EXHIBIT 99.2
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 & Larson, P.C.
January 14, 2000
Portland, Oregon
F-6
<PAGE>
INDEPENDENT AUDITOR'S REPORT
----------------------------
To the Board of Directors and Stockholders
Bank of Southern Oregon and Subsidiary
Medford, Oregon
We have audited the accompanying consolidated balance sheets of Bank of Southern
Oregon (a Corporation) and Subsidiary as of December 31, 1998 and 1997, and the
related consolidated statements of income, changes in shareholders' equity, and
cash flows for the years 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Bank of Southern
Oregon and Subsidiary as of December 31, 1998 and 1997, and the results of its
operations and its cash flows for the years then ended, in conformity with
generally accepted accounting principles.
/s/ Kosmatka, Donnelly & Co. LLP
Kosmatka, Donnelly & Co. LLP
Medford, Oregon
February 26, 1999
F-7
<PAGE>
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-8
<PAGE>
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-9
<PAGE>
BANK OF SOUTHERN OREGON AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Number of Comprehensive Common Retained
shares income (loss) stock earnings
------------ ---------------- ------------- ------------
<S> <C> <C> <C> <C>
Balances at January 1, 1997 782,920 $ 9,799,601 $ 648,200
Net income and comprehensive
income............................ -- $ 1,741,799 -- 1,741,799
================
Two-for-one stock split........... 782,920 -- --
Amortization of stock compensation -- -- 36,044
Transfer.......................... -- 2,100,000 (2,100,000)
------------ ------------- ------------
Balances at December 31, 1997..... 1,565,840 11,899,601 326,043
Comprehensive income:
Net income................... -- $ 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) -- --
Comprehensive income.............. -- $ 1,181,366 -- --
================
Three-for-one stock split......... 3,131,680 -- --
Amortization of stock compensation -- -- 21,598
Stock options exercised........... 100,480 96,133 --
Income tax benefit of stock
options exercised............ -- 318,526 --
------------ ------------- ------------
Balances at December 31, 1998..... 4,798,000 12,314,260 1,530,128
Comprehensive income:
Net income................... -- $ 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) -- --
----------------
Comprehensive income.............. $ 760,584 -- --
================
Amortization of stock compensation -- -- 15,720
Stock options exercised........... 39,740 42,505 --
Income tax benefit of stock options
exercised.................... -- 94,594 --
------------ ------------- ------------
Balances at December 31, 1999..... 4,837,740 $ 12,451,359 $ 2,787,275
============ ============= ============
</TABLE>
<TABLE>
<CAPTION>
Accumulated
other Total
comprehensive stockholders'
loss equity
- --------------- -----------------
<S> <C> <C>
Balances at January 1, 1997 $ -- $ 10,447,801
Net income and comprehensive
income............................ -- 1,741,799
Two-for-one stock split........... -- --
Amortization of stock compensation -- 36,044
Transfer.......................... -- --
--------------- -----------------
Balances at December 31, 1997..... -- 12,225,644
Comprehensive income:
Net income................... -- 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)
Comprehensive income.............. -- --
Three-for-one stock split......... -- --
Amortization of stock compensation -- 21,598
Stock options exercised........... -- 96,133
Income tax benefit of stock
options exercised............ -- 318,526
--------------- -----------------
Balances at December 31, 1998..... (1,121) 13,843,267
Comprehensive income:
Net income................... -- 1,241,427
Other comprehensive loss--
unrealized losses on investment
securities available-for-sale,
of income taxes of
approximately $299,000.. (480,843) (480,843)
Comprehensive income.............. -- --
Amortization of stock compensation -- 15,720
Stock options exercised........... -- 42,505
Income tax benefit of stock options
exercised.................... -- 94,594
--------------- -----------------
Balances at December 31, 1999..... $ (481,964) $ 14,756,670
=============== =================
</TABLE>
See accompanying notes.
F-10
<PAGE>
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 liabilit 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 investment 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-11
<PAGE>
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.
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.
F-12
<PAGE>
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)
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.
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-13
<PAGE>
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.
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.
F-14
<PAGE>
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)
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 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.
F-15
<PAGE>
BANK OF SOUTHERN OREGON AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
3. INVESTMENT SECURITIES AVAILABLE-FOR-SALE
Investment securities available-for-sale at December 31, 1999 and 1998
consisted of the following:
<TABLE>
<CAPTION>
Gross unrealized Gross unrealized Estimated fair
Amortized cost gains losses 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
-------------------- -------------------- --------------------- ----------------
Total.................... $ 5,433,163 $ 216 $ (1,337) $ 5,432,042
==================== ==================== ===================== ================
</TABLE>
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-16
<PAGE>
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)
Recovery 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.
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.
F-17
<PAGE>
BANK OF SOUTHERN OREGON AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
7. TIME CERTIFICATES OF DEPOSIT (CONTINUED)
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
=====================
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.
F-18
<PAGE>
BANK OF SOUTHERN OREGON AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
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.
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-19
<PAGE>
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.
11. BASIC AND DILUTED EARNINGS PER COMMON SHARE
The Bank's basic earnings per common share is 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.
F-20
<PAGE>
BANK OF SOUTHERN OREGON AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
11. BASIC AND DILUTED EARNINGS PER COMMON SHARE (CONTINUED)
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
---------------- --------------- -----------
1999
<S> <C> <C> <C>
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
===========
Effects 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 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
===================
F-21
<PAGE>
BANK OF SOUTHERN OREGON AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
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.
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 pro forma 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> <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 pro forma effects for 1999, 1998 and 1997 may not be
representative of the effects on reported results in future years.
F-22
<PAGE>
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
Options average Options average Options average
outstanding exercise price outstanding exercise price outstanding exercise 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-
Exercise Number of average remaining contractual Number of average
price range options exercise price life (years) options exercise 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.
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.
F-23
<PAGE>
BANK OF SOUTHERN OREGON AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
16. ESTIMATED FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
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.
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-24
<PAGE>
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
------------------ ----------------- ------------------ -----------------
Financial Assets:
<S> <C> <C> <C> <C>
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.
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.
F-25
<PAGE>
BANK OF SOUTHERN OREGON AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
17. REGULATORY MATTERS (CONTINUED)
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
Regulatory minimum to "well capitalized" under
be "adequately prompt corrective action
Actual capitalized" 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-26
<PAGE>
CONTENTS
------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT .............................................F-27
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets ..............................................F-28
Consolidated Statements of Income ........................................F-29
Consolidated Statements of Shareholders' Equity ...................F-30 - F-31
Consolidated Statements of Cash Flows .............................F-32 - F-33
Notes to Consolidated Financial Statements ........................F-34 - F-54
SUPPLEMENTARY INFORMATION
Three-Year Summary of Operations .........................................F-55
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
UNITED BANCORP
Roseburg, Oregon
We have audited the accompanying consolidated balance sheets of UNITED BANCORP
AND SUBSIDIARIES as of December 31, 1999 and 1998, and the related
consolidated statements of income, shareholders' equity and cash flows for
each of the three years in the period ended December 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the 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 audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of UNITED
BANCORP AND SUBSIDIARIES as of December 31, 1999 and 1998, and the results of
their operations and their cash flows for each of the three years in the
period ended December 31, 1999, in conformity with generally accepted
accounting principles.
As described in Note 19 to the consolidated financial statements, the 1998 and
1997 consolidated financial statements have been restated to incorporate the
cash out feature of the Company's stock option plan and adjust the accrual for
consulting services.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The supplementary
information is presented for purposes of additional analysis and is not a
required part of the basic consolidated financial statements. The
supplementary information has been subjected to the auditing procedures
applied in the audits of the basic consolidated financial statements and, in
our opinion, is fairly stated in all material respects in relation to the
basic consolidated financial statements taken as a whole.
Knight Vale & Gregory PLLC
Tacoma, Washington
January 7, 2000
F-27
<PAGE>
CONSOLIDATED BALANCE SHEETS
-------------------------------------------------------------------------------
(Dollars in Thousands)
United Bancorp and Subsidiaries
December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
(As Restated)
Note 19
<S> <C> <C>
ASSETS
Cash and due from banks $ 5,429 $ 5,349
Interest-bearing deposits in banks 25 7,075
Securities available for sale 61,241 57,166
Loans 62,470 43,631
Allowance for credit losses (679) (554)
NET LOANS 61,791 43,077
Premises and equipment 4,227 3,653
Accrued interest receivable 1,000 804
Other assets 1,955 825
TOTAL ASSETS $ 135,668 $ 117,949
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Demand $ 15,605 $ 16,077
Savings and interest-bearing demand 47,627 44,475
Time 26,529 27,004
TOTAL DEPOSITS 89,761 87,556
Federal funds purchased and securities
sold under agreements to repurchase 18,600 11,811
Short-term note payable 10,000 --
Long-term notes payable 2,157 2,485
ESOP notes payable 604 890
Accrued interest payable 276 182
Other liabilities 803 734
TOTAL LIABILITIES 122,201 103,658
SHAREHOLDERS' EQUITY
Preferred stock, no par value; 1,000,000 shares
authorized, none issued -- --
Common stock (par value: $2.50); 5,000,000 shares authorized;
issued and outstanding: 1999 - 1,811,334 shares;
1998 - 1,760,708 shares; 1997 - 438,929 shares 4,528 4,402
Surplus 938 638
Retained earnings 9,923 9,735
Unearned ESOP compensation (604) (890)
Accumulated other comprehensive income (loss) (1,318) 406
TOTAL SHAREHOLDERS' EQUITY 13,467 14,291
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 135,668 $ 117,949
</TABLE>
See notes to consolidated financial statements.
F-28
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
-------------------------------------------------------------------------------
(Dollars in Thousands, Except Per Share Amounts)
United Bancorp and Subsidiaries
Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
(As Restated) (As Restated)
Note 19 Note 19
<S> <C> <C> <C>
INTEREST INCOME
Loans $ 4,980 $ 4,556 $ 4,310
Deposits in banks 23 224 86
Securities available for sale:
Taxable 2,919 2,963 3,534
Tax-exempt 774 551 459
TOTAL INTEREST INCOME 8,696 8,294 8,389
INTEREST EXPENSE
Deposits 2,172 1,948 1,712
Federal funds purchased and securities
sold under agreements to repurchase 813 672 628
Notes payable 264 431 928
TOTAL INTEREST EXPENSE 3,249 3,051 3,268
NET INTEREST INCOME 5,447 5,243 5,121
PROVISION FOR CREDIT LOSSES 195 50 140
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 5,252 5,193 4,981
NON-INTEREST INCOME
Service charges on deposit accounts 681 580 539
Other service charges, commissions and fees 549 497 284
Net gains (losses) on sales of securities available for sale 7 264 (3)
Other 351 290 293
TOTAL NON-INTEREST INCOME 1,588 1,631 1,113
NON-INTEREST EXPENSE
Salaries and employee benefits 3,608 2,808 2,671
Net occupancy and equipment 996 869 673
Advertising 263 89 56
ATM expenses 163 139 152
Other 1,384 1,399 1,162
TOTAL NON-INTEREST EXPENSE 6,414 5,304 4,714
INCOME BEFORE INCOME TAXES 426 1,520 1,380
INCOME TAXES (BENEFIT) (61) 466 376
NET INCOME $ 487 $ 1,054 $ 1,004
EARNINGS PER SHARE
Basic $ .29 $ .65 $ .61
Diluted .28 .61 .60
</TABLE>
See notes to consolidated financial statements.
F-29
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- ------------------------------------------------------------------------------
(Dollars in Thousands, Except Per Share Amounts)
United Bancorp and Subsidiaries Years Ended December 31, 1999, 1998 and 1997
<TABLE> <CAPTION>
ACCUMULATED
SHARES OF UNEARNED OTHER
COMMON COMMON RETAINED ESOP COMPREHENSIVE
STOCK STOCK SURPLUS EARNINGS COMPENSATION INCOME (LOSS) TOTAL
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1996 437,258 $ 1,093 $ 3,449 $ 8,161 ($ 553) $ 2 $ 12,152
Comprehensive income:
Net income -- -- -- 1,004 -- -- 1,004
Other comprehensive income,
net of tax:
Change in unrealized gain
on securities -- -- -- -- -- 510 510
COMPREHENSIVE INCOME 1,514
ESOP compensation expense -- -- 69 -- 133 -- 202
Stock purchased for ESOP -- -- -- -- (420) -- (420)
Cash dividends declared
($.125 per share) -- -- -- (220) -- -- (220)
Dividends reinvested 1,670 4 35 -- -- -- 39
Retired stock 1 -- -- -- -- -- --
BALANCE AT DECEMBER 31,
1997 (AS RESTATED) 438,929 1,097 3,553 8,945 (840) 512 13,267
Comprehensive income:
Net income -- -- -- 1,054 -- -- 1,054
Other comprehensive income,
net of tax:
Change in unrealized loss
on securities -- -- -- -- -- (106) (106)
COMPREHENSIVE INCOME 948
Dividends reinvested 1,248 3 40 -- -- -- 43
Stock split - forward
4 to 1 1,320,531 3,302 (3,302) -- -- -- --
ESOP compensation expense -- -- 190 -- 254 -- 444
Stock purchased for ESOP -- -- -- -- (304) -- (304)
Cash dividends declared
($.15 per share) -- -- -- (264) -- -- (264)
Change in stock option plan -- -- 157 -- -- -- 157
BALANCE AT DECEMBER 31,
1998 (AS RESTATED) 1,760,708 4,402 638 9,735 (890) 406 14,291
</TABLE>
(continued)
See notes to consolidated financial statements.
F-30
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
-------------------------------------------------------------------------------
(concluded) (Dollars in Thousands, Except Per Share Amounts)
United Bancorp and Subsidiaries
Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
ACCUMULATED
SHARES OF UNEARNED OTHER
COMMON COMMON RETAINED ESOP COMPREHENSIVE
STOCK STOCK SURPLUS EARNINGS COMPENSATION INCOME (LOSS) TOTAL
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1998 (as restated) 1,760,708 $ 4,402 $ 638 $ 9,735 ($ 890) $ 406 $ 14,291
Comprehensive income:
Net income -- -- -- 487 -- -- 487
Other comprehensive income,
net of tax:
Change in unrealized
loss on securities -- -- -- -- -- (1,724) (1,724)
COMPREHENSIVE INCOME (1,237)
ESOP compensation expense -- -- 78 -- 286 -- 364
Income tax benefit from stock
options exercised -- -- 19 -- -- -- 19
Cash dividends declared
($.17 per share) -- -- -- (299) -- -- (299)
Dividends reinvested 4,626 11 30 -- -- -- 41
Common stock issued 46,000 115 173 -- -- -- 288
BALANCE AT
DECEMBER 31, 1999 1,811,334 $ 4,528 $ 938 $ 9,923 ($ 604) ($ 1,318) $ 13,467
</TABLE>
See notes to consolidated financial statements.
F-31
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------
(Dollars in Thousands)
United Bancorp and Subsidiaries
Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
(As Restated) (As Restated)
Note 19 Note 19
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 487 $ 1,054 $ 1,004
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for credit losses 195 50 140
Depreciation and amortization 555 478 339
Change in stock option plan - - 157 - -
Securities amortization - net of accretion 93 41 42
Net (gains) losses on sales of securities available for sale (7) (264) 3
(Gain) loss on sales of premises and equipment - - 27 (3)
Deferred income tax (benefit) 7 151 (172)
Stock dividends received (136) (132) (122)
(Increase) decrease in interest receivable (196) 151 (154)
Increase (decrease) in interest payable 94 (38) 32
Other, net 102 (258) 591
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,194 1,417 1,700
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in interest-bearing deposits in banks 7,050 (3,854) (2,993)
Proceeds from maturities of securities available for sale 9,867 15,480 8,575
Proceeds from sales of securities available for sale 1,464 15,061 3,110
Purchases of securities available for sale (18,153) (24,280) (15,808)
Increase in loans made to customers,
net of principal collections (18,933) (255) (3,567)
Purchases of premises and equipment (1,160) (1,115) (1,052)
Proceeds from sales of premises and equipment 31 280 39
Other 24 76 10
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (19,810) 1,393 (11,686)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 2,205 12,949 6,267
Net increase (decrease) in federal funds purchased and
securities sold under agreements to repurchase 6,789 (8,070) 9,337
Proceeds from short-term note payable 10,000 - - - -
Proceeds from long-term notes payable - - - - 1,000
Repayment of long-term notes payable (328) (6,232) (5,312)
Dividends reinvested 41 43 39
Proceeds from issuance of common stock 288 - - - -
Cash dividends paid (299) (264) (220)
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 18,696 (1,574) 11,111
NET INCREASE IN CASH AND DUE FROM BANKS 80 1,236 1,125
CASH AND DUE FROM BANKS
Beginning of year 5,349 4,113 2,988
END OF YEAR $ 5,429 $ 5,349 $ 4,113
</TABLE>
(continued)
See notes to consolidated financial statements.
F-32
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------
(concluded) (Dollars in Thousands)
United Bancorp and Subsidiaries
Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
(As Restated) (As Restated)
Note 19 Note 19
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid $ 3,155 $ 3,089 $ 3,236
Income taxes paid -- 643 607
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING
AND FINANCING ACTIVITIES
Valuation adjustment of securities available for sale,
net of tax ($1,724) ($ 106) $ 510
Proceeds from issuance of ESOP debt -- 304 420
ESOP compensation expense, including principal
payments on ESOP notes payable (364) (444) (202)
Income tax benefit from stock option exercised 19 -- --
</TABLE>
See notes to consolidated financial statements.
F-33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
United Bancorp and Subsidiaries
December 31, 1999 and 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of United Bancorp
(the Company); its wholly owned subsidiaries, Douglas National Bank (the Bank),
and DNB Mortgage Company; and the Bank's wholly owned subsidiary, Douglas
National Bank Insurance Agency, Inc. All significant intercompany transactions
and balances have been eliminated.
NATURE OF OPERATIONS
United Bancorp is a one-bank holding company, with lending and other activities
concentrated in and around Douglas County, Oregon. The Bank has eight branches,
including its main branch. Its primary source of revenue is providing loans to
customers, who are predominately small and middle-market businesses and
middle-income individuals.
CONSOLIDATED FINANCIAL STATEMENT PRESENTATION
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles and practices within the banking
industry. 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, and the disclosure of contingent assets and liabilities, as of the
date of the balance sheet, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ significantly from
those estimates. Material estimates that are particularly susceptible to
significant change in the near term relate to the determination of the allowance
for credit losses and deferred tax assets.
Certain prior year amounts have been reclassified to conform to the 1999
presentation. All dollar amounts, except per share information, are stated in
thousands.
SECURITIES AVAILABLE FOR SALE
Securities available for sale consist of debt securities which may be sold to
implement the Bank's asset/liability management strategies and in response to
changes in interest rates and similar factors, and certain equity securities.
Securities available for sale are reported at fair value. Unrealized gains and
losses, net of the related deferred tax effect, are reported as a net amount in
a separate component of shareholders' equity entitled "accumulated other
comprehensive income (loss)." Realized gains and losses on securities available
for sale, determined using the specific identification method, are included in
earnings. Amortization of premiums and accretion of discounts are recognized in
interest income over the period to maturity.
(continued)
F-34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
United Bancorp and Subsidiaries
December 31, 1999 and 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
LOANS
Loans are stated at the amount of unpaid principal, reduced by an allowance for
credit losses. Interest on loans is accrued daily based on the principal amount
outstanding.
Generally, the accrual of interest on loans is discontinued when, in
management's opinion, the borrower may be unable to meet payments as they become
due or when they are past due 90 days as to either principal or interest, unless
they are well secured and in the process of collection. When interest accrual is
discontinued, all unpaid accrued interest is reversed against current income. If
management determines that the ultimate collectibility of principal is in doubt,
cash receipts on non-accrual loans are applied to reduce the principal balance.
ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses is maintained at a level considered adequate to
provide for probable losses in the loan portfolio. The allowance is increased by
provisions charged to operations and reduced by loans charged off, net of
recoveries. The allowance is based on management's periodic evaluation of
probable losses in the loan portfolio after consideration of historical loss
experience, adverse situations that may affect the borrowers' ability to repay,
the estimated value of any underlying collateral, economic conditions, the
results of examination of individual loans, the evaluation of the overall
portfolio by senior credit personnel and federal and national regulatory
agencies, and other risks inherent in the portfolio. This evaluation is
inherently subjective, as it requires the use of current estimates, which may
vary from the ultimate collectibility experienced in the future. The estimates
used are reviewed periodically and, as adjustments become necessary, they are
charged to operations in the period in which they become known.
When management determines it is possible that a borrower will be unable to
repay all amounts due according to the terms of the loan agreement, including
scheduled interest payments, the loan is considered impaired. Loans that
experience insignificant payment delays and payment shortfalls are generally not
classified as impaired. Management determines the significance of payment delays
and payment shortfalls on a case-by-case basis, taking into consideration all of
the circumstances surrounding the loan and the borrower, including the length of
the delay, the reasons for the delay, the borrower's prior payment record, and
the amount of shortfall in relation to the principal and interest owed. The
amount of impairment is measured based on the present value of expected future
cash flows discounted at the loan's effective interest rate or, when the primary
source of repayment is provided by real estate collateral, at the fair value of
the collateral less estimated selling costs. The amount of impairment and any
subsequent charges are recorded through the provision for credit losses as an
adjustment to the allowance for credit losses.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation, which
is computed on the straight-line method over the estimated useful lives of the
assets. Leasehold improvements are amortized over the term of the lease or the
estimated useful life of the improvement, whichever is less. Gains or losses on
dispositions are reflected in earnings.
(continued)
F-35
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
United Bancorp and Subsidiaries
December 31, 1999 and 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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.
Subsidiaries provide for tax on a separate company basis and remit to the
company amounts currently due.
CASH EQUIVALENTS
The Company considers all amounts included in the balance sheets caption "Cash
and due from banks" to be cash equivalents.
STOCK-BASED COMPENSATION
The Company accounts for stock-based awards to employees using the intrinsic
value method, in accordance with APB No. 25, Accounting for Stock Issued to
Employees. Accordingly, no compensation expense has been recognized in the
financial statements for employee stock arrangements. However, the required pro
forma disclosures of the effects of all options granted on or after January 1,
1995 have been provided in accordance with SFAS No. 123, Accounting for
Stock-Based Compensation.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in estimating the
fair values of financial instruments disclosed in these financial statements:
CASH AND SHORT-TERM INSTRUMENTS
The carrying amounts of cash and short-term instruments approximate
their fair value.
SECURITIES AVAILABLE FOR SALE
Fair values for securities, excluding restricted equity securities, are
based on quoted market prices. The carrying values of restricted equity
securities approximate fair values.
LOANS
For variable rate loans that reprice frequently and have no significant
change in credit risk, fair values are based on carrying values. Fair
values for fixed rate loans are estimated using discounted cash flow
analyses, using interest rates currently being offered for loans with
similar terms to borrowers of similar credit quality. Fair values for
impaired loans are estimated using discounted cash flow analyses or
underlying collateral values, where applicable.
(continued)
F-36
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
United Bancorp and Subsidiaries
December 31, 1999 and 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (concluded)
FAIR VALUES OF FINANCIAL INSTRUMENTS (concluded)
DEPOSIT LIABILITIES
The fair values disclosed for demand deposits are, by definition, equal
to the amount payable on demand at the reporting date (that is, their
carrying amounts). The carrying amounts of variable rate, fixed term
money market accounts and certificates of deposit approximate their
fair values at the reporting date. Fair values for fixed rate
certificates of deposit are estimated using a discounted cash flow
calculation based on interest rates currently being offered on similar
certificates.
FEDERAL FUNDS PURCHASED AND SECURITIES SOLD UNDER AGREEMENTS TO
REPURCHASE The carrying amounts of federal funds purchased, borrowings
under repurchase agreements, and other short-term borrowings maturing
within 90 days approximate their fair values. Fair values of other
short-term borrowings are estimated using discounted cash flow analyses
based on the Company's current incremental borrowing rates for similar
types of borrowing arrangements.
SHORT-TERM NOTE PAYABLE
The carrying amounts of short-term notes payable maturing within 90
days approximate their fair value.
LONG-TERM NOTES PAYABLE
The fair values of the Company's notes payable are estimated using
discounted cash flow analyses based on the Company's current
incremental borrowing rates for similar types of borrowing
arrangements.
EARNINGS PER SHARE
Basic earnings per share exclude dilution and are computed by dividing net
income by the weighted average number of common shares outstanding. The weighted
average number of common shares is adjusted for unallocated ESOP shares (see
Note 9). Diluted earnings per share reflect the potential dilution that could
occur if common shares were issued pursuant to the exercise of options under the
Company's stock option plan.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. This statement
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in its balance sheet and measure those instruments at fair value.
Under this statement, an entity that elects to apply hedge accounting is
required to establish at the inception of the hedge the method it will use for
assessing the effectiveness of the hedging derivative and the measurement
approach for determining the ineffective aspect of the hedge. Those methods must
be consistent with the entity's approach to managing risk. This statement is
effective for all fiscal years beginning after June 15, 2000. The Company had no
derivatives as of December 31, 1999, nor does the Company engage in any hedging
activities. The Company does not anticipate that the adoption of SFAS No. 133
will have a material effect on its financial position or results of operations.
F-37
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
United Bancorp and Subsidiaries
December 31, 1999 and 1998
NOTE 2 - DEBT AND EQUITY SECURITIES
Debt and equity securities have been classified as available for sale according
to management's intent. The carrying amount of securities and their approximate
fair values were as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUES
<S> <C> <C> <C>
DECEMBER 31, 1999
U.S. Government and agency securities $18,705 $ -- $ 838 $17,867
Collateralized mortgage obligations and
mortgage-backed securities 24,894 5 790 24,109
Obligations of States and political subdivisions 17,394 42 556 16,880
Restricted equity securities 2,090 -- -- 2,090
Equity securities 295 -- -- 295
TOTAL $63,378 $ 47 $ 2,184 $61,241
DECEMBER 31, 1998
U.S. Government and agency securities $ 9,227 $ 162 $ 25 $ 9,364
Collateralized mortgage obligations and
mortgage-backed securities 31,432 268 49 31,651
Obligations of States and political subdivisions 13,658 354 51 13,961
Restricted equity securities 1,912 -- -- 1,912
Equity securities 278 -- -- 278
TOTAL $56,507 $ 784 $ 125 $57,166
</TABLE>
The carrying amount and approximate market value of debt securities at December
31, 1999 by contractual maturity are shown below. Expected maturities may differ
from contractual maturities because borrowers may have the right to call or
prepay obligations, with or without call or prepayment penalties.
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
<S> <C> <C>
Due in one year or less $ 2,820 $ 2,800
Due from one year to five years 26,470 25,862
Due from five to ten years 29,893 28,469
Due after ten years 1,810 1,725
TOTAL $60,993 $58,856
</TABLE>
(continued)
F-38
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
United Bancorp and Subsidiaries
December 31, 1999 and 1998
NOTE 2 - DEBT AND EQUITY SECURITIES (concluded)
Gross gains realized on sales of securities were $7, $288 and $13 in 1999, 1998
and 1997, respectively, and gross losses realized were $0, $24 and $16 in 1999,
1998 and 1997, respectively.
Securities carried at approximately $24,370 at December 31, 1999 and $22,581 at
December 31, 1998 were pledged to secure public deposits, repurchase agreement
deposit accounts, and for other purposes required or permitted by law.
NOTE 3 - LOANS
Loans at December 31 consist of the following:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Commercial and agriculture $ 10,762 $ 10,699
Real estate mortgage:
Commercial 18,816 15,329
Residential:
Multi-family 8,386 2,487
Single family dwelling 9,660 5,942
Real estate construction loans 9,428 4,915
Consumer 5,418 4,259
TOTAL LOANS $ 62,470 $ 43,631
Changes in the allowance for credit losses for the years ended December 31 are
as follows:
</TABLE>
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Balance at beginning of year $554 $ 491 $ 511
Provision for credit losses 195 50 140
Charge-offs (94) (63) (170)
Recoveries 24 76 10
NET (CHARGE-OFFS) RECOVERIES (70) 13 (160)
BALANCE AT END OF YEAR $679 $ 554 $ 491
</TABLE>
(continued)
F-39
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
United Bancorp and Subsidiaries
December 31, 1999, 1998 and 1997
NOTE 3 - LOANS (concluded)
Following is a summary of information pertaining to impaired loans:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
DECEMBER 31
Impaired loans without a valuation allowance $ 2 $ 57
Impaired loans with a valuation allowance -- --
TOTAL IMPAIRED LOANS $ 2 $ 57
VALUATION ALLOWANCE RELATED TO IMPAIRED LOANS $ -- $ --
YEARS ENDED DECEMBER 31
Average investment in impaired loans $ 30 $ 29
Interest income recognized on a cash basis on impaired loans 5 4
</TABLE>
At December 31, 1999, there were no commitments to lend additional funds to
borrowers whose loans had been modified. Loans 90 days and over past due still
accruing interest totaled $67 and $200 at December 31, 1999 and 1998,
respectively. There were no such loans at December 31, 1997.
Certain related parties of the Bank, principally Bank Directors and their
associates, were loan customers of the Bank in the ordinary course of business.
Total loans outstanding at December 31, 1999 and 1998 to key officers and
Directors were $2,412 and $2,427, respectively. During 1999, loan advances
totaled $279, and loan repayments totaled $294 on these loans.
Commitments to extend credit to related parties were approximately $20 and $198
at December 31, 1999 and 1998, respectively.
NOTE 4 - PREMISES AND EQUIPMENT
The components of premises and equipment at December 31 are as follows:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Land, buildings and improvements $ 4,499 $ 4,058
Furniture and equipment 2,870 2,417
7,369 6,475
Less accumulated depreciation and amortization (3,142) (2,822)
TOTAL PREMISES AND EQUIPMENT $ 4,227 $ 3,653
</TABLE>
F-40
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
United Bancorp and Subsidiaries
December 31, 1999 and 1998
NOTE 5 - DEPOSITS
The aggregate amount of certificates of deposit with balances in excess of one
hundred thousand dollars was approximately $3,521 and $5,881 at December 31,
1999 and 1998, respectively.
At December 31, 1999, the scheduled maturities of certificates of deposit are as
follows:
<TABLE>
<S> <C>
2000 $22,386
2001 2,354
2002 821
2003 363
2004 and thereafter 605
$26,529
</TABLE>
NOTE 6 - FEDERAL FUNDS PURCHASED
Federal funds purchased generally mature within one to four days from the
transaction date. Information concerning federal funds purchased is summarized
as follows:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Average balance during the year $2,538 $232
Average interest rate during the year 5.39% 6.0%
Maximum month-end balance during the year $6,380 $330
</TABLE>
NOTE 7 - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase represent short-term borrowings
with maturities which do not exceed 120 days. The following is a summary of such
short-term borrowings for the years ended December 31:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Average balance during the year $15,041 $14,076
Average interest rate during the year 4.50% 4.67%
Maximum month-end balance during the year $17,883 $16,013
</TABLE>
F-41
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
United Bancorp and Subsidiaries
December 31, 1999 and 1998
NOTE 8 - NOTES PAYABLE
Notes payable at December 31 are summarized as follows:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
BANK - SHORT-TERM
An advance from the Federal Home Loan Bank of Seattle, bearing interest at
4.95%, with a seven-day maturity, maturing in January 2000; collateralized by a
blanket pledge arrangement which requires the Bank to maintain unencumbered
collateral (FHLB stock, securities and loans); subject to penalties for prepayments. $10,000 $ - -
BANK - LONG-TERM
Advances from the Federal Home Loan Bank of Seattle, bearing interest at 5.6% to
7.8%, with maturity of individual advances between 2001 and 2014; collateralized
by a blanket pledge arrangement which requires the Bank to maintain unencumbered
collateral (FHLB stock,
securities and loans); subject to penalties for prepayments. 2,157 2,289
Note payable from a third party individual, bearing interest at 7.75%; monthly
principal and interest payments totaling $17 annually through August 2006;
collateralized by other assets, paid in full
during 1999. - - 196
TOTAL BANK NOTES PAYABLE 12,157 2,485
EMPLOYEE STOCK OWNERSHIP PLAN (ESOP)
Notes payable to Bank of America in quarterly installments totaling $44
annually, with interest at 90% of the lender's prime rate,
secured by Company stock, paid in full during 1999. - - 44
Note payable to Key Bank in quarterly installments totaling $110 annually
through March 2002, with interest at 7.7%, secured by
Company stock. 264 374
Note payable to Key Bank in quarterly installments totaling $50 annually through
December 2002, with interest at 7%, secured by
Company stock. 142 192
Note payable to Key Bank in quarterly installments totaling $61 annually through
June 2003, with interest at 7.39%, secured by
Company stock. 198 280
TOTAL ESOP NOTES PAYABLE 604 890
TOTAL NOTES PAYABLE $12,761 $3,375
</TABLE>
(continued)
F-42
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
United Bancorp and Subsidiaries
December 31, 1999 and 1998
NOTE 8 - NOTES PAYABLE (concluded)
The approximate aggregate maturities of long-term notes payable for future years
ending December 31 are as follows:
2000 $ 352
2001 440
2002 375
2003 1,281
2004 62
Thereafter 251
$2,761
NOTE 9 - EMPLOYEE BENEFIT PLANS
PROFIT SHARING PLAN
The Company's Employee Profit Sharing Plan covers substantially all employees of
the Company. Annual contributions are determined by the Board of Directors.
During 1999, 1998 and 1997, contributions to the plan were $29, $25 and $25,
respectively.
EXECUTIVE INCENTIVE PLAN
The Executive Incentive Plan rewards key officers for performance and continuity
of service. Awards earned under the plan in years prior to 1998 vest ratably
over four years, earning a prevailing market rate of interest over the vesting
period. Awards earned subsequent to 1998 vest immediately. There were no awards
earned in 1999. Awards earned under the plan were $30 and $29 in 1998 and 1997,
respectively. Expenses recognized under the plan were $11, $51 and $32 in 1999,
1998 and 1997, respectively.
EMPLOYEE STOCK OWNERSHIP PLAN AND DEBT
The Company sponsors a leveraged employee stock ownership plan (ESOP) that
covers substantially all employees of the Company. The Company makes annual
contributions to the ESOP. The amount of the annual contribution is
discretionary, except that it must be sufficient to enable the ESOP to service
its debt. The initial ESOP shares were pledged as collateral for the debt. As
the debt is repaid, shares are released and allocated to active employees, based
on the proportion of debt paid. The debt of the ESOP is recorded as a liability,
and the shares pledged as collateral are reported as unearned ESOP compensation
in the equity section of the balance sheet. As shares are released from
collateral, the Company reports compensation expense equal to the current market
price of the shares for all shares acquired by the ESOP. The difference between
the allocated shares' market value and the cost of the allocated shares in 1999,
1998 and 1997 was $78, $190 and $69, respectively, and is reflected as
compensation expense in the consolidated statements of income and in surplus in
the consolidated statements of shareholders' equity. ESOP compensation expense
related to the payment of debt was $286, $254 and $133 in 1999, 1998 and 1997,
respectively. The shares become outstanding for earnings-per-share computations
at the time of allocation to the active employees. Cash dividends paid on
unallocated shares which are collateral for debt are paid to the principal of
the debt. Dividends paid on allocated shares are distributed to the employee
account.
(continued)
F-43
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------------------------------------
United Bancorp and Subsidiaries
December 31, 1999 and 1998
NOTE 9 - EMPLOYEE BENEFIT PLANS (concluded)
Shares held by the ESOP as of December 31 were classified as follows:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Allocated shares:
Prior to January 1, 1993 31,286 31,286
Subsequent to December 31, 1992 188,246 156,892
219,532 188,178
Unallocated shares: 80,213* 122,590*
TOTAL ESOP SHARES 299,745 310,768
</TABLE>
* The approximate fair market value for the Company's unallocated shares at
December 31, 1999 and 1998 is $842 and $1,134, respectively.
NOTE 10 - INCOME TAXES
Income taxes are comprised of the following for the years ended December 31:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Current:
Federal (benefit) ($99) $208 $468
State 31 107 80
Deferred (benefit) 7 151 (172)
TOTAL INCOME TAXES (BENEFIT) ($61) $466 $376
</TABLE>
The following is a reconciliation between the statutory and the effective
federal income tax rate for the years ended December 31:
<TABLE>
<CAPTION>
1999 1998 1997
PERCENT PERCENT PERCENT
OF PRE-TAX OF PRE-TAX OF PRE-TAX
AMOUNT INCOME AMOUNT INCOME AMOUNT INCOME
<S> <C> <C> <C> <C> <C> <C>
Income tax at statutory rates $145 34.00% $517 34.00% $469 34.00%
Increase (decrease) resulting from:
State income tax, net of federal
income tax benefit 20 4.69 71 4.67 53 3.84
Tax-exempt income (232) (54.42) (196) (12.89) (155) (11.23)
Other 6 1.41 74 4.88 9 .64
TOTAL INCOME TAX EXPENSE (BENEFIT) ($ 61) (14.32%) $466 30.66% $376 27.25%
</TABLE>
(continued)
F-44
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
United Bancorp and Subsidiaries
December 31, 1999 and 1998
NOTE 10 - INCOME TAXES (concluded)
The tax effects of temporary differences that give rise to significant portions
of deferred tax assets and liabilities at December 31 are:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
DEFERRED TAX ASSETS
Accumulated depreciation $ 144 $150 $173
Benefit plans 222 229 326
Allowance for credit losses 150 72 50
Other 2 19 13
Unrealized loss on securities available for sale 821 - - - -
TOTAL DEFERRED TAX ASSETS 1,339 470 562
DEFERRED TAX LIABILITIES
Federal Home Loan Bank stock dividends 301 246 187
Unrealized gain on securities available for sale - - 253 317
TOTAL DEFERRED TAX LIABILITIES 301 499 504
NET DEFERRED TAX ASSETS (LIABILITIES) $1,038 ($ 29) $ 58
</TABLE>
NOTE 11 - STOCK SPLIT
On March 25, 1998, the shareholders of the Company approved a 4 to 1 forward
stock split of the outstanding shares of common stock of the Company for
shareholders of record on April 3, 1998. The Company's outstanding shares were
increased to 1,760,708. This transaction also increased common stock by $3,302
and decreased surplus by the same amount. All references to the number of common
shares and all per share data in these consolidated financial statements have
been restated to reflect the stock split.
NOTE 12 - COMMITMENTS AND CONTINGENCIES
The Bank is party to financial instruments with off-balance-sheet risk in the
normal course of business 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
risk in excess of the amount recognized in the balance sheets.
(continued)
F-45
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
United Bancorp and Subsidiaries
December 31, 1999 and 1998
NOTE 12 - COMMITMENTS AND CONTINGENCIES (concluded)
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. A summary of the Bank's
commitments at December 31 is as follows:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Commitments to extend credit $9,599 $5,942
Credit card lines of credit 2,438 2,326
Standby letters of credit 886 580
</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. 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's experience has been that approximately 80% to 85% of loan commitments are
drawn upon by customers. The Bank evaluates each customer's creditworthiness on
a case-by-case basis. The amount of collateral obtained, if deemed necessary by
the Bank upon extension of credit, is based on management's credit evaluation of
the party. Collateral held varies, but may include accounts receivable,
inventory, property and equipment, residential real estate, and income-producing
commercial properties.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. Those guarantees 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 varies
as specified above, and is required in instances where the Bank deems necessary.
The Bank has agreements with commercial banks for lines of credit totaling
$11,000, of which $1,300 was drawn at December 31, 1999. There were no draws on
these credit lines at December 31, 1998 or 1997. The Bank also has a credit line
with the Federal Home Loan Bank totaling 20% of assets, of which approximately
$12,157 and $2,289 had been drawn at December 31, 1999 and 1998, respectively,
(see Note 8).
The Company has entered into an employment contract with its former president,
providing compensation subsequent to retirement. The accrued liability for these
benefits was $555 and $559 at December 31, 1999 and 1998, respectively. The
Company also has a settlement agreement with its former President. An additional
liability of $115 was provided as a result of this agreement, of which $15 was
paid in 1999, and $100 was paid in 1998.
Because of the nature of its activities, the Company is subject to various
pending and threatened legal actions which arise in the ordinary course of
business. In the opinion of management, liabilities arising from these claims,
if any, will not have a material effect on the financial position of the
Company.
F-46
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
United Bancorp and Subsidiaries
December 31, 1999 and 1998
NOTE 13 - SIGNIFICANT CONCENTRATIONS OF CREDIT RISK
Most of the Company's business activity is with customers located in the State
of Oregon. Investments in state and municipal securities involve governmental
entities primarily within the state. Loans are generally limited, by federal and
state banking regulations, to 15% of the Company's shareholders' equity,
excluding accumulated other comprehensive income (loss).
NOTE 14 - STOCK OPTIONS
During 1996, the Company approved an incentive stock option plan for key
employees and a nonqualified stock option plan for directors of the Company. The
Company applies APB Opinion No. 25 and related interpretations in accounting for
this plan. Had compensation cost for the Company's stock option plan been
determined based upon the fair value at the grant date for awards granted in
1997 under this plan, consistent with the method of FASB 123, the Company's net
income and earnings per share would have been reduced to these pro forma amounts
at December 31:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Net income:
As reported $487 $1,054 $1,004
Pro forma 440 944 592
Earnings per share:
Basic:
As reported $.29 $.65 $.61
Pro forma .26 .58 .36
Diluted:
As reported .28 .61 .60
Pro forma .26 .55 .35
</TABLE>
Under the plans, the Company may grant options for up to 368,000 shares of its
common stock, of which 168,000 shares are reserved for issuance to the Company's
directors and 200,000 shares are reserved for issuance to key employees. The
exercise price of each option equals the fair market value of the Company's
stock on the date of grant. At the date of grant, 16.67% of each option is
exercisable; the remaining portion of each option is exercisable at the rate of
16.67% after each succeeding 12 months of continuous service to the Company.
Options granted to key employees subsequent to July 1, 1999 vest as follows: at
the date of grant 10% of each option is exercisable; the remaining portion of
each option is exercisable at a rate of 10% after each succeeding 12 months of
continuing service to the Company. In the case of options granted to directors,
directors are credited for prior service so that, for each twelve months of
service to the Company prior to the effective date of the option grant, the
vesting schedule is accelerated by 16.67%. During 1998, the vesting schedule was
accelerated by 50% in exchange for key employees waiving their right to cash
distributions for stock options granted in 1997. Stock options exercisable at
December 31, 1999 were 136,399, remaining options vest: 18,400 in 2000 and
18,399 in 2001.
(continued)
F-47
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
United Bancorp and Subsidiaries
December 31, 1999 and 1998
NOTE 14 - STOCK OPTIONS (concluded)
The fair value of each option granted is estimated on the date of grant, based
on the Black-Scholes option-pricing model and using the following
weighted-average assumptions: dividend yield of 1.47%; risk-free interest rate
of 5.76% for options granted in 1999 and 6.56% in 1997; and expected lives of
five and ten years. The weighted average fair value of options granted during
1999 was $1.84. The weighted average fair value of options granted during 1997
was $1.20 for employee options and $2.12 for director options. Management
believes that the assumptions used in the option-pricing model are highly
subjective and represent only one estimate of possible value, as there is no
active market for options granted. No stock options were granted in 1998.
A summary of the status of the Company's stock option plans as of December 31,
1999, 1998 and 1997, and changes during the years ending on those dates, is
presented below:
<TABLE>
<CAPTION>
1999 1998 1997
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
<S> <C> <C> <C> <C> <C>
Outstanding at beginning of year 204,000 $6.25 260,000 $6.25 - - $ - -
Granted 80,000 7.78 - - - - 280,000 6.25
Exercised (46,000) 6.25 - - - - - - - -
Forfeited (6,000) 6.25 (56,000) 6.25 (20,000) 6.25
OUTSTANDING AT END OF YEAR 232,000 6.78 204,000 6.25 260,000 6.25
Exercisable 136,399 173,000 158,672
</TABLE>
The following summarizes information about stock options outstanding and
exercisable at December 31, 1999:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE WEIGHTED
REMAINING AVERAGE
EXERCISE NUMBER CONTRACTUAL NUMBER EXERCISE
PRICE OUTSTANDING LIFE (YEARS) EXERCISABLE PRICE
<S> <C> <C> <C> <C> <C>
$6.25 - $8.25 219,000 8 134,233 $6.60
$8.75 - $10.50 13,000 10 2,166 9.83
232,000 136,399 6.78
</TABLE>
F-48
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
United Bancorp and Subsidiaries
December 31, 1999 and 1998
NOTE 15 - REGULATORY MATTERS
The Company and the Bank are 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 financial statements. Under capital adequacy
guidelines of the regulatory framework for prompt corrective action, the Company
must meet specific capital adequacy guidelines that involve quantitative
measures of the Bank's assets, and certain off-balance-sheet items as calculated
under regulatory accounting practices. The Bank's capital classification is 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 Company to maintain minimum amounts and ratios (set forth in the
table below) of Tier 1 capital (as defined in the regulations) to total average
assets (as defined), and minimum ratios of Tier 1 and total capital (as defined)
to risk-weighted assets (as defined). Management believes, as of December 31,
1999, that the Company and the Bank meet all capital requirements to which they
are subject.
As of December 31, 1999, the most recent notification from the Bank's regulator
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective 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 that
notification that management believes have changed the institution's category.
Actual capital amounts and ratios are also presented in the table:
<TABLE>
<CAPTION>
BE WELL CAPITALIZED
UNDER PROMPT
CAPITAL ADEQUACY CORRECTIVE ACTION
ACTUAL PURPOSES PROVISIONS
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
<S> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1999
Tier 1 capital (to average assets):
Consolidated $15,390 12.16% $5,063 4.00% N/A N/A
Douglas National Bank 12,810 10.49 4,883 4.00 $6,103 5.00%
Tier 1 capital (to risk-weighted assets):
Consolidated 15,390 18.35 3,355 4.00 N/A N/A
Douglas National Bank 12,810 15.27 3,355 4.00 4,194 5.00
Total capital (to risk-weighted assets):
Consolidated 16,069 19.16 6,711 8.00 N/A N/A
Douglas National Bank 13,489 16.08 6,711 8.00 8,389 10.00
</TABLE>
(continued)
F-49
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
United Bancorp and Subsidiaries
December 31, 1999 and 1998
NOTE 15 - REGULATORY MATTERS (concluded)
<TABLE>
<CAPTION>
TO BE WELL CAPITALIZED
UNDER PROMPT
CAPITAL ADEQUACY CORRECTIVE ACTION
ACTUAL PURPOSES PROVISIONS
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
<S> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1998
Tier 1 capital (to average assets):
Consolidated $14,775 13.04% $4,530 4.00% N/A N/A
Douglas National Bank 11,170 9.93 4,497 4.00 $5,621 5.00%
Tier 1 capital (to risk-weighted assets):
Consolidated 14,775 22.70 2,604 4.00 N/A N/A
Douglas National Bank 11,170 17.16 2,604 4.00 3,255 5.00
Total capital (to risk-weighted assets):
Consolidated 15,329 23.55 5,208 8.00 N/A N/A
Douglas National Bank 13,294 20.43 5,208 8.00 6,510 10.00
</TABLE>
RESTRICTIONS ON RETAINED EARNINGS
The Bank, as a National Bank, is subject to the dividend restrictions set forth
by the Comptroller of the Currency. Under such restrictions, the Bank may not,
without the prior approval of the Comptroller of the Currency, declare dividends
in excess of the sum of the current year's earnings (as defined) plus the
retained earnings (as defined) from the prior two years.
NOTE 16 - FAIR VALUES OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments at December 31
were as follows:
<TABLE>
<CAPTION>
1999 1998
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash and due from banks and
interest bearing deposits
with banks $ 5,454 $ 5,454 $12,424 $12,424
Securities available for sale 61,241 61,241 57,166 57,166
Loans receivable, net 61,791 61,352 43,077 43,814
</TABLE>
(continued)
F-50
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
United Bancorp and Subsidiaries
December 31, 1999 and 1998
NOTE 16 - FAIR VALUES OF FINANCIAL INSTRUMENTS (concluded)
The estimated fair values of the Company's financial instruments at December 31
were as follows:
<TABLE>
<CAPTION>
1999 1998
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
<S> <C> <C> <C> <C>
FINANCIAL LIABILITIES
Deposits $89,761 $89,850 $87,556 $86,258
Federal funds and repurchase
agreements 18,600 18,600 11,811 11,811
Notes payable:
Short-term 10,000 10,000 - - - -
Long-term 2,157 2,109 2,485 2,551
ESOP 604 603 890 897
</TABLE>
NOTE 17 - EARNINGS PER SHARE DISCLOSURES
Following is information regarding the calculation of basic and diluted earnings
per share for the years indicated.
<TABLE>
<CAPTION>
NET INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1999 Basic earnings per share:
NET INCOME $487 1,680,151 $.29
Effect of dilutive securities:
Options - - 48,663 (.01)
Diluted earnings per share:
NET INCOME $487 1,728,814 $.28
YEAR ENDED DECEMBER 31, 1998 Basic earnings per share:
NET INCOME $1,054 1,629,129 $.65
Effect of dilutive securities:
Options - - 87,696 (.04)
Diluted earnings per share:
NET INCOME $1,054 1,716,825 $.61
YEAR ENDED DECEMBER 31, 1997 Basic earnings per share:
NET INCOME $1,004 1,642,322 $.61
Effect of dilutive securities:
Options - - 44,436 (.01)
Diluted earnings per share:
NET INCOME $1,004 1,686,758 $.60
</TABLE>
F-51
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
United Bancorp and Subsidiaries
December 31, 1999 and 1998
NOTE 18 - COMPREHENSIVE INCOME
Net unrealized gains (losses) for 1999, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
TAX
BEFORE-TAX (EXPENSE) NET-OF-TAX
AMOUNT BENEFIT AMOUNT
1999
<S> <C> <C> <C>
Unrealized holding losses arising during the year, net ($2,806) $1,078 ($1,728)
Less reclassification adjustments for gains realized
in net income, net (7) 3 (4)
NET UNREALIZED LOSSES ($2,799) $1,075 ($1,724)
1998
Unrealized holding gains arising during the year, net $ 94 ($ 36) $ 58
Less reclassification adjustments for gains realized
in net income, net (264) 100 (164)
NET UNREALIZED LOSSES ($170) $ 64 ($106)
1997
Unrealized holding gains arising during the year $825 ($313) $512
Less reclassification adjustments for losses realized
in net income (3) 1 (2)
NET UNREALIZED GAINS $822 ($312) $510
</TABLE>
NOTE 19 - RESTATEMENT OF FINANCIAL STATEMENTS
The financial statements of the Company have been restated to incorporate the
cash out feature of the Company's stock option plan and adjust the accrual for
consulting services. In 1997, the expense related to the cash out feature
resulted in an increase in expense of $357, and adjusting the accrual for
consulting expenses resulted in a decrease in expense of $115. An accrued
liability for $242 was recorded. Income tax expense was decreased by $93.
The option plan was amended during 1998 to remove the cash out feature. As a
result of this, 1998 expense was increased by $13, income tax expense decreased
by $5, and surplus increased by $157.
Net income in 1997 was reduced by $149 ($.09 per share) and net income in 1998
was decreased by $8 (no impact on per share). Shareholders' equity at December
31, 1997 was decreased by $149. Shareholders' equity previously reported for
December 31, 1998 was not impacted.
F-52
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
United Bancorp and Subsidiaries
December 31, 1999 and 1998
NOTE 20 - MERGER TRANSACTION
On October 7, 1999 the Company entered into an Agreement and Plan of Merger
(Merger Agreement) with Bank of Southern Oregon. Under the terms of the Merger
Agreement, shareholders of the Company will receive 1.971 shares of Bank of
Southern Oregon stock for each share of the Company's stock they own. It is
anticipated that the merger will be accounted for as a pooling of interests. The
merger is subject to approval by the shareholders of both companies and by
federal and state regulatory agencies. The merger is expected to close in the
second quarter of 2000.
NOTE 21 - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY
CONDENSED BALANCE SHEETS - DECEMBER 31
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
ASSETS
Cash $ 253 $ 340
Investment in subsidiaries 11,602 13,147
Premises and equipment 1,401 1,199
Other assets 871 846
TOTAL ASSETS $14,127 $15,532
LIABILITIES AND SHAREHOLDERS' EQUITY
ESOP notes payable $ 604 $ 890
Notes payable to Bank - - 248
Other liabilities 56 103
Shareholders' equity 13,467 14,291
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $14,127 $15,532
CONDENSED STATEMENTS OF INCOME - YEARS ENDED DECEMBER 31
OPERATING INCOME $196 $ 215
DIVIDENDS FROM BANK 416 1,344
OPERATING EXPENSE 327 714
INCOME BEFORE INCOME TAXES AND EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARIES 285 845
INCOME TAXES (BENEFIT) (43) (131)
INCOME BEFORE EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARIES 328 976
EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARIES 159 77
NET INCOME $487 $1,053
</TABLE>
(continued)
F-53
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
United Bancorp and Subsidiaries
December 31, 1999 and 1998
NOTE 21 - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY (concluded)
CONDENSED STATEMENTS OF CASH FLOWS - YEARS ENDED DECEMBER 31
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $487 $1,053
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 57 14
ESOP shares earned 364 444
Equity in undistributed income of subsidiaries (159) (77)
Change in stock option plan - - 157
Deferred income tax (benefit) 6 (93)
Other, net 73 (121)
NET CASH PROVIDED BY OPERATING ACTIVITIES 828 1,377
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of premises and equipment (411) (637)
Proceeds from sales of premises and equipment - - 280
NET CASH USED IN INVESTING ACTIVITIES (411) (357)
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of note payables to bank (248) (288)
Repayment of ESOP notes payable (286) (254)
Proceeds from the issuance of common stock 288 - -
Dividends reinvested 41 43
Cash dividends paid (299) (264)
NET CASH USED IN FINANCING ACTIVITIES (504) (763)
NET INCREASE (DECREASE) IN CASH (87) 257
CASH
Beginning of year 340 83
END OF YEAR $253 $ 340
</TABLE>
F-54
<PAGE>
THREE-YEAR SUMMARY OF OPERATIONS
- ------------------------------------------------------------------------------
(Dollars in Thousands, Except Per Share Amounts)
United Bancorp and Subsidiaries
Years Ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Interest income $8,696 $8,294 $8,389
Interest expense (3,249) (3,051) (3,268)
NET INTEREST INCOME 5,447 5,243 5,121
Provision for credit losses (195) (50) (140)
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 5,252 5,193 4,981
Non-interest income 1,588 1,631 1,113
Non-interest expense (6,414) (5,304) (4,714)
INCOME BEFORE INCOME TAXES 426 1,520 1,380
INCOME TAXES (BENEFIT) (61) 466 376
NET INCOME $ 487 $1,054 $1,004
Per share (adjusted for stock split):
Net income - basic $ .29 $ .65 $ .61
Shareholders' equity 8.02 8.77 8.08
Dividends .17 .15 .125
Average number of shares outstanding 1,680,151 1,629,129 1,642,322
Dividends declared $299 $264 $220
Average assets $123,573 $113,258 $112,033
</TABLE>
F-55
