disposition of
Security is
51
<PAGE> 53
required by law, such notification shall be deemed reasonable and properly given
if mailed, postage prepaid, at least five calendar days before such disposition
to the last address of the Customer then appearing on the records of the Seattle
Bank. The proceeds of any disposition of Security shall be applied in the
following order to payment of: (a) all reasonable expenses incurred by or on
behalf of the Seattle Bank for the collection, care, safekeeping, sale,
foreclosure, delivery or other disposition of Security including, without
limitations, insurance, commissions, guarantees, security valuation fees,
expenses, costs and reasonable attorneys' fees incurred in connection therewith;
(b) interest on all Indebtedness, whether due or accrued; (c) the principal
amount of all Indebtedness; (d) any secondarily secured debt of the Customer to
any third party who proves its subordinate security interest in the Security to
the reasonable satisfaction of the Seattle Bank; and (e) any remainder to the
Customer. If there is a deficiency, the Customer shall be liable to the Seattle
Bank therefor. No delay by the Seattle Bank in the exercise of its Default
Rights shall operate as a waiver, and a wavier of any specific Default Right
shall not constitute a waiver of any other Default Right not specifically
waived. The Customer hereby irrevocably appoints the Seattle Bank and/or its
designee as its true and lawful attorney in fact to deal in any manner with the
Security in the event of a Default.
9. The Customer may open Accounts with the Seattle Bank subject to the
Regulations of the Seattle Bank. Any Customer's funds deposited in Accounts
shall be subject to withdrawal or charge at any time and from time to time upon
wire transfers or any other orders for the payment of money when made and drawn
on behalf of the Customer by a person or persons authorized by the Customer. The
Seattle Bank is authorized to pay any such wire transfers or other orders,
provided they are in the form prescribed by it, and to charge the Customer's
Accounts therefor, without inquiry as to the circumstances of issue or the
disposition of the proceeds, even if drawn to the individual order of any
authorized person or payable to others for his account.
10. The Seattle Bank, if it acts in good faith and with ordinary care (and
without liability if it does so act), can charge the Accounts with orders
received by the Seattle Bank from any person acting for or purporting to act for
the Customer by telephone, or otherwise orally, for the transfer of funds to
others, including the person giving such instructions or payable to others for
his account, or between Accounts of the Customer. All authorized Seattle Bank
charges and fees will be charged monthly to such Accounts.
11. The Customer shall maintain a net positive collected balance in all of
its Accounts. The Seattle Bank shall have the option of closing or restricting
the use of Accounts in which positive balances are not maintained. For each day
the aggregate collected balance of an Account is negative, the Customer shall
pay such charges as are consistent with the Seattle Bank's published schedules.
12. The Customer agrees to provide to the Seattle Bank, with five days
after a request, its business plans and other financial data. In connection
with, and as an extension of, any other informational rights of the Seattle Bank
relating to examination of the Customer by a supervising agency and reports
relating thereto, the Customer agrees that all Security shall always be subject
to audit and verification, at the Customer's expense, by or on behalf of the
Seattle Bank and that the Seattle Bank shall have access to the Customer's
premises and records for that purpose.
13. If the services of an attorney, either with or without suit, are
engaged by the Seattle Bank in connection with any Default or any dispute
relating to this Agreement, the Customer agrees to pay the Seattle Bank's
reasonable attorneys' fees, expenses and cost incurred in connection therewith.
14. This Agreement shall be construed and enforced according to the laws
of the State of Washington and the Act. I f any provision hereof is inconsistent
with the Act, this Agreement shall be deemed amended to the end that such
provision is not in conflict with the Act. In the event any such provision
cannot be so amended and is found to be contrary to law, the balance of this
Agreement shall remain in full force and effect if so elected by the Seattle
Bank.
52
<PAGE> 54
15. This Agreement shall continue until terminated by written notice from
one party to the other, provided that this Agreement shall remain applicable to
all then outstanding Indebtedness and duties of the Customer and to the
documents relating thereto.
Bank of Southern Oregon
- -------------------------
(Name of Customer)
- ---------
By John L. Anhorn President & CEO
-----------------------------------------------------
(Name) (Title)
/s/ John L. Anhorn
- ------------------------------------------------
(Signature)
Its President & CEO Date: February 1, 1999
--------------------------------------------- -----------------
(Title)
- ---------
and
By Richard Hieb EVP & COO
----------------------------------------------------
(Name)
(Title)
- ---------
/s/ Richard Hieb
- --------------------------------------------------
(Signature)
Its EVP & COO Date: February 1, 1999
------------------------------------------------ -----------------
(Title)
FEDERAL HOME LOAN BANK OF SEATTLE
By
(Name) (Title)
(Signature)
Its Date: , 199
---------------------------------------------- -------------------
53
<PAGE> 55
REPORT OF SYMONDS, EVANS & LARSON, P.C.,
INDEPENDENT AUDITORS
To the Board of Directors and
Stockholders of Bank of Southern Oregon
We have audited the accompanying consolidated balance sheet of Bank of Southern
Oregon and subsidiaries as of December 31, 1999, 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 Bank's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit. The consolidated financial
statements of Bank of Southern Oregon and subsidiary as of December 31, 1998,
and for each of the years in the two-year period then ended, were audited by
other auditors whose report dated February 26, 1999, expressed an unqualified
opinion on those statements.
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 consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated 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 1999 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Bank of
Southern Oregon and subsidiaries as of December 31, 1999, and the results of
their operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
/s/ Symonds, Evans and Larson, P.C.
January 14, 2000
Portland, Oregon
F-1
<PAGE> 56
BANK OF SOUTHERN OREGON AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
<TABLE>
<CAPTION>
ASSETS 1999 1998
------ -------------- ---------------
<S> <C> <C>
Cash and cash equivalents:
Cash and due from banks $ 7,163,535 $ 4,578,193
Interest-bearing deposits with Federal Home Loan Bank 2,851,791 14,836,932
Federal funds sold 4,900,000 10,000,000
Securities purchased under agreements to resell 498,402 1,538,900
-------------- ---------------
Total cash and cash equivalents 15,413,728 30,954,025
Investment securities available-for-sale 22,045,199 5,432,042
Interest-bearing deposit with Federal Home Loan Bank 1,000,000 6,000,000
Federal Home Loan Bank stock 3,880,700 3,604,200
Loans, net 109,628,914 96,773,354
Premises and equipment, net 6,068,916 2,907,805
Accrued interest and other assets 2,946,557 1,178,587
-------------- ---------------
Total assets $ 160,984,014 $ 146,850,013
============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Deposits:
Demand $ 28,184,424 $ 20,427,614
Interest-bearing demand 63,544,624 59,987,310
Savings 4,146,873 2,571,111
Time 44,108,291 43,643,622
-------------- ---------------
Total deposits 139,984,212 126,629,657
Federal Home Loan Bank borrowings 5,245,161 5,845,161
Accrued interest and other liabilities 997,971 531,928
-------------- ---------------
Total liabilities 146,227,344 133,006,746
Commitments and contingencies (Notes 1, 9, 15 and 18)
Stockholders' equity:
Common stock, no par value; 10,000,000 shares
authorized; 4,837,740 shares issued and
outstanding (4,798,000 in 1998) 12,451,359 12,314,260
Retained earnings 2,787,275 1,530,128
Accumulated other comprehensive loss (481,964) (1,121)
-------------- ---------------
Total stockholders' equity 14,756,670 13,843,267
-------------- ---------------
Total liabilities and stockholders' equity $ 160,984,014 $ 146,850,013
============== ===============
</TABLE>
See accompanying notes.
F-2
<PAGE> 57
BANK OF SOUTHERN OREGON AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
-------------- ------------- --------------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $ 9,489,825 $ 9,915,070 $ 9,714,686
Taxable interest on investment securities 1,126,920 476,952 563,566
Interest-bearing deposits with Federal Home Loan Bank 721,824 680,156 337,715
Federal funds sold 468,490 345,571 374,719
Dividends on Federal Home Loan Bank stock 276,666 259,850 245,386
Securities purchased under agreements to resell 32,607 48,795 23,603
-------------- ------------- --------------
Total interest income 12,116,332 11,726,394 11,259,675
Interest expense:
Deposits:
Interest-bearing demand 2,138,722 2,283,542 2,421,683
Savings 109,182 74,370 70,532
Time 2,258,864 2,470,052 1,794,487
-------------- ------------- --------------
Total interest expense on deposits 4,506,768 4,827,964 4,286,702
Interest on Federal Home Loan Bank borrowings 324,466 89,160 -
-------------- ------------- --------------
Total interest expense 4,831,234 4,917,124 4,286,702
-------------- ------------- --------------
Net interest income 7,285,098 6,809,270 6,972,973
Loan loss provision 640,000 1,652,113 1,731,000
-------------- ------------- --------------
Net interest income after loan loss provision 6,645,098 5,157,157 5,241,973
Noninterest income:
Service charges on deposit accounts 364,776 373,716 357,046
Gains on sales of investment securities, net - 114,719 34,289
Other 127,039 42,912 11,022
-------------- ------------- --------------
Total noninterest income 491,815 531,347 402,357
Noninterest expense:
Salaries and employee benefits 2,767,981 1,898,147 1,693,785
Professional fees 396,482 431,807 271,037
Equipment 337,979 287,343 165,156
Occupancy, net 219,496 138,750 134,441
Data processing 211,531 208,383 174,202
Advertising 187,818 84,015 51,669
Other 1,006,199 709,572 426,241
-------------- ------------- --------------
Total noninterest expense 5,127,486 3,758,017 2,916,531
-------------- ------------- --------------
Income before income taxes 2,009,427 1,930,487 2,727,799
Provision for income taxes 768,000 748,000 986,000
-------------- ------------- --------------
Net income $ 1,241,427 $ 1,182,487 $ 1,741,799
============== ============= ==============
Earnings per common share:
Basic $ 0.26 $ 0.25 $ 0.37
============== ============= ==============
Diluted $ 0.25 $ 0.24 $ 0.36
============== ============= ==============
</TABLE>
See accompanying notes.
F-3
<PAGE> 58
BANK OF SOUTHERN OREGON AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Accumulated
other Total
Number of Comprehensive Common Retained comprehensive stockholders'
Shares Income (Loss) Stock Earnings Loss Equity
-------------- --------------- --------- -------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balances at January 1, 1997 782,920 $ 9,799,601 $ 648,200 $ - $ 10,447,801
Net income and comprehensive income - $ 1,741,799 - 1,741,799 - 1,741,799
=============
1,741,799
Two-for-one stock split 782,920 - - - -
Amortization of stock
compensation - - 36,044 - 36,044
Transfer - 2,100,000 (2,100,000) - -
-------------- ------------- ------------- ------------- -------------
Balances at December 31, 1997 1,565,840 11,899,601 326,043 - 12,225,644
Comprehensive income:
Net income - $ 1,182,487 - 1,182,487 - 1,182,487
Other comprehensive loss -
Unrealized holding gains
arising during the period
on investment securities
of approximately $69,000
(net of income taxes of
approximately $44,000) net
of reclassification
adjustment for gains
included in net income of
approximately $70,000 (net
of income taxes of
approximately $44,000) - (1,121) - - (1,121) (1,121)
-------------
Comprehensive income - $ 1,181,366 - - - -
=============
Three-for-one stock split 3,131,680 - - - -
Amortization of stock
compensation - - 21,598 - 21,598
Stock options exercised 100,480 96,133 - - 96,133
Income tax benefit of
stock options exercised - 318,526 - - 318,526
-------------- ------------- ------------- ------------- -------------
Balances at December 31, 1998 4,798,000 12,314,260 1,530,128 (1,121) 13,843,267
Comprehensive income:
Net income - $ 1,241,427 - 1,241,427 - 1,241,427
Other comprehensive loss -
unrealized losses on investment
securities available-for-sale,
net of income taxes of
approximately $299,000 - (480,843) - - (480,843) (480,843)
-------------
Comprehensive income - $ 760,584 - - - -
=============
Amortization of stock
compensation - - 15,720 - 15,720
Stock options exercised 39,740 42,505 - - 42,505
Income tax benefit of stock
options exercised - 94,594 - - 94,594
-------------- ------------- ------------- ------------- -------------
Balances at December 31, 1999 4,837,740 $ 12,451,359 $ 2,787,275 $ (481,964) $ 14,756,670
============== ============= ============= ============= =============
</TABLE>
See accompanying notes.
F-4
<PAGE> 59
BANK OF SOUTHERN OREGON AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
-------------- ------------- ---------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 1,241,427 $ 1,182,487 $ 1,741,799
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 313,452 205,917 166,846
Amortization of premium (accretion of discount)
on investment securities, net (105,898) (100,655) 33,323
Dividends on Federal Home Loan Bank stock (276,500) (259,850) (245,386)
Loan loss provision 640,000 1,652,113 1,731,000
Gains on sales of investment securities, net - (114,719) (34,289)
Provision (credit) for deferred income taxes (244,688) (316,102) 71,134
Amortization of deferred compensation 15,720 21,598 36,044
Decrease (increase) in accrued interest and other assets 6,456 935,134 (934,226)
Increase (decrease) in accrued interest and other liabilities 466,043 63,977 (194,230)
--------------- ------------- --------------
Net cash provided by operating activities 2,056,012 3,269,900 2,372,015
Cash flows from investing activities:
Purchases of investment securities (22,777,602) (10,194,995) (596,094)
Proceeds from maturities of investment securities 5,490,000 - 1,000,000
Proceeds from sales of investment securities - 11,564,017 1,946,449
Decrease (increase) in interest-bearing deposit with
Federal Home Loan Bank 5,000,000 (6,000,000) -
Loan originations, net (14,631,204) (7,425,703) (7,497,788)
Purchases of premises and equipment, net (3,474,563) (392,313) (138,235)
--------------- ------------- --------------
Net cash used in investing activities (30,393,369) (12,448,994) (5,285,668)
Cash flows from financing activities:
Net increase in deposits 13,354,555 6,888,732 11,335,266
Net borrowings from (payments to) Federal Home Loan Bank (600,000) 5,845,161 -
Proceeds from exercise of stock options 42,505 96,133 -
-------------- ------------- --------------
Net cash provided by financing activities 12,797,060 12,830,026 11,335,266
-------------- ------------- --------------
Increase (decrease) in cash and cash equivalents (15,540,297) 3,650,932 8,421,613
Cash and cash equivalents at beginning of the year 30,954,025 27,303,093 18,881,480
-------------- ------------- --------------
Cash and cash equivalents at end of the year $ 15,413,728 $ 30,954,025 $ 27,303,093
============== ============= ==============
</TABLE>
See accompanying notes.
F-5
<PAGE> 60
BANK OF SOUTHERN OREGON AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts
of Bank of Southern Oregon, and its wholly-owned subsidiaries, McAndrews
Commercial Property, Inc. (McAndrews) and PremierWest Bancorp
(PremierWest) (collectively, "the Bank"). McAndrews owns certain bank
premises. PremierWest was organized effective November 26, 1999 to become
the holding company of Bank of Southern Oregon. Management expects that
during the second quarter of 2000 there will be a direct share exchange
between Bank of Southern Oregon and PremierWest, whereby PremierWest will
become the holding company for Bank of Southern Oregon and McAndrews. (In
addition, see Note 18 regarding the pending merger with United Bancorp.)
All significant intercompany accounts and transactions have been
eliminated in consolidation.
DESCRIPTION OF BUSINESS
The Bank conducts a general banking business and primarily operates in
one business segment. Its activities include the usual lending and
deposit functions of a commercial bank: commercial, real estate,
installment and mortgage loans; checking and savings accounts; automated
teller machines (ATMs) and safe deposit facilities.
METHOD OF ACCOUNTING
The Bank prepares its consolidated financial statements in conformity
with generally accepted accounting principles and prevailing practices
within the banking industry. The Bank utilizes the accrual method of
accounting which recognizes income when earned and expenses when
incurred. The preparation of consolidated financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, the disclosure of contingent assets
and liabilities at the date of the consolidated financial statements, and
the reported amounts of income and expenses during the reporting periods.
Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand, amounts due from banks, interest-bearing deposits with
Federal Home Loan Bank, federal funds sold (which are generally sold for
one-day periods) and securities purchased under agreements to resell.
F-6
<PAGE> 61
BANK OF SOUTHERN OREGON AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Securities purchased under agreements to resell are generally overnight
investments fully collateralized by U.S. government securities.
The Bank maintains balances in correspondent bank accounts which, at
times, may exceed federally insured limits. Management believes that its
risk of loss associated with such balances is minimal due to the
financial strength of the correspondent banks. The Bank has not
experienced any losses in such accounts.
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
During 1999 and 1998, noncash transactions resulted from unrealized
losses on investment securities available-for-sale, net of income taxes
and the income tax benefit of stock options exercised, as disclosed in
the accompanying consolidated statements of changes in stockholders'
equity. In addition, noncash transactions related to transfers of loans
to other real estate totaled approximately $1,136,000, $73,000 and
$257,000 for the years ended December 31, 1999, 1998 and 1997,
respectively.
During 1999, 1998 and 1997, the Bank paid approximately $4,834,000,
$4,950,000 and $4,219,000, respectively, in interest expense.
INVESTMENT SECURITIES
Investment securities that management has the positive intent and ability
to hold to maturity are classified as held-to-maturity securities and
reported at cost, adjusted for premiums and discounts that are recognized
in interest income using the interest method over the period to maturity.
Investment securities that are purchased and held principally for the
purpose of selling them in the near term are classified as trading
securities and are reported at fair value, with unrealized gains and
losses included in noninterest income. The Bank had no trading securities
as of December 31, 1999 or 1998.
Investment securities that are not classified as either held-to-maturity
securities or trading securities are classified as available-for-sale
securities and are reported at fair value, with unrealized gains and
losses excluded from earnings and reported as other comprehensive income
or loss, net of income taxes.
F-7
<PAGE> 62
BANK OF SOUTHERN OREGON AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Gains or losses on the sale of available-for-sale securities are
determined using the specific-identification method. Premiums and
discounts on available-for-sale securities are recognized in interest
income using the interest method over the period to maturity.
Declines in the fair value of individual held-to-maturity and
available-for-sale securities below their cost that are other than
temporary would result in write-downs of the individual securities to
their fair value. The related write-downs would be included in earnings
as realized losses.
FEDERAL HOME LOAN BANK STOCK
The Bank's investment in Federal Home Loan Bank (FHLB) stock is carried
at par value, which approximates fair value. As a member of the FHLB
system, the Bank is required to maintain a minimum level of investment in
FHLB stock based on specific percentages of its outstanding mortgages,
total assets or FHLB advances. At December 31, 1999, the Bank's minimum
required investment was approximately $483,000. The Bank may request
redemption at par value of any FHLB stock in excess of the minimum
required investment. Stock redemptions are at the discretion of FHLB.
LOANS
Loans are stated at the amount of unpaid principal, reduced by any
deferred loan fees and reserve for loan losses. The reserve for loan
losses represents management's recognition of the assumed risks of
extending credit and the quality of the existing loan portfolio. The
reserve is established to absorb known and inherent losses in the loan
portfolio as of the balance sheet date. The reserve is maintained at a
level considered adequate to provide for probable loan losses based on
management's assessment of various factors affecting the portfolio. Such
factors include historical loss experience; review of problem loans;
underlying collateral values and guaranties; current economic conditions;
legal representation regarding the outcome of pending legal action for
collection of loans and related loan guaranties; and an overall
evaluation of the quality, risk characteristics and concentration of
loans in the portfolio. The reserve is based on estimates, and ultimate
losses may vary from the current estimates. These estimates are reviewed
periodically, and, as adjustments become necessary, they are reported in
earnings in the periods in which they become known. The reserve is
increased by provisions charged to operations and reduced by loans
charged-off, net of recoveries.
F-8
<PAGE> 63
BANK OF SOUTHERN OREGON AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
The Bank considers loans to be impaired when management believes that it
is probable that all amounts due will not be collected according to the
contractual terms. An impaired loan must be valued using the present
value of expected future cash flows discounted at the loan's effective
interest rate, the loan's observable market price or the estimated fair
value of the loan's underlying collateral or related guaranty. The Bank
primarily measures impairment on all large balance nonaccrual loans
(typically commercial and commercial real estate loans) based on the
estimated fair value of the underlying collateral or related guaranty. In
certain other cases, impairment is measured based on the present value of
expected future cash flows discounted at the loan's effective interest
rate. Amounts deemed impaired are either specifically allocated for in
the reserve for loan losses or reflected as a partial charge-off of the
loan balance. Smaller balance homogeneous loans (typically installment
loans) are collectively evaluated for impairment. Accordingly, the Bank
does not separately identify individual installment loans for impairment
disclosures. Generally, the Bank evaluates a loan for impairment when it
is placed on nonaccrual status. All of the Bank's impaired loans at
December 31, 1999 and 1998 were on nonaccrual status.
The accrual of interest on impaired loans is discontinued when, in
management's opinion, the borrower may be unable to make payments as they
become due. When interest accrual is discontinued, all unpaid accrued
interest is reversed. Interest income is subsequently recognized only to
the extent cash payments are received.
Loan origination and commitment fees, net of certain direct loan
origination costs, are generally recognized as an adjustment of the yield
of the related loan.
Interest income on all loans is accrued as earned on the simple interest
method.
Various regulatory agencies, as an integral part of their examination
process, periodically review the Bank's reserve for loan losses. Such
agencies may require the Bank to recognize additions to the reserve based
on their judgment of the information available to them at the time of
their examinations.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost, less accumulated depreciation.
Depreciation on premises and equipment is computed on the straight-line
method over the estimated useful lives of the assets.
F-9
<PAGE> 64
BANK OF SOUTHERN OREGON AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
OTHER REAL ESTATE
Other real estate, acquired through foreclosure or deeds in lieu of
foreclosure, is carried at the lower of cost or estimated net realizable
value. When the property is acquired, any excess of the loan balance over
the estimated net realizable value is charged to the reserve for loan
losses. Holding costs, subsequent write-downs to net realizable value, if
any, or any disposition gains or losses are included in noninterest
income and expense. Other real estate at December 31, 1999 and 1998
totaled approximately $1,209,000 and $73,000, respectively.
STOCKHOLDERS' EQUITY
The Bank, as a state-chartered bank, is prohibited from declaring or
paying any dividend in an amount greater than retained earnings.
During 1998 and 1997, the Bank declared stock splits. Basic and diluted
earnings per common share (see Note 11) and the stock option plan
information (see Note 14) have been adjusted to give retroactive effect
to the stock splits.
ADVERTISING
Advertising costs are generally charged to expense during the year in
which they are incurred.
INCOME TAXES
Deferred tax assets and liabilities are reflected at currently enacted
income tax rates applicable to the period in which the deferred tax
assets or liabilities are expected to be realized or settled. As changes
in tax laws or rates are enacted, deferred tax assets and liabilities are
adjusted through the provision for income taxes.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1999, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 137 (SFAS No. 137),
"Accounting for Derivative Instruments and Hedging Activities-Deferral of
the Effective Date of FASB Statement No. 133," an amendment of SFAS No.
133, which establishes accounting and reporting
F-10
<PAGE> 65
BANK OF SOUTHERN OREGON AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
standards for derivative instruments and hedging activities and requires
that an entity recognize all derivatives as either assets or liabilities
in the balance sheet and measure those instruments at fair value. SFAS
No. 133, as amended by SFAS No. 137, is effective for all quarterly and
annual financial statements of fiscal years beginning after June 15,
2000. The Bank had no significant derivatives as of December 31, 1999,
nor does the Bank engage in any hedging activities. Accordingly, the Bank
does not anticipate that the adoption of SFAS No. 133, as amended by SFAS
No. 137, will have a material effect on its consolidated financial
position or results of operations.
RECLASSIFICATIONS
Certain amounts in 1998 and 1997 have been reclassified to conform with
the 1999 presentation.
2. CASH AND DUE FROM BANKS
The Bank is required to maintain an average reserve balance
(approximately $600,000 and $683,000 at December 31, 1999 and 1998,
respectively) with the Federal Reserve Bank or maintain such reserve
balance in the form of cash. This requirement was met by holding cash and
maintaining an average reserve balance with the Federal Reserve Bank in
excess of this amount.
3. INVESTMENT SECURITIES AVAILABLE-FOR-SALE
Investment securities available-for-sale at December 31, 1999 and 1998
consisted of the following:
<TABLE>
<CAPTION>
Gross Gross
Amortized unrealized unrealized Estimated
cost gains losses fair value
---------------- --------------- ---------------- ----------------
<S> <C> <C> <C> <C>
1999
U.S. Government agency
securities $ 22,826,663 $ - $ (781,464) $ 22,045,199
================ =============== ================ ================
1998
U.S. Treasury securities $ 2,378,622 $ 216 $ - $ 2,378,838
FHLB Agency Bond 3,054,541 - (1,337) 3,053,204
---------------- --------------- ---------------- ----------------
$ 5,433,163 $ 216 $ (1,337) $ 5,432,042
================ =============== ================ ================
</TABLE>
F-11
<PAGE> 66
BANK OF SOUTHERN OREGON AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
3. INVESTMENT SECURITIES AVAILABLE-FOR-SALE (CONTINUED)
No gains or losses were realized on sales of investment securities in
1999. Gross gains of approximately $129,000 and gross losses of
approximately $14,000 were realized on sales of investment securities in
1998. Gross gains of approximately $34,000 were realized on sales of
investment securities in 1997. There were no gross losses on sales of
investment securities in 1997. The provision for income taxes applicable
to the net gains on sales of investment securities was approximately
$44,000 and $12,000 in 1998 and 1997, respectively.
Investment securities available-for-sale with an estimated fair value of
approximately $4,656,000 and $5,432,000 at December 31, 1999 and 1998,
respectively, were pledged to secure public deposits and for other
purposes as required or permitted by law. In addition, an investment
security available-for-sale with an estimated fair value of approximately
$5,066,000 was pledged to secure FHLB borrowings as of December 31, 1999
(see Note 8).
All investment securities available-for-sale at December 31, 1999 are due
after one year through five years. However, expected maturities will
differ from contractual maturities, because borrowers may have the right
to call or prepay obligations with or without call or prepayment
penalties.
4. LOANS
Loans at December 31, 1999 and 1998 consisted of the following:
<TABLE>
<CAPTION>
1999 1998
------------------ ------------------
<S> <C> <C>
Commercial $ 22,303,499 $ 30,599,262
Real estate - construction 25,415,581 24,879,565
Real estate - other 60,757,825 39,036,714
Consumer installment 3,590,884 4,419,803
Other 442,494 582,179
------------------ ------------------
112,510,283 99,517,523
Less:
Reserve for loan losses 2,396,495 2,278,171
Deferred loan fees 484,874 465,998
------------------ ------------------
2,881,369 2,744,169
------------------ ------------------
Loans, net $ 109,628,914 $ 96,773,354
================== ==================
</TABLE>
F-12
<PAGE> 67
BANK OF SOUTHERN OREGON AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
4. LOANS (CONTINUED)
As of December 31, 1999 and 1998, the Bank's market area consisted
principally of Jackson County, Oregon and, to a lesser extent, Josephine
County, Oregon. A substantial portion of the Bank's loans are
collateralized by real estate in this geographic area and, accordingly,
the ultimate collectibility of a substantial portion of the Bank's loan
portfolio is susceptible to changes in the local market conditions.
5. RESERVE FOR LOAN LOSSES
Transactions in the reserve for loan losses for the years ended December
31, 1999, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------------- ------------------ ------------------
<S> <C> <C> <C>
Balance at beginning of year $ 2,278,171 $ 1,078,698 $ 936,175
Loan loss provision 640,000 1,652,113 1,731,000
Loans charged-off (740,155) (559,356) (1,616,023)
Recoveries of loans previously
charged-off 218,479 106,716 27,546
----------------- ----------------- ------------------
Balance at end of year $ 2,396,495 $ 2,278,171 $ 1,078,698
================= ================= ==================
</TABLE>
At December 31, 1999 and 1998, the Bank had approximately $2,772,000 and
$4,946,000, respectively, in impaired loans. Of these impaired loans,
approximately $2,772,000 and $4,809,000 had a related valuation allowance
of approximately $836,000 and $973,000, respectively. The average
recorded investment in impaired loans for 1999, 1998 and 1997 was
approximately $4,113,000, $7,200,000 and $2,250,000, respectively.
Interest income recognized on impaired loans in 1999, 1998 and 1997 was
insignificant.
Loans on nonaccrual status at December 31, 1999 and 1998 were
approximately $2,772,000 and $4,946,000, respectively. Interest income
which would have been realized on nonaccrual loans had they remained
current was approximately $410,000, $720,000 and $250,000 during 1999,
1998 and 1997, respectively. Loans contractually past due 90 days or more
on which the Bank continued to accrue interest at December 31, 1999 and
1998 were insignificant. As of December 31, 1999 and 1998, there were no
commitments to lend additional funds to borrowers whose loans had been
modified.
F-13
<PAGE> 68
BANK OF SOUTHERN OREGON AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
6. PREMISES AND EQUIPMENT
Premises and equipment at December 31, 1999 and 1998 consisted of the
following:
<TABLE>
<CAPTION>
1999 1998
------------------ -------------------
<S> <C> <C>
Land $ 1,440,151 $ 857,651
Land improvements 230,644 226,385
Buildings 3,405,360 1,423,062
Furniture and equipment 2,119,216 1,349,031
------------------ ------------------
7,195,371 3,856,129
Less accumulated depreciation 1,126,455 948,324
------------------ ------------------
Premises and equipment, net $ 6,068,916 $ 2,907,805
================== ==================
</TABLE>
7. TIME CERTIFICATES OF DEPOSIT
Time certificates of deposit in excess of $100,000 aggregated
approximately $14,560,000 and $14,556,000 at December 31, 1999 and 1998,
respectively. Interest expense on time certificates of deposit in excess
of $100,000 was approximately $655,000, $852,000 and $580,000 in 1999,
1998 and 1997, respectively.
At December 31, 1999, the scheduled annual maturities of all time
certificates of deposit were approximately as follows:
2000 $ 34,508,000
2001 8,073,000
2002 1,081,000
2003 231,000
2004 212,000
Thereafter 3,000
----------------
$ 44,108,000
================
F-14
<PAGE> 69
BANK OF SOUTHERN OREGON AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
8. BORROWING AGREEMENTS
The Bank participates in the Cash Management Advance Program (the
Program) with FHLB. Under the Program, the Bank has available borrowings
of approximately $10,800,000 as of December 31, 1999, with interest at
FHLB's cash management rate. Borrowings outstanding under the Program are
collateralized by a blanket pledge agreement on FHLB stock, any funds on
deposit with FHLB, investment securities and loans.
On August 28, 1998, the Bank borrowed $6,000,000 from FHLB under a
promissory note agreement. The promissory note is due August 28, 2008,
and the Bank is required to make monthly principal payments of $50,000,
plus interest at a fixed rate of 5.82%. The amount of the promissory note
outstanding as of December 31, 1999 and 1998, was $5,245,161 and
$5,845,161, respectively. As of December 31, 1999, an interest-bearing
deposit with FHLB of $1,000,000 and an investment security
available-for-sale with an estimated fair value of approximately
$5,066,000 were pledged as collateral for the promissory note. As of
December 31, 1998, an interest-bearing deposit with FHLB of $6,000,000
was pledged as collateral for the promissory note.
The Bank also maintains federal funds lines with correspondent banks as a
back-up source of liquidity. As of December 31, 1999, the Bank had
approximately $4,000,000 of federal funds lines available to draw against
on an uncollateralized basis.
9. OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
In the normal course of business, the Bank is a party to financial
instruments with off-balance sheet risk to meet the financing needs of
its customers. These financial instruments include commitments to extend
credit and standby letters of credit. These instruments involve, to
varying degrees, elements of credit and interest-rate risk in excess of
amounts recognized in the accompanying consolidated balance sheets. The
contract amounts of these instruments reflect the extent of the Bank's
involvement in these particular classes of financial instruments. As of
December 31, 1999 and 1998, the Bank held no significant derivative
financial instruments.
The Bank'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 is represented by the contractual amount of
those instruments. The Bank uses the same credit policies in making
commitments and conditional obligations as it does for on-balance sheet
instruments. The distribution of commitments to extend credit
approximates the distribution of loans outstanding.
F-15
<PAGE> 70
BANK OF SOUTHERN OREGON AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
9. OFF-BALANCE SHEET FINANCIAL INSTRUMENTS (CONTINUED)
A summary of the Bank's off-balance sheet financial instruments at
December 31, 1999 and 1998 is approximately as follows:
<TABLE>
<CAPTION>
1999 1998
------------------ ------------------
<S> <C> <C>
Commitments to extend credit $ 30,666,000 $ 18,914,000
Standby letters of credit 1,286,000 1,841,000
------------------ ------------------
Total off-balance sheet financial instruments $ 31,952,000 $ 20,755,000
================== ==================
</TABLE>
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 fees. Since many of the commitments
are expected to expire without being drawn upon, the total commitment
amounts do not necessarily represent future cash requirements. The Bank
evaluates each customer's creditworthiness on a case-by-case basis. The
amount of collateral obtained, if it is deemed necessary by the Bank upon
extension of credit, is based on management's credit evaluation of the
counterparty. Collateral held for other commitments varies but may
include accounts receivable, inventory, property and equipment and
income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the Bank
to guaranty the performance of a customer to a third party. These
guaranties are primarily issued to support public and private borrowing
arrangements. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to
customers. Collateral held, if any, varies as specified above.
10. INCOME TAXES
The provision (credit) for income taxes for the years ended December 31,
1999, 1998 and 1997 was approximately as follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------------- ------------------ ------------------
<S> <C> <C> <C>
Current:
Federal $ 878,345 $ 880,400 $ 822,200
State 134,343 183,702 92,666
----------------- ------------------ ------------------
1,012,688 1,064,102 914,866
Deferred (244,688) (316,102) 71,134
----------------- ------------------ ------------------
Provision for income taxes $ 768,000 $ 748,000 $ 986,000
================= ================== ==================
</TABLE>
F-16
<PAGE> 71
BANK OF SOUTHERN OREGON AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
10. INCOME TAXES (CONTINUED)
The provision for income taxes results in effective tax rates which are
different than the federal income tax statutory rate. The nature of the
differences for the years ended December 31, 1999, 1998 and 1997 were
approximately as follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------------- ------------------ ------------------
<S> <C> <C> <C>
Expected federal income tax at statutory
rate of 34% $ 683,200 $ 656,400 $ 927,500
State income taxes, net of federal effect 88,400 84,900 66,100
Other, net (3,600) 6,700 (7,600)
----------------- ------------------ ------------------
Provision for income taxes $ 768,000 $ 748,000 $ 986,000
================= ================== ==================
</TABLE>
The components of the net deferred tax assets and liabilities at December
31, 1999 and 1998 were approximately as follows:
<TABLE>
<CAPTION>
1999 1998
------------------ ------------------
<S> <C> <C>
Assets:
Loan loss provision $ 568,000 $ 477,000
Net unrealized losses on investment
securities available-for-sale 300,000 -
Other 23,000 29,000
------------------ ------------------
Total deferred tax assets 891,000 506,000
Liabilities:
FHLB stock dividends 307,000 204,000
Accumulated depreciation 110,000 92,000
------------------ ------------------
Total deferred tax liabilities 417,000 296,000
------------------ ------------------
Net deferred tax assets $ 474,000 $ 210,000
================== ==================
</TABLE>
Management believes, primarily based upon the Bank's historical
performance, that the net deferred tax assets will be recognized in the
normal course of operations and, accordingly, management has not reduced
net deferred tax assets by a valuation allowance.
The Bank made income tax payments of approximately $633,000, $305,000 and
$1,460,000 during 1999, 1998 and 1997, respectively.
F-17
<PAGE> 72
BANK OF SOUTHERN OREGON AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
11. BASIC AND DILUTED EARNINGS PER COMMON SHARE
The Bank's basic earnings per common share are computed by dividing net
income by the weighted-average number of common shares outstanding during
the period. The Bank's diluted earnings per common share is computed by
dividing net income by the weighted-average number of common shares
outstanding plus dilutive common shares related to stock options.
The numerators and denominators used in computing basic and diluted
earnings per common share for the years ended December 31, 1999, 1998 and
1997 can be reconciled as follows:
<TABLE>
<CAPTION>
Net
income Shares Per-share
(numerator) (denominator) amount
-------------- ------------- ----------
<S> <C> <C> <C>
1999
----
Basic earnings per common share -
Income available to common stockholders $ 1,241,427 4,815,612 $ 0.26
==============
Effect of assumed conversion of stock options - 149,469
-------------- -------------
Diluted earnings per common share $ 1,241,427 4,965,081 $ 0.25
============== ============= ==============
1998
----
Basic earnings per common share -
Income available to common stockholders $ 1,182,487 4,747,760 $ 0.25
==============
Effect of assumed conversion of stock options - 238,048
-------------- -------------
Diluted earnings per common share $ 1,182,487 4,985,808 $ 0.24
============== ============= ==============
1997
----
Basic earnings per common share -
Income available to common stockholders $ 1,741,799 4,697,520 $ 0.37
==============
Effect of assumed conversion of stock options - 198,967
-------------- -------------
Diluted earnings per common share $ 1,741,799 4,896,487 $ 0.36
============== ============= ==============
</TABLE>
12. TRANSACTIONS WITH RELATED PARTIES
Some of the officers and directors (and the companies with which they are
associated) are customers of, and have had banking transactions with, the
Bank in the ordinary course of the Bank's business. In addition, the Bank
expects to continue to have such banking
F-18
<PAGE> 73
BANK OF SOUTHERN OREGON AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
12. TRANSACTIONS WITH RELATED PARTIES
transactions in the future. All loans and commitments to loan to such
parties are generally made on the same terms, including interest rates
and collateral, as those prevailing at the time for comparable
transactions with other persons. In the opinion of management, these
transactions do not involve more than the normal risk of collectibility
or present any other unfavorable features.
An analysis of activity with respect to loans to directors and officers
of the Bank for the year ended December 31, 1999 was as follows:
Balance at December 31, 1998 $ 3,659,664
Additions 3,492,519
Repayments (2,590,865)
------------------
Balance at December 31, 1999 $ 4,561,318
==================
13. 401(K) PROFIT SHARING PLAN
The Bank maintains a 401(k) profit sharing plan (the Plan) that covers
substantially all full-time employees over 18 years of age. Employees may
make voluntary tax-deferred contributions to the Plan, and Bank
contributions to the Plan are at the discretion of the Bank's Board of
Directors (the Board), not to exceed the amount deductible for federal
income tax purposes. Employees vest in the Bank's contributions over a
period of seven years. Bank contributions to the Plan which were charged
to operations were approximately $45,000, $32,000 and $69,000 for the
years ended December 31, 1999, 1998 and 1997, respectively.
14. STOCK OPTION PLAN
The Bank has a stock option plan (the Stock Option Plan), whereby the
Bank may grant Incentive Stock Options (ISOs) and Non-qualified Stock
Options (NSOs).
The option price of ISOs is the fair market value of the Bank's common
stock at the date of grant. The option price of NSOs must be at least
equal to the book value per share of the Bank's common stock at the date
of the Bank's most recently completed fiscal year. All options generally
expire in ten years if not exercised; however, the Board has the right to
suspend or terminate the Stock Option Plan at any time, except with
respect to the remaining options outstanding.
F-19
<PAGE> 74
BANK OF SOUTHERN OREGON AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
14. STOCK OPTION PLAN (CONTINUED)
SFAS No. 123, "Accounting for Stock-Based Compensation," (SFAS No. 123)
requires companies, such as the Bank, that use the intrinsic value method
to account for employee stock options to provide pro forma disclosures of
the net income and earnings per share effect of applying the fair
value-based method of accounting for stock options. The effect of
applying the fair value-based method to stock options granted in the
years ended December 31, 1999 and 1998 resulted in an estimated
weighted-average grant date fair value of $4.22 and $2.40, respectively.
There were no stock options granted in 1997. Had compensation cost been
determined based on the fair value of the options at the date of grant,
the Bank's proforma net income, pro forma basic earnings per common share
and pro forma diluted earnings per common share would have been as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------------- ------------- --------------
<S> <C> <C> <C>
Net income As reported $ 1,241,427 $ 1,182,487 $ 1,741,799
Pro forma 1,160,393 1,089,884 1,730,366
Basic earnings per common share As reported $ 0.26 $ 0.25 $ 0.37
Pro forma 0.24 0.23 0.37
Diluted earnings per common share As reported $ 0.25 $ 0.24 $ 0.36
Pro forma 0.23 0.22 0.35
</TABLE>
The Bank used the Black-Scholes option-pricing model with the following
weighted-average assumptions to value options granted:
<TABLE>
<CAPTION>
1999 1998
------------- ---------
<S> <C> <C>
Dividend yield 0% 0%
Expected volatility 37.0% 27.9%
Risk-free interest rate 6.3% 4.6%
Expected option lives 7 years 5 years
</TABLE>
Because SFAS No. 123 is applicable only to options granted subsequent to
December 31, 1994, the proforma effects for 1999, 1998 and 1997 may not
be representative of the effects on reported results in future years.
F-20
<PAGE> 75
BANK OF SOUTHERN OREGON AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
14. STOCK OPTION PLAN (CONTINUED)
At December 31, 1999, 163,230 shares reserved under the Stock Option Plan
were available for future grant. Activity related to the Stock Option
Plan for the years ended December 31, 1999, 1998 and 1997 was as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------------------ ------------------------ -------------------------
Weighted Weighted Weighted
average average average
Options exercise Options exercise Options exercise
outstanding price outstanding price outstanding price
----------- ----------- ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning
of year 361,240 $ 4.14 311,220 $ 0.99 315,420 $ 1.00
Granted 25,000 8.25 156,260 8.20 - -
Exercised (39,740) 1.07 (100,480) 0.86 - -
Forfeited (2,700) 4.73 (5,760) 1.47 (4,200) 1.07
----------- ----------- -----------
Balance at end of year 343,800 $ 4.79 361,240 $ 4.14 311,220 $ 0.99
=========== =========== =========== =========== =========== ===========
</TABLE>
Compensation expense for NSOs is recognized over the vesting period based
on the difference between the option price and the fair value of the
stock options at the date of grant. Compensation expense for the years
ended December 31, 1999, 1998 and 1997 was approximately $16,000, $22,000
and $36,000, respectively.
Information regarding the number, weighted-average exercise price and
weighted-average remaining contractual life of options by range of
exercise price at December 31, 1999 is as follows:
<TABLE>
<CAPTION>
Options Outstanding Exercisable Options
-------------------------------------------- ----------------------------
Weighted-
Weighted- average Weighted-
average remaining average
Exercise Number of exercise contractual Number of exercise
price range options price life (years) options price
------------------ ------------- -------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
$ 0.81 84,000 $ 0.81 2 84,000 $ 0.81
1.07 56,220 1.07 4 56,220 1.07
1.75 23,820 1.75 6 11,412 1.75
7.12 4,760 7.12 8 952 7.12
8.25 175,000 8.25 8 - 8.25
------------- -------------
343,800 $ 4.79 5.8 152,584 $ 1.02
============= ============== ===== ============= =============
</TABLE>
Exercisable options as of December 31, 1998 and 1997 totaled 172,052 and
248,724, respectively.
F-21
<PAGE> 76
BANK OF SOUTHERN OREGON AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
15. CONTINGENCIES
In the ordinary course of business, the Bank becomes involved in various
litigation arising from normal banking activities. In the opinion of
management, the ultimate disposition of these actions will not have a
material adverse effect on the Bank's consolidated financial position or
results of operations at December 31, 1999.
16. ESTIMATED FAIR VALUES OF FINANCIAL INSTRUMENTS
The following disclosures are made in accordance with the provisions of
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments"
(SFAS No. 107), which requires the disclosure of fair value information
about financial instruments where it is practicable to estimate that
value.
In cases where quoted market values are not available, the Bank primarily
uses present value techniques to estimate the fair values of its
financial instruments. Valuation methods require considerable judgment,
and the resulting estimates of fair value can be significantly affected
by the assumptions made and methods used. Accordingly, the estimates
provided herein do not necessarily indicate amounts which could be
realized in a current market exchange.
In addition, as the Bank normally intends to hold the majority of its
financial instruments until maturity, it does not expect to realize many
of the estimated amounts disclosed. The disclosures also do not include
estimated fair value amounts for items which are not defined as financial
instruments but which have significant value. These include such
off-balance sheet items as core deposit intangibles. The Bank does not
believe that it would be practicable to estimate a representational fair
value for these types of items as of December 31, 1999 and 1998.
Because SFAS No. 107 excludes certain financial instruments and all
nonfinancial instruments from its disclosure requirements, any
aggregation of the fair value amounts presented would not represent the
underlying value of the Bank.
The Bank used the following methods and assumptions to estimate the fair
value of its financial instruments:
CASH AND CASH EQUIVALENTS: The carrying amount approximates the
estimated fair value of these instruments.
F-22
<PAGE> 77
BANK OF SOUTHERN OREGON AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
16. ESTIMATED FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
INVESTMENT SECURITIES AVAILABLE-FOR-SALE: The market value of
investment securities available-for-sale, which is based on quoted
market values or the market values for comparable securities,
represents estimated fair value.
INTEREST-BEARING DEPOSIT WITH FHLB: The carrying amount approximates
the estimated fair value.
FHLB STOCK: The carrying amount approximates the estimated fair
value.
LOANS: The estimated fair value of loans is calculated by discounting
the contractual cash flows of the loans using December 31, 1999 and
1998 origination rates. The resulting amounts are adjusted to
estimate the effect of changes in the credit quality of borrowers
since the loans were originated.
DEPOSITS: The estimated fair value of demand deposits, consisting of
checking, savings and certain interest-bearing demand deposit
accounts, is represented by the amounts payable on demand. The
estimated fair value of certificates of deposit is calculated by
discounting the scheduled cash flows using the December 31, 1999 and
1998 rates offered on these instruments.
FHLB BORROWINGS: The estimated fair value of FHLB borrowings is
calculated by discounting the scheduled cash flows using quoted rates
from FHLB as of December 31, 1999 and 1998.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS: The estimated fair value of
off-balance sheet financial instruments (primarily commitments to
extend credit) is determined based on fees currently charged for
similar commitments. Management estimates that these fees approximate
$230,000 and $142,000 as of December 31, 1999 and 1998, respectively.
F-23
<PAGE> 78
BANK OF SOUTHERN OREGON AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
16. ESTIMATED FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
The estimated fair values of the Bank's significant on-balance sheet
financial instruments at December 31, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
1999 1998
---------------------------------- -----------------------------------
Carrying Estimated Carrying Estimated
value fair value value fair value
---------------- --------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 15,413,728 $ 15,414,000 $ 30,954,025 $ 30,954,000
Investment securities
available-for-sale 22,045,199 22,045,000 5,432,042 5,432,000
Interest-bearing deposit with
FHLB 1,000,000 996,000 6,000,000 6,000,000
FHLB stock 3,880,700 3,881,000 3,604,200 3,604,000
Loans, net 109,628,914 109,357,000 96,773,354 98,065,000
Financial liabilities:
Deposits 139,984,212 139,956,000 126,629,657 124,959,000
FHLB borrowings 5,245,161 4,990,000 5,845,161 5,845,000
</TABLE>
17. REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory - and possibly
additional discretionary - actions by regulators that, if undertaken,
could have a direct material effect on the Bank's consolidated financial
statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of assets,
liabilities and certain off-balance sheet items as calculated under
regulatory accounting practices. The Bank's 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 Bank to maintain minimum amounts and ratios (set
forth in the table below) of Tier 1 capital (as defined in the
regulations) to average assets (as defined), and Tier 1 and total capital
(as defined) to risk-weighted assets (as defined). Management believes
that as of December 31, 1999 and 1998, the Bank met or exceeded all
relevant capital adequacy requirements.
F-24
<PAGE> 79
BANK OF SOUTHERN OREGON AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
17. REGULATORY MATTERS (CONTINUED)
As of December 31, 1999, the most recent notification from the Federal
Deposit Insurance Corporation categorized the Bank as well capitalized
under the regulatory framework for prompt correction action. To be
categorized as well capitalized, the Bank must maintain minimum total
risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in
the table. There are no conditions or events since the notification from
the regulators that management believes would change the Bank's
regulatory capital categorization.
The Bank's actual and required capital amounts and ratios are presented
in the following table (dollars in thousands):
<TABLE>
<CAPTION>
Regulatory minimum
to be "well capitalized"
Regulatory minimum to be under prompt correc-
Actual "adequately capitalized" tive action provisions
------------------------ ------------------------ ----------------------
Amount Ratio Amount Ratio Amount Ratio
----------- ----------- ----------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1999:
Tier 1 capital (to average assets) $15,238 9.5% $ 6,421 4.0% $ 8,026 5.0%
Tier 1 capital
(to risk-weighted assets) 15,238 11.9 5,125 4.0 7,688 6.0
Total capital
(to risk-weighted assets) 16,849 13.1 10,251 8.0 12,814 10.0
December 31, 1998:
Tier 1 capital (to average assets) 13,842 9.9 5,593 4.0 6,991 5.0
Tier 1 capital
(to risk-weighted assets) 13,842 11.3 4,900 4.0 7,350 6.0
Total capital
(to risk-weighted assets) 16,121 13.2 9,800 8.0 12,250 10.0
</TABLE>
18. PENDING MERGER
Effective October 7, 1999, the Bank entered into a definitive agreement
to acquire United Bancorp and its wholly-owned subsidiary, Douglas
National Bank (collectively, "United"). As part of the proposed merger,
the Bank will reorganize as a subsidiary of PremierWest. Under the terms
of the definitive agreement, United shareholders will receive
approximately 1.97 shares of PremierWest for each share of United common
stock. The proposed merger is expected to be accounted for as a
pooling-of-interests to be consummated in the second quarter of 2000.
In accordance with generally accepted accounting principles, as of
December 31, 1999, the Bank has capitalized approximately $87,000 of
costs incurred to effect the proposed merger. All merger-related costs
will be expensed in the period that the merger is consummated.
F-25
