SECURITY BANK HOLDING CO, 424B1, 1996-09-16

SECURITY BANK HOLDING CO
424B1, 1996-09-16
STATE COMMERCIAL BANKS

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<PAGE>
Filed Pursuant to 424(b)(1)
Registration No. 033-80795

SECURITY BANK HOLDING COMPANY

170 S. SECOND ST.
COOS BAY, OREGON 97420
TELEPHONE: 541-267-5356

350,000 SHARES OF COMMON STOCK

All of the shares of Common Stock, $5.00 par value ("Common Stock"), offered
hereby are newly issued shares of Security Bank Holding Company. Prior to this
Offering there has been a limited public market for the shares of Security Bank
Holding Company Common Stock. The shares are traded in the over-the-counter
market through the OTC Bulletin Board Service and the Pink Sheet Service of the
National Quotation Bureau. The stock has traded in the range of $7.75 to $9.00
since January 1, 1996, and was quoted at $8.00 bid, $8.75 ask as of September
12, 1996, the most recent day prior to the Offering. Application has been made
to the National Association of Securities Dealers Automated Quotation System
("NASDAQ") for inclusion of the Common Stock in the NASDAQ National Market
System under the symbol "SBHC."
------------------------

SEE "RISK FACTORS" ON PAGE 4 FOR CERTAIN INFORMATION THAT SHOULD BE
CONSIDERED BY PROSPECTIVE INVESTORS.
---------------------

THE SHARES OFFERED HEREBY ARE NOT SAVINGS OR DEPOSIT ACCOUNTS OR OTHER
OBLIGATIONS OF A BANK AND ARE NOT INSURED BY THE BANK INSURANCE FUND OF THE
FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY.
------------------------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.

<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO PUBLIC DISCOUNT (1)(2) COMPANY (2)
Per Share......................... $8.00 $0.64 $7.36
<S> <C> <C> <C>
Total (3)......................... $2,800,000 $224,000 $2,576,000
</TABLE>

(1) See "Underwriting" for information concerning indemnification of the
Underwriter and other matters.

(2) Before deducting expenses payable by the Company, estimated to be $250,000.

(3) The Company has granted to the Underwriter a 45-day option to purchase up to
52,500 additional shares of Common Stock on the same terms per share, to
cover over-allotments, if any. If all such Common Stock is purchased, the
total Price to Public, Underwriting Discount, and Proceeds to the Company
will be $3,220,000, $257,600, and $2,962,400, respectively.
------------------------

The Common Stock is offered by the Underwriter, subject to prior sale, when,
as and if delivered to and accepted by it, and subject to the Underwriter's
right to accept or reject any order in whole or in part. It is expected that
delivery of the Common Stock will be made at the office of Black & Company,
Inc., Portland, Oregon on or about September 18, 1996.
------------------------

BLACK & COMPANY, INC.

THE DATE OF THIS PROSPECTUS IS SEPTEMBER 13, 1996
<PAGE>
SECURITY BANK HOLDING COMPANY

PARENT COMPANY(1) OF

SECURITY BANK

<TABLE>
<CAPTION>
DEPOSITS AS OF
BRANCH LOCATIONS JUNE 30, 1996 YEAR OPENED
- --------------------- ---------------- ----------------
<S> <C> <C>
Bandon $ 19,625,774 1974
Brookings-Harbor 14,092,575 1985
Bunker Hill 8,125,137 1977
Coos Bay-Mall 25,306,483 1985
Coquille 18,814,467 1971
Myrtle Point 23,227,973 1919
North Bend 22,000,850 1983
----------------
Total $ 131,193,259
----------------
----------------
</TABLE>

AND MAJORITY SHAREHOLDER(2) OF
LINCOLN SECURITY BANK

<TABLE>
<CAPTION>
DEPOSITS AS
OF JUNE 30,
LOCATION 1996 DATE OPENED
- --------------------- ------------- ----------------
<S> <C> <C>
Newport $ 3,014,603 May 30, 1996
</TABLE>

- ------------------------
(1) Security Bank is a wholly-owned subsidiary of the Company.

(2) The Company owns approximately 68.44% of Lincoln Security Bank's outstanding
capital stock.

The Company will provide to shareholders quarterly reports containing
unaudited financial statements and annual reports containing financial
statements audited by the Company's independent auditors. In addition, the
Company will furnish annual reports on Form 10-KSB and quarterly reports on Form
10-QSB free of charge to shareholders who so request in writing addressed to the
Secretary of the Company.

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SHARES AT A
LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.

2
<PAGE>
PROSPECTUS SUMMARY

THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND CONSOLIDATED FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO,
APPEARING ELSEWHERE IN THIS PROSPECTUS. EXCEPT AS OTHERWISE INDICATED ALL
INFORMATION IN THIS PROSPECTUS ASSUMES THE UNDERWRITER'S OVER-ALLOTMENT OPTION
IS NOT EXERCISED.

THE COMPANY

Security Bank Holding Company (the "Company") is a bank holding company
headquartered in Coos Bay, Oregon. The Company's principal subsidiary is
Security Bank ("Security Bank"), a state-chartered, FDIC-insured commercial bank
organized in 1919, which serves Coos and Curry Counties, Oregon, from seven
offices. The Company's only other subsidiary is Lincoln Security Bank ("Lincoln"
or "Lincoln Security"), a newly-organized state-chartered bank located in
Newport, Oregon, in which the Company holds a majority interest. Security Bank
and Lincoln Security are referred to collectively herein as the "Banks". The
Banks offer a broad range of commercial and personal banking services to their
customers, who are primarily individuals, small and medium-sized businesses, and
professionals. The Banks' lending activities include commercial, real estate
construction and consumer loans. They also originate residential mortgage loans
most of which are fixed rate loans sold into the secondary market primarily to
the Federal National Mortgage Association and Federal Home Loan Mortgage
Corporation. Through a subsidiary of Security Bank, the Company acts as an
insurance agent selling annuities, whole life and health care insurance and,
through an unaffiliated securities broker dealer, makes available mutual funds
for its customers.

At June 30, 1996, the Company had consolidated assets of $170.1 million, net
loans of $80.6 million and deposits of $133.8 million. Since January 1, 1990,
total assets, net 1oans, and deposits have each increased at a compound annual
rate of 11.60%, 8.98% and 9.40%, respectively.

The Company's return on equity has exceeded 12% for each year since 1990 and
was 15.39% and 16.61% for the years ended December 31, 1995 and 1994,
respectively, and 11.47% (annualized) for the six months ended June 30, 1996.
During this period the Company has maintained strong asset quality, as of June
30, its net loan charge-offs as a percentage of loans averaged 0.01%, which is
below peer group averages.

The Company has enjoyed this growth and performance from its primary markets
of Coos and Curry Counties. While the population of and employment in these
counties are now growing, rebounding from significant declines during the late
1970's and early 1980's when forest products production dropped precipitously,
Security Bank has grown faster than the markets it serves by gaining market
share from competitors. The Company believes that its success is attributable to
its emphasis on personalized customer service, its mix of innovative products
tailored to the needs of its local customers, and its identity as a local
community bank. To enhance this success, the Company is pursuing strategic
opportunities in markets beyond those which it currently serves. For example, to
diversify credit risks and generate more loan demand, Security Bank opened a
mortgage banking office in Eugene, Oregon, in November, 1995. In addition, the
Company's investment in Lincoln Security is intended to expand the Company's
market by replicating the successful strategy used by Security Bank. The economy
of Lincoln County derives more benefit from tourism and its proximity to
Portland, Oregon, than Coos and Curry Counties, and is currently enjoying lower
unemployment rates. The Company believes that the investment in Lincoln Security
Bank further diversifies the Company's exposure to credit risks and presents an
opportunity to experience additional growth.

The Banks compete directly with much larger commercial banks, each of which
is a subsidiary of a multi-state financial services company, operates in a
number of other markets, and has more resources than the Banks. In order to
compete effectively, the Banks have chosen to provide more personal customer
service than their competitors, and distinguish themselves as the local
community bank in their respective markets. This marketing strategy has
permitted Security Bank to enjoy strong net interest margins, among the highest
of community banks of any size. As community banks, the Banks are able to offer
loan and deposit products specifically designed for the markets they serve.

3
<PAGE>
For example, Security Bank offers products intended to meet the needs of the
increasing number of retirees which constitute a high percentage of the new
residents in Coos and Curry Counties. As a result of its business strategy,
Security Bank has been the fastest growing bank in its market since 1990, as
measured by the rate of increase in total deposits.

RISK FACTORS

Prospective investors should carefully consider the risks inherent in an
investment in the Common Stock offered hereby. Such risks include the exposure
to the local economy, credit and interest-rate risks, concentration of ownership
in certain shareholders, regulatory risks, dependence on key personnel,
competition, a limited market for the stock, and certain other risks as more
fully discussed herein. See "Risk Factors".

THE OFFERING

<TABLE>
<S> <C>
COMMON STOCK
Common Stock offered by the
Company............................. 350,000
Common Stock to be outstanding after
the Offering........................ 3,112,325(1)
DIRECTED SHARES........................ 35,000 shares (10% of the Offering) have been
reserved, subject to demand, for sale to
directors, officers, employees and customers
of the Company and its subsidiaries, and
residents of Coos, Curry and Lincoln Counties,
consistent with the Company's current local
ownership and focus.
USE OF PROCEEDS........................ The net proceeds of the Offering will be used
to enhance capital levels to support internal
growth of the Company, and for general
corporate purposes. The Company may use a
portion of the proceeds to prepay certain
indebtedness of the Company incurred in
connection with the Company's Employee Stock
Ownership Plan. See "Use of Proceeds" and
"Management -- Other Benefit Plans."
NASDAQ NMS SYMBOL...................... SBHC
</TABLE>

- ------------------------
(1) Includes 522,471 shares issued to the Security Bank Holding Company Employee
Stock Ownership Plan which are not yet allocated to employees and are
pledged to secure repayment of notes to the Company. Does not include 96,600
shares subject to stock options. See "Management -- Other Benefit Plans."

4
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA

The following table sets forth certain information concerning the
consolidated financial condition, operating results, and key operating ratios at
the dates and for the periods indicated. The data for the six months ended June
30, 1996 and 1995, are derived from unaudited consolidated financial statements,
but, in the opinion of management, reflect all adjustments necessary for a fair
presentation of the data for these periods. Operating results for the six months
ended June 30, 1996, are not necessarily indicative of the results that may be
expected for the entire year ending December 31, 1996. This information does not
purport to be complete, and should be read in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations, and
the Consolidated Financial Statements of the Company and Notes thereto included
in this Prospectus.

<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
---------------------------- ----------------------------
1996 1995 1995 1994
------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>

INCOME STATEMENT DATA
Interest income................................... $ 6,480,411 $ 5,907,746 $ 11,956,672 $ 10,202,954
Interest expense.................................. 2,625,035 2,147,500 4,421,195 3,134,453
------------- ------------- ------------- -------------
Net interest income............................... 3,855,376 3,760,246 7,535,477 7,068,501
Provision for loan losses......................... 90,000 95,000 160,000 200,000
------------- ------------- ------------- -------------
Net interest income after provision for loan
losses........................................... 3,765,376 3,665,246 7,375,477 6,868,501
Non-interest income............................... 1,398,812 1,039,990 2,244,446 1,960,645
Non-interest expense.............................. 4,059,054 3,623,501 7,122,814 6,392,068
------------- ------------- ------------- -------------
Income before provision for income taxes.......... 1,105,134 1,081,735 2,497,109 2,437,078
Provision for income taxes........................ 280,000 323,000 633,000 761,700
------------- ------------- ------------- -------------
Net income........................................ $ 825,134 $ 758,735 $ 1,864,109 $ 1,675,378
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
DIVIDENDS
Cash.............................................. $ 224,736 $ 159,936 $ 319,885 $ 284,090
Ratio of dividends declared to net income......... 27.24% 21.08% 17.16% 16.96%
PER SHARE DATA (1)
Net income per share.............................. $ 0.36 $ 0.35 $ 0.83 $ 0.77
Cash dividends per common share................... $ 0.10 $ 0.07 $ 0.14 $ 0.13
Weighted average shares outstanding............... 2,269,517 2,180,990 2,239,670 2,180,763
BALANCE SHEET DATA (AT PERIOD END)
Investment securities............................. $ 70,028,458 $ 51,768,791 $ 58,227,575 $ 53,860,160
Loans, net and mortgage loans held for sale....... 81,991,144 77,163,307 79,527,430 73,922,003
Total assets...................................... 170,068,251 147,339,058 158,588,333 145,570,559
Total deposits.................................... 133,801,070 121,042,292 127,290,415 121,118,155
Total shareholders' equity........................ 13,889,249 12,037,484 14,371,854 10,628,796
SELECTED RATIOS
Return on average total assets.................... 1.00% 1.04% 1.26% 1.25%
Return on average total shareholders' equity...... 11.61% 13.29% 15.39% 16.61%
Net interest spread............................... 4.46% 5.09% 4.96% 5.30%
Efficiency ratio (2).............................. 77.36% 75.49% 72.83% 70.79%
ASSET QUALITY RATIOS
Reserve for loan losses to:
Ending total loans.............................. 1.27% 1.42% 1.32% 1.35%
Non-performing assets........................... 219.20% 557.58% 227.62% 1588.70%
Non-performing assets to ending total
assets (3)....................................... 0.28% 0.14% 0.29% 0.04%
Net loan charge-offs to average loans............. (0.12) % (0.01) % (0.15) % (0.14) %
CAPITAL RATIOS
Average shareholders' equity to average assets.... 8.65% 7.82% 8.18% 7.51%
Tier 1 capital ratio (4) (5)...................... 13.34% 11.68% 12.36% 11.11%
Total risk-based capital ratio (5)................ 14.31% 12.73% 13.36% 12.10%
Leverage ratio (5) (6)............................ 8.39% 8.36% 8.29% 7.88%
</TABLE>

- ------------------------------
(1) Per share data has been adjusted for the 50% stock dividend paid on January
5, 1996. Excludes shares issued to the Security Bank Holding Company
Employee Stock Ownership Plan which are not yet allocated to employees and
are pledged to secure repayment of notes to the Company. See "Management --
Other Benefit Plans."

5
<PAGE>
(2) Efficiency ratio is noninterest expense divided by the sum of net interest
income plus noninterest income.

(3) Nonperforming assets consist of nonaccrual loans, loans contractually past
due 90 days or more and other real estate owned.

(4) This ratio is Tier 1 capital divided by risk-weighted assets.

(5) Computed in accordance with final 1994 Federal Reserve Bank guidelines.

(6) Leverage ratio is Tier 1 capital divided by adjusted total assets.

6
<PAGE>
RISK FACTORS

Prospective investors should carefully consider the following risk factors
as well as the other information contained in this Prospectus.

EXPOSURE TO LOCAL ECONOMY

The Company's performance is substantially dependent on the banking
operations of the Banks. Security Bank's operations are materially dependent
upon and sensitive to the economy of its market area along the southern Oregon
coast. Adverse economic developments can impact the collectibility of loans and
have a negative effect on the Company's earnings and financial condition. The
economies of Coos and Curry Counties depend primarily on forest products
manufacturing, retail trade, tourism, government, services and agriculture.
Particularly in the 1980's, Security Bank's market area experienced high
unemployment as a result of the shift away from forest products manufacturing,
including a 48% reduction in Coos County forest products manufacturing jobs from
1983 to 1993. The job losses and mill closures of the early 1980's led to
significant loan losses by the Bank. Subsequent developments have reduced the
dependence of the local economy on forest products manufacturing and have
increased the number of non-manufacturing jobs. Nonetheless, forest products job
losses are expected to continue and there can be no assurance that new jobs will
replace those lost, or that future economic changes will not have a significant
adverse impact on Security Bank and the Company. Lincoln Security is similarly
exposed to and dependent on the economy of its market area in Lincoln County,
which, although not as dependent on the forest products industry as Coos or
Curry Counties, is nonetheless subject to changes in its primary industries of
tourism and fishing. Accordingly, no assurances can be made that future economic
changes will not have a significant adverse impact on Lincoln Security. See
"Business -- Economic Conditions and Demographics."

CREDIT RISK

The Company, like other lenders, is subject to credit risk, which is the
risk of losing principal and interest due to a customer's failure to repay
according to the terms of loan agreements. Security Bank's net charge-offs, past
due loans, and non-performing loans have been significantly less than community
banks of similar size over the past three years. As a new bank, Lincoln has had
no loan-loss experience. The Banks lend on a short-term basis to commercial and
individual borrowers for construction purposes and provide variable rate pricing
on term real estate loans. As of June 30, 1996, Security Bank had approximately
43% of its loan portfolio in real estate related loans which included a mix of
commercial, residential and construction real estate loans. A downturn in the
economy or the real estate market along the central or southern Oregon coast or
a rapid increase in interest rates could have a negative impact on collateral
values and the borrowers' ability to repay. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Lending and Credit
Management."

INTEREST RATE RISK

The Banks' earnings are largely derived from net interest income, which is
interest income and fees earned on loans and investment income less interest
expense paid on deposits and other borrowings. Interest rates are highly
sensitive to many factors which are beyond the control of the Banks, including
general economic conditions and the policies of various governmental and
regulatory authorities. As interest rates change, net interest income is
affected. With fixed rate assets (such as fixed rate loans) and liabilities
(such as certificates of deposit), the rate at which this change occurs depends
on the maturity of the asset or liability. The differences between the amounts
of interest-sensitive assets and interest-sensitive liabilities, measured over
various time periods, are referred to as sensitivity gaps. Although management
strives to minimize risk through asset/liability management policies and
believes that the maturities of the Banks' assets are reasonably balanced in
relation to maturities of liabilities to limit sensitivity gaps, from time to
time maturities are not balanced. During such periods, a rapid decrease or
increase in interest rates could have an adverse effect on the spreads

7
<PAGE>
between the interest rates earned on assets and the rates of interest paid on
liabilities, and therefore on the Banks' results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Interest Sensitivity."

LINCOLN SECURITY BANK

As part of the Company's strategic plan for growth through geographical
diversification, the Company recently assisted with the organization of Lincoln
Security Bank, a new commercial bank in Newport, Oregon, which received its
charter and commenced operations on May 30, 1996. The Company invested
approximately $2.1 million of Lincoln's $3.0 million initial capital through the
purchase of all of the shares of Lincoln's Class B Common Stock, and has
committed to provide administrative and operational support to the new bank for
which services the Company, for the first year of Lincoln's operation, will
receive fees based on the incremental cost to Security Bank of providing such
services. After that time, the services and fees will be subject to negotiation
and are expected to be of a similar nature and magnitude as currently
established. The Company owns a majority of Lincoln's voting stock and can elect
a majority of its Board of Directors. The initial Board of Directors, however,
comprises primarily local Lincoln County representatives and two directors of
the Company. Although the Company, through its ownership of a controlling
interest, retains the prerogative of replacing Lincoln's directors and otherwise
influencing management decisions, the Company expects to permit the bank to
operate as an independent community bank provided that the bank's performance is
deemed satisfactory by the Company's board of directors, giving consideration to
the operating history of the bank, the local economic and demographic
conditions, and factors affecting the banking industry in general.

Local investors, who purchased shares of Lincoln's Class A Common Stock in a
community offering to raise the balance of the initial capital of the bank, have
an option to purchase the Class B Common Stock from the Company, in accordance
with a shareholders agreement, during a five year period beginning on May 30,
2001, and ending May 30, 2006, at a price per share equal to the greater of (a)
$10.00 (as adjusted for any stock split, cash or stock dividend, or
reclassification) increased by the lesser of the annualized rate of return on
equity for the Company for each year after the date of Lincoln's charter, or
17.5%, such rate applied annually and compounded as of January 1 of each year,
or (b) the appraised value as determined in accordance with the procedure set
forth in the shareholders agreement. Accordingly, the Company's return on its
investment in Lincoln could be limited by the pre-determined price for the Class
B Common Stock in accordance with the terms of the shareholders agreement. See
"Business -- Lincoln Security Bank."

As a commercial bank, Lincoln faces not only the same risks faced by most
community banks, but also has commenced its operations with no previous
business, depositors, loan customers or other business relationships. Even if
Lincoln is successful in implementing its business plan, which success cannot be
assured, it is likely to incur losses during the first year of operation. In the
event Lincoln incurs losses which reduce its capital below the regulatory
minimum levels, Lincoln's shareholders may be subject to assessment on their
shares. Thus, the Company may be required to invest additional capital to
support the bank or risk the loss of its investment. In the event the Company's
shares of Lincoln stock were assessed, the investment of additional capital in
Lincoln could adversely impact the Company's ability to pay dividends to its
shareholders or to entertain other opportunities to expand its operations.
Accordingly, the results of Lincoln's operations could have an adverse impact on
the Company's earnings, dividend payments or future growth. Moreover, as the
ability of Lincoln to pay dividends to its shareholders is limited by regulatory
restrictions, the Company is unlikely to receive dividends from the bank in the
foreseeable future. See "Business -- Lincoln Security Bank" and "Supervision and
Regulation -- Dividends."

MORTGAGE LENDING OPERATION'S CONTRIBUTION TO INCOME

Security Bank derives income from originating mortgage loans and selling
them into the secondary market. The contribution to Security Bank's pre-tax
income from this activity represented 5.79% for the six month period ended June
30, 1996, and 6.51% and 5.55% for the years ended December 31,

8
<PAGE>
1995, and 1994, respectively. The bank has benefitted from mortgage refinancing
transactions that have been motivated by favorable interest rates. Although
Security Bank will continue to originate and sell loans into the secondary
market, there is no assurance that the current favorable interest rate
environment will continue or that mortgage lending operations will continue to
contribute as favorably to the net income of the Bank. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Non-Interest Income."

CONCENTRATION OF OWNERSHIP

As of June 30, 1996, 35.43% of the Company's outstanding shares were held by
the Company's Employee Stock Ownership Plan ("ESOP"), although 53.38% of those
shares are pledged by the ESOP to secure borrowings from the Company, and are
not allocated to employees and are therefore excluded from earnings and book
value per share calculations. Although the percentage of total outstanding
shares held by the ESOP will decrease to 31.45% after this Offering, the ESOP
will remain the Company's largest shareholder by a significant margin.
Accordingly, the election of directors and other matters considered and voted on
by Company shareholders may be significantly affected by the vote of the ESOP
shares, and the ability of other shareholders to influence management through
the election of directors or by shareholder resolution will likely be limited.
The ESOP is under the supervision of a three-member Board of Trustees appointed
by the Board of Directors of the Company. Currently, one of these Trustees is an
employee of Security Bank. Under the Employee Retirement Income Security Act
("ERISA"), the Trustees are obligated to act in the best interests of the
employee-beneficiaries of the ESOP, as investors in the Company. See "Management
- -- Other Benefit Plans."

The directors of the Company currently own an additional 222,042 shares, or
8.04% of the Company's outstanding shares (in addition to certain shares in the
ESOP), which will decrease to 7.13% after the Offering. An investor not
represented on the Board of Directors holds an additional 18.42% (16.35% after
the Offering) of the outstanding shares. See "Principal Shareholders."

COMPETITION

The banking industry in Oregon is highly competitive with respect to both
loans and deposits, and is dominated by a small number of large banks with many
offices operating over a wide geographic area. As of June 30, 1996, there were
four other commercial banks with twenty-three offices in Security Bank's primary
service area, all of which are banks with significantly greater assets and with
operations in other parts of Oregon. Additionally, there are several credit
unions, a savings association, finance companies and mortgage companies in the
Company's service area. A similar competitive environment exists in Lincoln
County where Lincoln Security Bank operates. Among the advantages possessed by
the Banks' commercial bank competitors is the ability to conduct wide-ranging
advertising campaigns and to allocate assets to geographic regions of higher
yields and demand. By virtue of their greater total capitalization, such banks
also have substantially higher lending limits than the Banks. Additionally, such
banks offer certain services, such as trust and international banking services,
which are not offered directly by the Banks, but are offered through
arrangements with correspondent institutions. In 1994, the Riegle-Neal
Interstate Banking and Branching Efficiency Act was adopted by Congress which
permits banks to cross state boundaries. Some of the Banks' competitors are
likely to reduce costs by combining what are now commonly-owned separate banks
in different states. Although Security Bank has been able to compete effectively
in its market area, there can be no assurance that it will be able to continue
to do so, or that Lincoln Security will effectively compete in its market area.
See "Business -- Competition."

DEPENDENCE ON KEY PERSONNEL

The Company's success is dependent on the services of Charles D. Brummel,
President and Chief Executive Officer, and Michael J. Delvin, Executive Vice
President, of the Company and the Bank. The loss of services of either
executive, or of certain other key officers, could adversely affect the Company

9
<PAGE>
and the Bank. No assurance can be given that replacement officers of comparable
abilities could be found. The Company does not maintain key person life
insurance on these individuals. See "Management."

LIMITED MARKET FOR THE SHARES

There is currently a limited market for the Company's shares. Although the
shares will be offered on the over-the-counter market, and application has been
made to list the shares on the National Association of Securities Dealers
Automated Quotation ("NASDAQ") National Market System ("NMS"), there can be no
assurance that an active public market will develop or be maintained for the
shares. Black & Company, Inc., the Underwriter of the Offering, and Ryan Beck &
Co. have committed to make a market in the shares. The Company will seek and
encourage other market makers to make a market, but no assurance can be given as
to whether an active market will develop. The market price could be subject to
significant fluctuations in response to variations in quarterly operating
results of the Company, general conditions of the banking industry and other
factors. If an active market in the shares does not develop, the price of the
shares may fluctuate substantially due to the effect of supply and demand in a
limited market. Even if an active market for the shares does develop, investors
in this Offering cannot be assured of being able to resell shares purchased in
the Offering at or above the initial offering price. See "Market for Common
Stock."

DEPENDENCE UPON SUBSIDIARY OPERATIONS

The Company is a bank holding company and is substantially dependent upon
dividends from its subsidiaries, the Banks, for revenues to pay its expenses,
including debt repayment, and to pay dividends to shareholders. The Banks are
subject to regulatory limitations upon the payment of dividends and the receipt
of dividends from the Banks cannot be assumed. Further, no cash dividends are
anticipated from Lincoln Security during that bank's initial years of operation.
Accordingly, the Company is dependent on Security Bank for its revenues.
Although the Company expects to continue to receive dividends from Security
Bank, no assurances as to the timing or amount of future dividends can be made.
See "Dividends" and "Supervision and Regulation -- Dividends."

OFFERING PRICE

The price of the shares offered hereby was derived from negotiations between
the Company and the Underwriter. There can be no assurance that the market will
sustain the offering price or that the offering price necessarily indicates the
actual value of the Common Stock. Although past trading has been limited, the
closing bid prices over the past three years have, except in the fourth quarter
of 1995, been below the offering price of the Common Stock. See "Underwriting"
and "Market for Common Stock."

REGULATORY RISK

Banks are subject to extensive regulation. These regulations are intended to
protect depositors not shareholders. As state-chartered banks, the Banks are
subject to regulation and supervision by the Federal Deposit Insurance
Corporation ("FDIC"), which insures the Banks' deposits, and the Director of the
Oregon Department of Consumer and Business Services, through the Division of
Finance and Corporate Securities (the "Oregon Director"). As a bank holding
company, the Company is subject to regulation and supervision by the Board of
Governors of the Federal Reserve System ("Federal Reserve") and the Oregon
Director. Federal and state regulation puts banks at a competitive disadvantage
compared to less regulated competitors such as finance companies, credit unions,
mortgage banking companies, and leasing companies.

While the banking industry continues to lose market share to less regulated
competitors, legislative reactions to the problems of the thrift industry have
added to the regulatory burden on banks. The Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA") amended numerous federal banking
statutes and has required the bank regulatory agencies to adopt regulations for
implementing many of its provisions. The FDICIA and the regulations thereunder
have increased regulatory and supervisory requirements for financial
institutions which has resulted, and will continue to result, in increased
operating expenses. See "Supervision and Regulation."

10
<PAGE>
ANTI-TAKEOVER PROVISIONS

Oregon law includes limitations upon the acquisition of an Oregon
corporation, such as the Company. As a bank holding company, the acquisition of
the Company or its subsidiaries would be subject to approval of banking
regulators. These limitations and requirements may serve to delay or prevent an
acquisition of the Company by another financial institution without the consent
and cooperation of the Board of Directors of the Company. Moreover, certain
provisions of Oregon law limit the ability of persons or entities to acquire
control of the Company or to effect certain corporate transactions without the
consent of the board of directors or the shareholders. These provisions are
intended to discourage hostile corporate acquisitions. In addition, the
Company's articles of incorporation authorize the board of directors to issue
additional shares of authorized but unissued shares of the Company's stock,
including the Common Stock, voting preferred stock, and warrants, options or
other rights to acquire shares of stock. While this authority is intended to
give the board the ability to raise capital, and provide flexibility in
financing corporate transactions, the issuance of additional securities of the
Company could have the effect of diluting the ownership interest of a
substantial shareholder or increasing the consideration necessary to acquire
control of the Company, and could thus be deemed to be an anti-takeover
provision. Further, the Company's bylaws provide for a staggered board of
directors whereby approximately one-third of the director positions are filled
each year. This provision makes it more difficult for a dissident shareholder to
remove the entire board of directors at one time. Such a provision may have the
effect of discouraging potential acquirors, and may be considered an
anti-takeover defense. Oregon law and the Company's bylaws may therefore have
the effect of making the Company less attractive for takeover, and the
shareholders may not benefit from a rise in the price of the Common Stock that a
takeover could cause. See "Description of Common Stock -- Anti-takeover
Provisions."

USE OF PROCEEDS

The net proceeds to the Company from the sale of the Common Stock offered by
the Company are estimated to be $2,326,000 after deduction of underwriting
discounts and expenses payable by the Company.

The net proceeds of the Offering are not currently allocated for specific
purposes. Management expects to use the net proceeds generally to enhance
capital levels to support the growth of the Company and for general corporate
purposes. The Company's investment in Lincoln Security committed a significant
portion of the Company's available capital. Consequently, the Company believes
it prudent to restore capital levels to prior levels to position the Company to
take advantage of future opportunities for growth or expansion should such
opportunities arise. The Company will from time to time consider investment or
acquisition candidates and establishment of branches outside its current market
area. The Company currently has no specific plans, agreements or other
arrangements with others for any investment or acquisition at this time.

The Company may use certain of the net proceeds to pay some or all of the
Company's indebtedness to Bank of America Oregon, with a current balance of
$644,000, incurred in connection with the Company's Employee Stock Ownership
Plan. The loan accrues interest at Bank of America Oregon's prime rate less
one-half percent, and matures on December 15, 1999. See "Management -- Other
Benefit Plans." Pending their ultimate application, the net proceeds will be
invested in short-term investments.

The Company and the Bank currently exceed all regulatory capital
requirements and are therefore not required to raise additional capital to
comply with such requirements. After the Offering, the Company expects to
continue to exceed all regulatory requirements.

11
<PAGE>
MARKET FOR COMMON STOCK

Only a limited market for the Common Stock has existed prior to this
Offering. The Common Stock has been traded over-the-counter through the OTC
Bulletin Board and the Pink Sheet Service of the National Quotation Bureau. The
Company has applied for inclusion of the Common Stock on the NASDAQ National
Market System under the symbol "SBHC" effective on the date of the Offering.
Effective with the Offering, the Company's Common Stock will be registered under
the Securities Exchange Act of 1934 and is expected to be eligible to be held in
margin accounts. The following lists the bid prices at the end of each period,
obtained from Black & Company, Inc., the principal market maker in the Company's
Common Stock, as adjusted for prior stock dividends including a 50% stock
dividend paid on January 5, 1996. Prices do not include retail mark-ups, mark-
downs or commissions and may not represent actual transactions:

<TABLE>
<CAPTION>
CLOSING BID PRICE
AT END OF PERIOD
-----------------
<S> <C>
1994
First Quarter............................................................. $ 4.83
Second Quarter............................................................ $ 5.33
Third Quarter............................................................. $ 5.67
Fourth Quarter............................................................ $ 5.50
1995
First Quarter............................................................. $ 5.33
Second Quarter............................................................ $ 6.00
Third Quarter............................................................. $ 6.83
Fourth Quarter............................................................ $ 7.67
1996
First Quarter............................................................. $ 7.88
Second Quarter............................................................ $ 8.50
</TABLE>

On June 30, 1996, the Common Stock was held of record by approximately 455
shareholders, a number which does not include beneficial owners who hold shares
in "street name." As of September 12, 1996, the closing bid price of the Common
Stock was $8.00 per share.

12
<PAGE>
CAPITALIZATION

The following table sets forth: (i) the consolidated capitalization of the
Company at June 30, 1996, and (ii) the consolidated capitalization of the
Company on an as-adjusted basis giving effect to the issuance of the Common
Stock offered hereby and receipt of net proceeds therefrom, as if the sale of
the Common Stock had been consummated on June 30, 1996.

<TABLE>
<CAPTION>
JUNE 30, 1996
------------------------------
ACTUAL AS ADJUSTED
-------------- --------------
<S> <C> <C>
SHAREHOLDERS' EQUITY:
Nonvoting preferred stock, $5.00 par value
Authorized 5,000,000 shares, none issued.................................... $ -- $ --
Voting preferred stock, $5.00 par value
Authorized 5,000,000 shares, none issued.................................... -- --
Common Stock, $5.00 par value
Authorized 10,000,000 shares;
2,762,325 shares issued and outstanding.................................... 13,811,625
3,112,325 shares issued and outstanding, as adjusted........................ 15,561,625
Surplus....................................................................... 164,862 740,862
Retained earnings............................................................. 2,289,352 2,289,352
Unrealized gains on investment securities available for sale.................. (523,276) (523,276)
Less unearned ESOP shares at cost (1)......................................... 1,853,314 1,853,314
-------------- --------------
Total Shareholders' Equity -- Controlling Interest............................ $ 13,889,249 $ 16,215,249
-------------- --------------
-------------- --------------
CAPITAL RATIOS (2):
Tier 1 capital ratio........................................................ 13.34% 15.48%
(Regulatory Minimum: 4.00%)
Total risk-based capital ratio.............................................. 14.31% 16.45%
(Regulatory Minimum: 8.00%)
Leverage capital ratio (3).................................................. 8.39% 9.60%
(Regulatory Minimum: 3.00%)
</TABLE>

- ------------------------
(1) Reflects 522,471 shares held of record by the Security Bank Holding Company
Employee Stock Ownership Plan Trust. Such shares are not allocated to
employees and are pledged to secure repayment of indebtedness to the
Company. At the time the shares are allocated and released from the pledge,
an amount equal to the then market value of the shares is charged to income
and shareholders' equity increases by an equal amount. See "Management --
Benefit Plans."

(2) Computed in accordance with Federal Reserve guidelines. See "Supervision and
Regulation."

(3) The leverage ratio is Tier 1 capital divided by adjusted total assets.

13
<PAGE>
DILUTION

The net tangible book value of the Company at June 30, 1996 was $13,889,249
or $6.20 per share of Common Stock. Net tangible book value per share is
determined by dividing the net tangible book value of the Company (tangible
assets less liabilities) by the number of outstanding shares of Common Stock
(excluding 522,471 shares held of record by the Security Bank Holding Company
Employee Stock Ownership Plan Trust which are not allocated to employees and are
pledged to secure repayment of indebtedness to the Company). After giving effect
to the issuance and sale of 350,000 shares of Common Stock being offered by the
Company (at an Offering price of $8.00 per share) and after deducting
Underwriting discounts and offering costs, the net tangible book value per share
at June 30, 1996 would have been $6.26. This represents an immediate increase in
net tangible book value of $0.06 per share to the existing shareholders and an
immediate dilution of $1.74 per share to new investors.

The following table illustrates this per share dilution in net tangible book
value:

<TABLE>
<S> <C> <C>
Assumed Offering price..................................... $ 8.00
Net tangible book value before offering.................... $ 6.20
Increase attributable to sale of Common Stock by the
Company to new investors.................................. .06
---------
Proforma net tangible book value after the Offering (1).... 6.26
---------
Dilution to new investors (2).............................. $ 1.74
---------
---------
</TABLE>

- ------------------------

(1) After deduction of underwriting discounts and commissions and anticipated
offering expenses to be paid by the Company.

(2) Dilution is determined by subtracting net tangible book value per share
after the Offering from the amount of cash paid by a new investor for a
share of Common Stock.

DIVIDENDS

The Company has paid cash dividends for each of the past six full fiscal
years. Dividends for those periods were as follows:

<TABLE>
<CAPTION>
CASH DIVIDEND PER SHARE
PERIOD (1)
- ------------ --------------------------
<S> <C>
1991 $ 0.067
1992 $ 0.087
1993 $ 0.100
1994 $ 0.133
1995 $ 0.147
1996 $ 0.200(2)
</TABLE>

- ------------------------

(1) Adjusted to reflect subsequent stock dividends.

(2) In addition to cash dividends, the Company issued a 100% stock dividend in
August, 1994 and a 50% stock dividend in January, 1996.

The Company has no significant operations and is dependent upon its
subsidiaries, the Banks, for revenues through the receipt of dividends from the
Banks to pay its expenses and to provide cash dividends to the Company's
shareholders. Currently, and for the foreseeable future, Security Bank is the
Company's sole source of dividends. Oregon and federal banking laws and
regulations place restrictions on the payment of dividends by a bank to its
shareholders. See "Supervision and Regulation -- Dividends." The Board of
Directors' dividend policy is to review the Company's financial performance,
capital adequacy, regulatory compliance and cash resources, and, if such review
is favorable, to declare and pay a cash dividend to its shareholders
semi-annually. Although the Company expects to continue to pay cash dividends,
future dividends are subject to these limitations and to the discretion of the
Board of Directors, and could be reduced or eliminated. The performance of
Lincoln Security Bank is not expected to have a material effect on the Company's
ability to pay dividends.

14
<PAGE>
SELECTED QUARTERLY FINANCIAL DATA

The following tables set forth the Company's unaudited consolidated
financial data regarding operations for the first two quarters of 1996 and each
quarter of 1995 and 1994. This information, in the opinion of management,
includes all normal recurring adjustments necessary to state fairly the
information set forth therein:
<TABLE>
<CAPTION>
1996 QUARTER ENDED (UNAUDITED)
--------------------------------------------------
JUNE 30 MAR. 31
----------- -----------
(AMOUNTS IN THOUSANDS EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Interest income............................................... $ 3,315 $ 3,165
Interest expense.............................................. 1,359 1,266
----------- -----------
Net interest income........................................... 1,956 1,899
Provision for loan losses..................................... 45 45
----------- -----------
Net interest income after provision for loan losses........... 1,911 1,854
Non-interest income........................................... 719 680
Non-interest expenses......................................... 2,042 2,017
----------- -----------
Income before provision for income taxes...................... 588 517
Provision for income taxes.................................... 140 140
----------- -----------
Net income.................................................... $ 448 $ 377
----------- -----------
----------- -----------
Weighted average number of shares outstanding (1)............. 2,269,517 2,266,834
Net income per share (1)...................................... $ 0.19 $ 0.17

1995 QUARTER ENDED (UNAUDITED)
--------------------------------------------------
DEC. 31 SEPT. 30 JUNE 30 MAR. 31
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Interest income............................................... $ 3,049 $ 3,000 $ 3,024 $ 2,884
Interest expense.............................................. 1,167 1,106 1,101 1,047
----------- ----------- ----------- -----------
Net interest income........................................... 1,882 1,894 1,923 1,837
Provision for loan losses..................................... 20 45 50 45
----------- ----------- ----------- -----------
Net income after provision for loan losses.................... 1,862 1,849 1,873 1,792
Non-interest income........................................... 664 540 569 471
Non-interest expenses......................................... 1,783 1,717 1,878 1,745
----------- ----------- ----------- -----------
Income before provision for income taxes...................... 743 672 564 518
Provision for income taxes.................................... 75 235 147 176
----------- ----------- ----------- -----------
Net income.................................................... $ 668 $ 437 $ 417 $ 342
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Weighted average number of shares outstanding (1)............. 2,239,670 2,181,050 2,180,990 2,180,980
Net income per share.......................................... $ 0.29 $ 0.19 $ 0.19 $ 0.16
<CAPTION>

1994 QUARTER ENDED (UNAUDITED)
--------------------------------------------------
DEC. 31 SEPT. 30 JUNE 30 MAR. 31
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Interest income............................................... $ 2,656 $ 2,654 $ 2,524 $ 2,369
Interest expense.............................................. 920 803 737 674
----------- ----------- ----------- -----------
Net interest income........................................... 1,736 1,851 1,787 1,695
Provision for loan losses..................................... 20 60 60 60
----------- ----------- ----------- -----------
Net interest income after provision for loan losses........... 1,716 1,791 1,727 1,635
Non-interest income........................................... 327 515 543 575
Non-interest expenses......................................... 1,322 1,678 1,699 1,693
----------- ----------- ----------- -----------
Income before provision for income taxes...................... 721 628 571 517
Provision for income taxes.................................... 190 198 198 176
----------- ----------- ----------- -----------
Net income.................................................... $ 531 $ 430 $ 373 $ 341
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Weighted average number of shares outstanding (1)............. 2,180,763 2,123,519 2,123,495 2,123,456
Net income per share (1)...................................... $ 0.23 $ 0.20 $ 0.18 $ 0.16
</TABLE>

- ------------------------------
(1) Per share data has been adjusted for a 50% stock dividend paid in January,
1996, and a 100% stock dividend paid in August, 1994. Excludes shares
issued to the Security Bank Holding Company Employee Stock Ownership Plan
which are not yet allocated to employees and are pledged to secure
repayment of notes to the Company. See "Management -- Other Benefit Plans."

15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995, AND
THE YEARS ENDED DECEMBER 31, 1995 AND 1994.

The following summary financial data and the discussion and analysis should
be read in conjunction with the Company's unaudited consolidated financial
statements and the notes thereto for the six month periods ended June 30, 1996
and 1995, and its audited consolidated financial statements and the notes
thereto for the years ended December 31, 1995 and 1994 included elsewhere in
this Prospectus. The results of operations for the Company in future periods may
be affected by many factors, including the results of operations of Lincoln
Security, which is not expected to contribute significantly to the earnings of
the Company during the next twelve months, and economic and demographic changes
in the Company's market areas. See "Business -- Lincoln Security Bank" and "--
Economic Conditions and Demographics." All references the "Bank" in the
following discussion are references to Security Bank.

RESULTS OF OPERATIONS

The operating results of the Bank depend primarily on its net interest
income. The Bank's net interest income is determined by its interest rate
spread, the relative amounts of interest-earning assets and interest-bearing
liabilities, and the degree of mismatch in the maturity and repricing
characteristics of its interest-earning assets and interest-bearing liabilities.
Interest rate spread is the difference between the yields earned on its
interest-earning assets and the rates paid on its interest-bearing liabilities.
The Bank's net income is also affected by the establishment of provisions for
loan losses and the level of its other income, including service charges on
deposit accounts and sold real estate loan fees, as well as its other expenses
and income tax provisions.

SUMMARY INCOME STATEMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
INCREASE (DECREASE)
---------------------------------------------
AS A
IN DOLLARS PERCENTAGE
------------------------------ -------------
SIX MONTHS SIX MONTHS YEAR YEAR SIX MONTHS YEAR ENDED SIX MONTHS
ENDED ENDED ENDED ENDED ENDED 6/30 12/31 ENDED 6/30
6/30/96 6/30/95 12/31/95 12/31/94 1996 TO 1995 1995 TO 1994 1996 TO 1995
----------- ----------- --------- --------- --------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income................ $ 6,480 $ 5,908 $ 11,957 $ 10,203 $ 572 $ 1,754 9.68%
Interest expense............... 2,625 2,148 4,421 3,134 477 1,287 22.21%
----------- ----------- --------- --------- ----- ------------- -------------
Net interest income before
provision for loan losses... 3,855 3,760 7,536 7,069 95 467 2.53%
Provision for loan losses...... 90 95 160 200 (5) (40) (5.26)%
----------- ----------- --------- --------- ----- ------------- -------------
Net interest income after
provision for loan losses... 3,765 3,665 7,376 6,869 100 507 2.73%
Non-interest income............ 1,399 1,040 2,244 1,961 359 283 34.52%
Non-interest expense........... 4,059 3,623 7,123 6,393 436 730 12.03%
----------- ----------- --------- --------- ----- ------------- -------------
Income before provision for
income taxes................ 1,105 1,082 2,497 2,437 23 60 2.13%
Provision for income taxes..... 280 323 633 762 (43) (129) (13.31)%
----------- ----------- --------- --------- ----- ------------- -------------
Net income................... $ 825 $ 759 $ 1,864 $ 1,675 $ 66 $ 189 8.70%
----------- ----------- --------- --------- ----- ------------- -------------
----------- ----------- --------- --------- ----- ------------- -------------

YEAR ENDED
12/31
1995 TO 1994
-------------
<S> <C>
Interest income................ 17.19%
Interest expense............... 41.07%
-------------
Net interest income before
provision for loan losses... 6.61%
Provision for loan losses...... (20.00)%
-------------
Net interest income after
provision for loan losses... 7.38%
Non-interest income............ 14.43%
Non-interest expense........... 11.42%
-------------
Income before provision for
income taxes................ 2.46%
Provision for income taxes..... (16.93)%
-------------
Net income................... 11.28%
-------------
-------------
</TABLE>

FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995

GENERAL. As shown in the table above, net income increased to $825,000 for
the six months ended June 30, 1996 from $759,000 for the same period of 1995, an
8.70% increase. The increase in both interest expense and non-interest expense
were more than offset by increases in interest income and non-interest income.
The increase in net income is mostly attributable to a lower provision for
income taxes in the six month period ended June 30, 1996, over the same period
in 1995, as a result of overpayment of income taxes in 1995.

16
<PAGE>
NET INTEREST INCOME. Net interest income before the provision for loan
losses increased $95,000 or 2.53% for the six months ended June 30, 1996 over
same period in 1995. The increase in interest income was primarily due to a
$17.9 million or 13.22% increase in average interest-earning assets for the six
months ended June 30, 1996 over the same period in 1995. The largest component
of the increase in earning assets was an increase in investment securities
volume of $12.1 million, which accounted for $386,000 of the total increase in
interest income. The increase in loans and other earning asset volume of $5.8
million for the first six months of 1996 compared to the same period in 1995
resulted in an increase in interest income of $261,000. The yield on earning
assets decreased to 8.51% for the six months ended June 30, 1996, from 8.81% for
the same period in 1995. This decrease in yield accounted for a $107,000
decrease in interest income. The remaining $32,000 of the increase in interest
income was due to one additional day in the six month period ended June 30, 1996
over the same period in 1995. Interest-bearing liabilities increased $14.0
million or 12.06% for the six months ended June 30, 1996, compared to the same
period in 1995. The volume increase accounted for $345,000 of the increase in
interest expense. The rate on interest-bearing liabilities increased to 4.05%
for the six months ended June 30, 1996, compared to 3.72% for the same period in
1995. This increase in rate accounted for a $121,000 increase in interest
expense. The remaining $12,000 of the increase in interest expense was due to
one additional day in the six month period ended June 30, 1996 over the same
period in 1995.

PROVISION FOR LOAN LOSSES. The loan loss provision during the six month
period ended June 30, 1996, was $90,000 and $95,000 for the same period in 1995.
Net charge-offs during the six-month periods were $94,000 and ($3,000) for 1996
and 1995, respectively.

Management believes the loan loss provision maintains the reserve for loan
losses at an appropriate level. The reserve for loan losses was $1,059,000 at
June 30, 1996, as compared to $1,115,000 at June 30, 1995. The Bank's ratio of
reserve for loan losses to total loans was 1.27% at June 30, 1996, compared to
1.42% at June 30, 1995.

Non-performing assets (defined as loans on non-accrual status, 90 days or
more past due, and other real estate owned) were $483,000 and $200,000 at June
30, 1996 and 1995, respectively. The increase in non-performing assets is
attributable to small number of non-performing loans secured by single family
residential real estate. Management believes the loans are adequately secured
and that no significant losses will be incurred. Management does not believe
that the increase represents a deterioration of the credit quality of the loan
portfolio or an indication of future credit problems.

NON-INTEREST INCOME. Non-interest income increased 34.52% in the first six
months of 1996 as compared to the same period in 1995. The increase in
non-interest income is due in large part to fees generated by the origination
and sale of mortgage loans. Mortgage loan originations were $28.4 million in the
first six months of 1996, up from $11.3 million for the same period in 1995.
Loans sold were $29.6 million and $11.1 million for the first six months of 1996
and 1995, respectively, generating $484,000 and $242,000 of fee income during
each respective period, an increase of 100.00%. Security Bank has benefitted
from mortgage refinancing transactions that have been motivated by favorable
interest rates. Although the Bank will continue to originate and sell loans into
the secondary market, there is no assurance that the favorable interest rate
environment will continue or that mortgage lending operations will continue to
significantly contribute to the net income of the Bank.

NON-INTEREST EXPENSE. Non-interest expense increased 12.03% in the first
six months of 1996 compared to the first six months of 1995. The primary
non-interest expenses are salaries and employee benefits, and expenses relating
to occupancy and equipment. Salaries and employee benefits were up due to
increased staff levels in the commercial loan department and the Eugene loan
production office which opened in November, 1995.

17
<PAGE>
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994.

GENERAL. Net income increased to $1.9 million for the year ended December
31, 1995 from $1.7 million for the same period in 1994, a 11.28% increase. The
combined increases in interest income and non-interest income exceeded increases
in interest expense and non-interest expense.

NET INTEREST INCOME. Net interest income before the provision for loan
losses increased $0.5 million or 6.61% for the year ended December 31, 1995 over
the same period in 1994. The increase resulted from a $1.8 million increase in
interest income offset by a $1.3 million increase in interest expense. The
increase in interest income is due primarily to an increase in average earning
assets of $13.4 million or 10.91% for the year ended December 31, 1995, over the
same period in 1994. Although loans and investments continued to increase during
the year of 1995, new deposits at prevailing interest rates limited the increase
in the net interest income. Interest expense increased due to both volume and
rate for the comparable periods in 1995 over 1994. Average interest-bearing
liabilities increased $11.5 million or 10.91% for the year ended December 31,
1995, compared to the same period in 1994. The weighted average yields earned
were 8.75% and 8.28% for the years ended December 31, 1995 and 1994,
respectively. Average yields earned increased 47 basis points or 5.68% for the
year ended December 31, 1995 compared to the same period in 1994. Average rates
paid were 3.79% and 2.98% for the years ended December 31, 1995 and 1994,
respectively. This represents an increase of 81 basis points or 27.18% for the
year ended December 31, 1995, compared to 1994.

PROVISION FOR LOAN LOSSES. The loan loss provision decreased during the
year ended December 31, 1995, to $160,000 as compared to $200,000 for the same
period in 1994. Net charge-offs during the years were $114,000 and $92,000 for
1995 and 1994, respectively. The loan loss provision decreased between 1994 and
1995 as a result of an improvement in the local economy and the quality of the
loan portfolio.

Management believes the loan loss provision maintains the reserve for loan
losses at an appropriate level. The reserve for loan losses was $1,063,000 at
December 31, 1995, as compared to $1,017,000 at December 31, 1994. The Bank's
ratio of reserve for loan losses to total loans was 1.32% at December 31, 1995,
compared to 1.35% at December 31, 1994.

Non-performing assets (defined as loans 90 days or more past due, and other
real estate owned) were $467,000 and $64,000 at December 31, 1995 and 1994,
respectively. The increase in non-performing assets is attributable to a small
number of non-performing loans secured by single family residential real estate.
Management believes the loans are adequately secured and that no significant
losses will be incurred. Management does not believe that the increase
represents a deterioration of the credit quality of the loan portfolio or an
indication of future credit problems.

NON-INTEREST INCOME. Non-interest income increased 14.43% for the year
ended December 31, 1995 as compared to the same period in 1994. Gains on sales
of investment securities available for sale of $13,000 in 1995 compared to
losses of $168,000 in 1994, accounted for more than 60% of the increase in
non-interest income. The other significant portion of the increase in
non-interest income was a result of increased income from service charges on
deposit accounts which were $910,000 in 1995, compared to $847,000 in 1994, a
7.42% increase. Mortgage loan originations were $32.1 million in the year ended
December 31, 1995, up from $20.1 million for the same period in 1994. Loans sold
were $30.9 million and $22.5 million for the years ended December 31, 1995 and
1994, respectively, generating $611,000 and $628,000 of fee income during each
respective period, a decrease of 2.7% from 1994 to 1995. A strong refinance
market supported mortgage origination activity.

NON-INTEREST EXPENSE. Non-interest expense increased 11.42% for the year
ended December 31, 1995, as compared to year ended December 31, 1994. The
primary non-interest expenses are salaries and employee benefits, and expenses
relating to occupancy and equipment.

PROVISION FOR INCOME TAXES. The provision for income taxes decreased 16.93%
for the year ended December 31, 1995 as compared to the same period in 1994.
This was the result of an over-payment of taxes in 1994.

18
<PAGE>
LOAN LOSSES AND RECOVERIES

The provision for loan losses charged to operating expense is based on the
Bank's loan loss experience and such factors which, in management's judgment,
deserve recognition in estimating possible loan losses. Management monitors the
loan portfolio to ensure that the reserve for loan losses is adequate to cover
outstanding loans on non-accrual status and any current loans deemed to be in
serious doubt of repayment according to each loan's repayment plan. The
following table summarizes the Bank's reserve for loan losses, and charge-off
and recovery activity:

<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED DECEMBER 31,
ENDED ------------------------------
JUNE 30, 1996 1995 1994
-------------- -------------- --------------
<S> <C> <C> <C>
Loans outstanding at end of period............................... $ 83,198,749 $ 80,743,626 $ 75,103,857
-------------- -------------- --------------
-------------- -------------- --------------
Average loans outstanding during period.......................... $ 80,611,985 $ 77,922,578 $ 67,716,356
-------------- -------------- --------------
-------------- -------------- --------------
Reserve balance beginning of period.............................. $ 1,062,993 $ 1,016,770 $ 909,131
Recoveries:
Commercial..................................................... 2,900 -- --
Real estate.................................................... -- -- --
Installment.................................................... 10,047 64,715 54,460
Credit card.................................................... 1,031 6,666 1,817
-------------- -------------- --------------
13,978 71,381 56,277
Loans Charged off:
Commercial..................................................... (11,457) -- --
Real estate.................................................... -- -- --
Installment.................................................... (72,448) (156,017) (128,548)
Credit card.................................................... (24,330) (29,141) (20,090)
-------------- -------------- --------------
$ (108,235) $ (185,158) $ (148,638)
-------------- -------------- --------------
Net loans (charged off) recovered................................ (94,257) (113,777) (92,361)
Provision charged to operations.................................. 90,000 160,000 200,000
-------------- -------------- --------------
Reserve balance, end of period................................... $ 1,058,736 $ 1,062,993 $ 1,016,770
-------------- -------------- --------------
-------------- -------------- --------------
Ratio of net loans charged off to average loans outstanding...... (0.12)% (0.15)% (0.14)%
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>

LENDING AND CREDIT MANAGEMENT

Although a risk of nonpayment exists with respect to all loans, certain
specific types of risks are associated with different types of loans. Due to the
nature of the Bank's customer base and the growth experienced in Coos and Curry
Counties, real estate is frequently a material component of collateral for the
Bank's loans. The expected source of repayment of these loans is generally the
operations of the borrower's business or personal income, but real estate
provides an additional measure of security. Risks associated with real estate
loans include fluctuating land values, local economic conditions, changes in tax
policies, and a concentration of loans within a limited geographic market area.

The Bank mitigates risk on construction loans by generally lending funds to
customers that have been pre-qualified for long term financing and who are using
contractors acceptable to the Bank. The commercial real estate risk is further
mitigated by making the majority of commercial real estate loans on
owner-occupied properties.

The Bank manages the general risks inherent in the loan portfolio by
following loan policies and underwriting practices designed to result in prudent
lending activities. For example, the Bank limits commercial loans to 70% of the
value of the collateral, and residential mortgages, which may be first or second
liens, to 80% of the value of the collateral.

19
<PAGE>
The following table presents information with respect to non-performing
assets:

<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, ----------------------
1996 1995 1994
----------- ----------- ---------
<S> <C> <C> <C>
Loans on non-accrual status................................................. $ 483,000 $ 432,000 $ --
Loans past due greater than 90 days but not on non-accrual status........... -- -- 21,000
Other real estate owned, net................................................ -- 35,000 43,000
----------- ----------- ---------
Total non-performing assets................................................. $ 483,000 $ 467,000 $ 64,000
----------- ----------- ---------
----------- ----------- ---------
Percentage of non-performing assets to total assets......................... 0.28% 0.29% 0.04%
</TABLE>

Interest income which would have been realized on non-accrual or past-due
loans if they had remained current was insignificant.

ALLOCATION OF RESERVE FOR LOAN LOSSES

The Bank does not normally allocate the reserve for loan losses to specific
loan categories with the exception of credit cards. An allocation by credit
quality is made below for presentation purposes. This allocation process does
not necessarily measure anticipated future credit losses; rather, it seeks to
measure the Bank's assessment at a point in time of perceived credit loss
exposure and the impact of current and anticipated economic conditions.

<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
-------------------------- ------------------------------------------------------
PERCENT OF PERCENT OF PERCENT OF
1996 TOTAL LOANS 1995 TOTAL LOANS 1994 TOTAL LOANS
------------- ----------- ------------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Unclassified loans......... $ 590,037 94.62% $ 668,847 94.80% $ 852,536 96.20%
Letters of credit.......... 1,833 .38% 2,542 0.53% -- --
Credit cards............... 38,466 2.31% 38,511 2.39% 33,091 2.20%
Watchlist.................. 82,000 .83% 85,900 0.81% 18,748 0.50%
Substandard................ 289,300 1.77% 225,400 1.42% 50,996 0.45%
Doubtful................... 57,100 .09% 41,793 0.05% 6,399 0.01%
Specific-reserve........... -- -- -- -- 55,000 0.64%
------------- ----------- ------------- ----------- ------------- -----------
$ 1,058,736 100.00% $ 1,062,993 100.00% $ 1,016,770 100.00%
------------- ----------- ------------- ----------- ------------- -----------
------------- ----------- ------------- ----------- ------------- -----------
</TABLE>

20
<PAGE>
ANALYSIS OF NET INTEREST INCOME

The following table presents information regarding yields on
interest-earning assets, expense or interest-bearing liabilities, and net yields
on interest-earning assets for the periods indicated (amounts in thousands
except percentages):
<TABLE>
<CAPTION>
ANALYSIS FOR THE SIX MONTHS ENDED INCREASE
JUNE 30, 1996 AND 1995 1996 1995 (DECREASE) CHANGE
- ---------------------------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Average interest-earning assets................................. $ 153,119 $ 135,235 $ 17,884 13.22%
Average interest-bearing liabilities............................ $ 130,445 $ 116,403 14,042 12.06%
Average yields earned (1)....................................... 8.51% 8.81% (0.30)% (3.41)%
Average rates paid (1).......................................... 4.05% 3.72% (0.33)% 8.87%
----------- ----------- -----------
Net interest spread (1)......................................... 4.46% 5.09% (0.63)% (12.38)%
----------- ----------- -----------
----------- ----------- -----------
Net interest income to average interest-earning assets (1)...... 5.06% 5.61% (0.55)% (9.80)%
----------- ----------- -----------
----------- ----------- -----------

ANALYSIS FOR THE YEARS ENDED INCREASE
DECEMBER 31, 1995 AND 1994 1995 1994 (DECREASE) CHANGE
- ---------------------------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Average interest-earning assets................................. $ 136,688 $ 123,246 $ 13,442 10.91%
Average interest-bearing liabilities............................ $ 116,803 $ 105,318 $ 11,485 10.91%
Average yields earned........................................... 8.75% 8.28% 0.47% 5.68%
Average rates paid.............................................. 3.79% 2.98% 0.81% 27.18%
----------- ----------- -----------
Net interest spread............................................. 4.96% 5.30% (0.34)% (6.42)%
----------- ----------- -----------
----------- ----------- -----------
Net interest income to average interest-earning
assets......................................................... 5.51% 5.74% (0.23)% (4.01)%
----------- ----------- -----------
----------- ----------- -----------
</TABLE>

- ------------------------
(1) Annualized

21
<PAGE>
ANALYSIS OF CHANGES IN INTEREST DIFFERENTIAL

The following table sets forth the dollar amount of the increase (decrease)
in the Company's consolidated interest income and expense and attributes such
dollar amounts to changes in volume as well as changes in rates. Rate/volume
variances which were immaterial have been allocated equally between rate and
volume changes.

<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1996 OVER 1995
-------------------------------------------------
AMOUNT OF CHANGE
TOTAL ATTRIBUTED TO
INCREASE ------------------------------------
(DECREASE) VOLUME RATE DAYS
----------- ----------- ------------ ---------
<S> <C> <C> <C> <C>
Interest income:
Federal funds sold.......................................... $ 60,517 $ 66,754 $ (6,338) $ 101
Time deposits -- domestic financial institutions............ (22,375) (24,587) 2,021 191
Investment securities -- taxable............................ 288,334 321,091 (39,368) 6,611
Investment securities -- exempt from federal income
taxes (1).................................................. 35,162 65,058 (32,513) 2,617
Loans, net and mortgage loans held for sale................. 130,100 177,266 (69,341) 22,175
Net investment in direct financing leases................... 69,824 45,069 24,206 549
Federal Home Loan Bank stock................................ 11,103 (3,200) 13,996 307
----------- ----------- ------------ ---------
Total interest income..................................... $ 572,665 $ 647,451 $ (107,337) $ 32,551
----------- ----------- ------------ ---------
----------- ----------- ------------ ---------
Interest expense:
Interest on deposits:
Interest-bearing demand................................... $ 12,469 $ 8,711 $ 3,569 $ 189
NOW accounts.............................................. (16,699) (4,434) (12,970) 705
Money market accounts..................................... 79,097 41,590 36,364 1,143
Savings accounts.......................................... (7,353) (10,861) 2,406 1,102
Time deposits............................................. 364,969 222,061 136,770 6,138
Securities sold under agreement to repurchase............... (1,372) 2,592 (4,413) 449
ESOP debt................................................... (6,532) (4,181) (2,536) 185
Short term borrowings....................................... 6 (60) 5 61
Federal Home Loan Bank borrowings........................... 52,950 89,611 (38,523) 1,862
----------- ----------- ------------ ---------
Total interest expense.................................... $ 477,535 $ 345,029 $ 120,672 $ 11,834
----------- ----------- ------------ ---------
Net interest income........................................... $ 95,130 $ 302,422 $ (228,009) $ 20,717
----------- ----------- ------------ ---------
----------- ----------- ------------ ---------
</TABLE>

- ------------------------
(1) Interest income from investment securities exempt from federal income tax is
not reported on a tax equivalent basis.

22
<PAGE>

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995 OVER 1994
------------------------------------------
AMOUNT OF CHANGE
TOTAL ATTRIBUTED TO
INCREASE ---------------------------
(DECREASE) VOLUME RATE
------------- ------------- ------------
<S> <C> <C> <C>
Interest income:
Federal funds sold.................................................. $ 28,846 $ (5,275) $ 34,121
Time deposits -- domestic financial institutions.................... (16,590) (26,241) 9,651
Investment securities -- taxable.................................... 78,937 22,184 56,753
Investment securities -- exempt from federal income taxes(1)........ 120,561 136,777 (16,216)
Loans, net and mortgage loans held for sale......................... 1,408,733 1,021,244 387,489
Net investment in direct financing leases........................... 112,603 90,912 21,691
Federal Home Loan Bank stock........................................ 20,628 23,315 (2,687)
------------- ------------- ------------
Total interest income............................................. $ 1,753,718 $ 1,262,916 $ 490,802
------------- ------------- ------------
------------- ------------- ------------
Interest expense:
Interest on deposits:
Interest-bearing demand........................................... $ 11,310 $ (5,606) $ 16,916
NOW accounts...................................................... 3,828 603 3,225
Money market...................................................... 105,217 13,090 92,127
Savings........................................................... (12,237) (26,602) 14,365
Time deposits..................................................... 840,409 369,246 471,163
Securities sold under agreement to repurchase....................... 47,402 6,181 41,221
ESOP debt........................................................... 22,435 (3,981) 26,416
Short-term borrowings............................................... 7,185 427 6,758
Federal Home Loan Bank borrowings................................... 261,193 144,977 116,216
------------- ------------- ------------
Total interest expense............................................ $ 1,286,742 $ 498,335 $ 788,407
------------- ------------- ------------
------------- ------------- ------------
Net interest income................................................... $ 466,976 $ 764,581 $ (297,605)
------------- ------------- ------------
------------- ------------- ------------
</TABLE>

- ------------------------
(1) Interest income from investment securities exempt from federal income tax is
not reported on a tax equivalent basis.

23
<PAGE>
SUMMARY BALANCE SHEETS
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
INCREASE (DECREASE)
--------------------------------------------------------
IN DOLLARS AS A PERCENTAGE
-------------------------- ----------------------------
6/30/96 12/31/95 12/31/94 1995 TO 1996 1995 TO 1994 1995 TO 1996 1995 TO 1994
--------- --------- --------- ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Federal funds sold............... $ 741 $ 3,084 $ 1,058 $ (2,343) $ 2,026 (75.97)% 191.49%
Investments securities, net...... 70,028 58,228 53,860 11,800 4,368 20.27% 8.11%
Loans and leases, net............ 85,622 83,069 75,973 2,553 7,096 3.07% 9.34%
Other earning assets............. 2,124 2,044 3,213 80 (1,169) 3.91% 36.38%
--------- --------- --------- ------------ ------------ ------ -------------
Total earning assets........... 158,515 146,425 134,104 12,090 12,321 8.26% 9.19%
Other assets..................... 11,553 12,163 11,467 (610) 696 (5.02)% 6.07%
--------- --------- --------- ------------ ------------ ------ -------------
Total assets................... $ 170,068 $ 158,588 $ 145,571 $ 11,480 $ 13,017 7.24% 8.94%
--------- --------- --------- ------------ ------------ ------ -------------
--------- --------- --------- ------------ ------------ ------ -------------
LIABILITIES AND SHAREHOLDERS'
EQUITY
Non-interest bearing deposits.... $ 19,506 $ 19,492 $ 18,469 $ 14 $ 1,023 0.07% 5.54%
Interest bearing deposits........ 114,295 107,798 102,649 6,497 5,149 6.03% 5.02%
Federal Home Loan Bank
borrowings...................... 13,720 11,500 8,786 2,220 2,714 19.30% 30.89%
Other liabilities................ 7,695 5,426 5,038 2,269 388 41.82% 7.70%
--------- --------- --------- ------------ ------------ ------ -------------
Total liabilities.............. 155,216 144,216 134,942 11,000 9,274 7.63% 6.87%
Minority interest in
subsidiary...................... 963 -- -- 963 -- N/A N/A
Equity........................... 13,889 14,372 10,629 (483) 3,743 (3.36)% 35.21%
--------- --------- --------- ------------ ------------ ------ -------------
Total liabilities and
shareholders' equity.......... $ 170,068 $ 158,588 $ 145,571 $ 11,480 $ 13,017 7.24% 8.94%
--------- --------- --------- ------------ ------------ ------ -------------
--------- --------- --------- ------------ ------------ ------ -------------
</TABLE>

FINANCIAL CONDITION

As shown in the table above, total assets have continued to grow in 1996 as
compared to the prior periods. Assets have grown 7.24% at June 30, 1996,
compared to December 31, 1995, and 8.94% from December 31, 1994 to December 31,
1995. The growth in 1996 is the result of increased deposits which were invested
in investment securities. The growth in both 1996 and 1995 was primarily the
result of loan demand, as the southern Oregon coast's growth and economic
factors continue to be favorable. The ratio of gross loans and leases to
deposits decreased to 64.89% at June 30, 1996, compared to 66.22% at December
31, 1995, and 63.70% at December 31, 1994.

The growth in interest-earning assets has been predominantly in loans and
investment securities. Net loans increased $7.1 million at December 31, 1995,
over the same period in 1994, and increased $2.6 million from December 31, 1995,
to June 30, 1996. The lower, more stable interest rate environment of the last
two years and a stronger, more stable local economy have been major contributors
to the increased activity for the year ended December 31, 1995. The modest
decline in net loans at June 30, 1996, from December 31, 1995, is attributable
to a rise in interest rates which slowed loan activity. Investment securities
increased $4.4 million as of December 31, 1995, as compared to the same period
in 1994 and an additional $11.8 million as of June 30, 1996, due to the
continued growth in deposit funds available for investment. Federal funds sold,
reflecting short term (over-night) investments, increased at the comparable
period-end time frames. The level of federal funds sold fluctuates daily
relative to loan demand, deposit fluctuations and investment activity, and
provides a source of liquidity for the Bank.

Deposit growth continued for the years ended December 31, 1995 and 1994, and
for the six months ended June 30, 1996. Total deposits increased $6.5 million at
June 30, 1996, compared to December 31, 1995, and $6.2 million at December 31,
1995, compared to December 31, 1994. The growth in 1996 and 1995 has been
predominantly in interest-bearing deposits. The ratio of interest-bearing
deposits to total deposits decreased slightly from 84.8% at December 31, 1994,
to 84.7% at December 31, 1995, and was 85.4% at June 30, 1996.

The Bank is a member of the Federal Home Loan Bank of Seattle. This
membership allows the Bank access to low cost, long-term funding otherwise
unavailable. The Bank has utilized this funding,

24
<PAGE>
and in 1995 borrowed $2.7 million to support loan and investment growth. In the
six months ended June 30, 1996, the Bank has borrowed an additional $2.2
million, leaving the balance at $13.7 million as of June 30, 1996.

LIQUIDITY

Liquidity enables the Bank to meet the withdrawals of its depositors and the
borrowing needs of its loan customers. The Bank maintains its liquidity position
through maintenance of cash resources and a stable core deposit base. A further
source of liquidity is the Bank's ability to borrow funds. The Bank maintains
three unsecured lines of credit totaling $10.0 million for the purchase of funds
on an overnight basis. The Bank is also a member of the Federal Home Loan Bank
which provides a secured line of credit in the amount of $25.2 million, and
other funding opportunities for liquidity and asset/ liability matching. Over
the past three years these lines have been used periodically. As of June 30,
1996, $0.7 million were borrowed under the Bank's unsecured lines of credit and
$13.7 million were borrowed from the Federal Home Loan Bank. Interest rates
charged on the lines are determined by market factors.

The Bank's liquidity has been stable and adequate over the past three years.
Short-term deposits have continued to grow and excess investible cash is loaned
on a short term basis (federal funds sold). The Bank's primary source of funds
is consumer deposits and commercial accounts. These funds are not subject to
significant movements as a result of changing interest rates and other economic
factors, and therefore enhance the Bank's long term liquidity.

CAPITAL RESOURCES

Beginning in 1990, federal regulators required the calculation of Risk-based
Capital. This is an analysis that weights balance sheet and off-balance sheet
items for their inherent risk. It requires minimum standards for Risk-based
Capital by Capital Tier. Full implementation of this analysis was required in
1992, requiring a minimum total Risk-based Capital ratio of 8.00% and a minimum
Tier 1 Capital Ratio of 4.00%. At June 30, 1996, Security Bank had a Risk-based
Capital Ratio of 14.31% and Tier 1 Capital Ratio of 13.34%. This was compared to
13.36% and 12.36% for total Risk-Based Capital and Tier 1 Capital, respectively,
at December 31, 1995, and 12.10% and 11.11% for total Risk-Based Capital and
Tier 1 Capital, respectively, at December 31, 1994. If the Bank were fully
leveraged, further growth would be restricted to the level attainable through
generation and retention of net income unless the Bank were to seek additional
capital from outside sources.

INTEREST SENSITIVITY

Interest sensitivity relates to the effect of changing interest rates on net
interest income. Interest-earning assets which have interest rates tied to an
index, such as prime rate, or which mature in relatively short periods of time
are considered interest-rate sensitive. Interest-bearing liabilities with
interest rates that can be re-priced in a discretionary manner, or which mature
in short periods of time, are also considered interest-rate sensitive. The
differences between the amounts of interest-sensitive assets and
interest-sensitive liabilities, measured at various time periods, are referred
to as sensitivity gaps. As rates change, these gaps will cause either a
beneficial or adverse effect on net interest income. A negative gap represents a
beneficial effect on net interest income if rates were to fall and an adverse
effect if rates were to rise. Conversely, a positive gap would have a beneficial
effect on net interest income in a rising rate environment and a negative effect
if rates fell.

At June 30, 1996, rate sensitive liabilities maturing or available for
repricing within a one-year period of time approximated rate sensitive assets.

Due to the uncertainty of changing interest rates, the Bank's strategy is to
manage a majority of its interest-earning assets and interest-bearing deposits
to mature or reprice within one year and strive for as close to a balanced gap
as is feasible. Management considers a fluctuation between a 10.0% positive gap
and a 10.0% negative gap within one year to be a controlled gap position. The
Bank's liability sensitivity within one year has been favorable because interest
rates have generally declined in recent periods. In the event interest rates
rise, the Bank's strategy is to increase its asset sensitivity predominantly
through variable asset pricing.

25
<PAGE>
ESTIMATED MATURITY OR REPRICING
JUNE 30, 1996

<TABLE>
<CAPTION>
THREE
MONTHS TO
LESS THAN LESS ONE TO OVER
THREE MONTHS THAN ONE YEAR FIVE YEARS FIVE YEARS TOTAL
------------ ------------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS:
Securities and investments (1)................. $ 8,219,358 $16,239,982 $29,662,413 $18,878,903 $ 73,000,656
Federal funds sold............................. 740,774 0 0 0 740,774
Loans.......................................... 30,605,331 16,100,140 29,104,829 7,239,580 83,049,880
Leases......................................... 173,427 519,089 2,364,298 574,088 3,630,902
------------ ------------- ----------- ----------- -------------
Total interest earning assets................ $ 39,738,890 $32,859,211 $61,131,540 $26,692,533 160,422,212
------------ ------------- ----------- -----------
------------ ------------- ----------- -----------
Unrealized gains on securities available for
sale.......................................... (848,538)
Reserve for loan losses........................ (1,058,736)
Cash and due from banks........................ 4,454,948
Other assets................................... 7,098,365
-------------
Total assets................................. $ 170,068,251
-------------
-------------
INTEREST BEARING LIABILITIES
Interest bearing demand accounts............... 2,741,564 0 0 0 2,741,564
Savings/time deposits (2)...................... 44,770,991 21,736,686 23,061,307 21,984,309 111,553,293
Borrowed funds................................. 9,386,560 10,720,500 0 0 20,107,060
------------ ------------- ----------- ----------- -------------
Total interest bearing liabilities........... $ 56,899,115 $32,457,186 $23,061,307 $21,984,109 134,401,717
------------ ------------- ----------- -----------
------------ ------------- ----------- -----------
Non-interest bearing demand accounts........... 19,506,213
Other liabilities.............................. 1,308,170
Minority interest in subsidiary................ 962,702
Shareholders' equity........................... 13,889,249
-------------
Total liabilities & shareholders' equity..... $ 170,068,251
-------------
-------------
Interest sensitivity gap....................... $(17,160,225) $ 402,025 $38,070,233 $ 4,708,424 $ 26,020,457
Cumulative interest sensitivity gap............ $(17,160,225) $(16,758,200) $21,312,033 $26,020,457
Cumulative interest sensitivity gap as a
percentage of total assets.................... (10.09)% (9.85)% 12.53% 15.30%
</TABLE>

- ------------------------------
(1) The portion of this section relating to mortgage-backed securities is
presented based upon estimated cash flows, maturities and/or repricings,
and includes Collateralized Mortgage Obligations.

(2) The portion of this section relating to savings and NOW accounts are
presented as repricings within the earliest period presented and adjusted
for decay rates as provided by the Federal Home Loan Bank of Seattle and
are based upon industry experience of institutions located within the
FHLB's 12th district.

INFLATION

The primary impact of inflation on the Company's operations is increased
asset yields, deposit costs and operating overhead. Unlike most industrial
companies, virtually all of the assets and liabilities of a financial
institution are monetary in nature. As a result, interest rates generally have a
more significant impact on a financial institution's performance than the
effects of general levels of inflation. Although interest rates do not
necessarily move in the same direction or to the same extent as the prices of
goods and services, increases in inflation generally have resulted in increased
interest rates. The effects of inflation can magnify the growth of assets, and
if significant, would require that equity capital increase at a faster rate than
would otherwise be necessary.

26
<PAGE>
INVESTMENT PORTFOLIO

The following table shows the amortized costs, estimated market values,
unrealized gains and unrealized losses of the Company's portfolio of investments
as of June 30, 1996, and December 31, 1995 and 1994:
<TABLE>
<CAPTION>
JUNE 30, 1996: ESTIMATED UNREALIZED UNREALIZED
AVAILABLE FOR SALE AMORTIZED COST MARKET VALUE GAINS LOSSES
- --------------------------------------------------- -------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
U.S. Government & federal agencies................. $ 15,043,238 $ 14,665,358 $ 11,260 $ 389,140
Mortgage-backed securities......................... 30,298,756 29,758,717 19,335 559,374
United States Treasury............................. 1,993,956 2,015,620 21,664 --
Corporate obligations.............................. 5,253,424 5,212,562 14,337 55,199
Obligations of state and political subdivisions.... 17,303,072 17,626,351 452,962 129,683
U.S. federal securities mutual bond funds.......... 984,550 749,850 -- 234,700
-------------- -------------- ------------- -------------
Total available for sale....................... $ 70,876,996 $ 70,028,458 $ 519,558 $ 1,368,096
-------------- -------------- ------------- -------------
-------------- -------------- ------------- -------------

1995 AVAILABLE FOR SALE
- ---------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government and federal agencies............... $ 4,050,026 $ 4,124,050 $ 74,024 $ --
Mortgage-backed securities......................... 19,832,982 20,120,370 305,801 18,413
United States Treasury............................. 6,008,416 6,110,595 111,216 9,037
Corporate obligations.............................. 9,605,693 9,566,990 63,764 102,467
Obligations of state and political subdivisions.... 16,461,146 17,368,220 914,907 7,833
U.S. federal securities mutual bond funds.......... 984,550 937,350 -- 47,200
-------------- -------------- ------------- -------------
Total available for sale....................... $ 56,942,813 $ 58,227,575 $ 1,469,712 $ 184,950
-------------- -------------- ------------- -------------
-------------- -------------- ------------- -------------
<CAPTION>

1994 AVAILABLE FOR SALE
- ---------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government and federal agencies............... $ 499,701 $ 499,215 $ -- $ 486
Mortgage-backed securities......................... 1,698,229 1,578,227 3,231 123,233
United States Treasury............................. 6,051,604 5,850,290 10,404 211,718
Corporate obligations.............................. 15,861,574 15,292,099 21,768 591,243
U.S. federal securities mutual bond funds.......... 1,740,818 1,365,637 -- 375,181
-------------- -------------- ------------- -------------
Total available for sale....................... $ 25,851,926 $ 24,585,468 $ 35,403 $ 1,301,861
-------------- -------------- ------------- -------------
-------------- -------------- ------------- -------------
<CAPTION>

1994 HELD TO MATURITY
- ---------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government and federal agencies............... $ 1,063,647 $ 1,021,250 $ -- $ 42,397
Mortgage-backed securities......................... 10,005,308 9,407,067 -- 598,241
United States Treasury............................. 1,990,889 1,921,560 -- 69,329
Corporate obligations.............................. 514,605 501,585 -- 13,020
Obligations of state and political subdivisions.... 15,700,243 15,819,038 348,475 229,680
-------------- -------------- ------------- -------------
Total held to maturity......................... $ 29,274,692 $ 28,670,500 $ 348,475 $ 952,667
-------------- -------------- ------------- -------------
-------------- -------------- ------------- -------------
</TABLE>

27
<PAGE>
The following is a summary of the contractual maturities and weighted
average yields of investment securities classified as available for sale at June
30, 1996:

AVAILABLE FOR SALE

<TABLE>
<CAPTION>
WEIGHTED
ESTIMATED AVERAGE
AMORTIZED COST MARKET VALUE YIELD (1)
-------------- -------------- -----------
<S> <C> <C> <C>
U.S. GOVERNMENT AND FEDERAL AGENCIES
One year or less................................................... $ 485,436 $ 485,436 5.6196%
After one year through five years.................................. 11,057,802 10,739,937 6.8278%
After five years through ten years................................. 3,500,000 3,439,985 6.94%
-------------- --------------
Total............................................................ $ 15,043,238 $ 14,665,358 6.45%
-------------- --------------
-------------- --------------
MORTGAGE-BACKED SECURITIES
After one year through five years.................................. $ 1,410,156 $ 1,404,117 6.14%
After five years through ten years................................. 5,393,015 5,327,185 6.67%
After ten years.................................................... 23,495,585 23,027,415 6.59%
-------------- --------------
Total $ 30,298,756 $ 29,758,717 6.59%
-------------- --------------
-------------- --------------
UNITED STATES TREASURY
One year or less................................................... $ -- $ -- --
After one year through five years.................................. 1,993,956 2,015,620 6.93%
-------------- --------------
Total............................................................ $ 1,993,956 $ 2,015,620 6.93%
-------------- --------------
-------------- --------------
CORPORATE OBLIGATIONS
One year or less................................................... $ 1,658,571 $ 1,651,494 6.64%
After one year through five years.................................. 3,594,853 3,561,068 6.38%
-------------- --------------
Total............................................................ $ 5,253,424 $ 5,212,562 6.47%
-------------- --------------
-------------- --------------
OBLIGATIONS OF STATE AND POLITICAL SUBDIVISIONS
One year or less................................................... $ 622,720 $ 627,893 5.43%
After one year through five years.................................. 4,518,018 4,641,751 5.82%
After five years through ten years................................. 6,326,561 6,531,971 6.09%
After ten years.................................................... 5,835,773 5,824,736 5.64%
-------------- --------------
Total............................................................ $ 17,303,072 $ 17,626,351 5.84%
-------------- --------------
-------------- --------------
U.S. FEDERAL SECURITIES MUTUAL BOND FUNDS
One year or less................................................... $ 984,550 $ 749,850 5.40%
-------------- --------------
Total............................................................ $ 984,550 $ 749,850 5.40%
-------------- --------------
-------------- --------------
Total securities available for sale................................ $ 70,876,996 $ 70,028,458 6.36%
-------------- --------------
-------------- --------------
</TABLE>

- ------------------------
(1) Yields on tax-exempt securities have not been stated on a tax-equivalent
basis.

As of June 30, 1996, the Company had no securities classified as "held to
maturity".

LOAN PORTFOLIO

Interest earned on the loan portfolio is the primary source of income for
the Bank. Net loans represented 48% of total assets as of June 30, 1996.
Although the Bank strives to serve the credit needs of its service area, its
primary focus is on real estate and commercial loans. The Bank makes
substantially all of its loans to customers located within the Bank's service
areas. The Bank has no loans defined as highly leveraged transactions by the
Federal Reserve Bank. The Bank has no significant agricultural loans. Commercial
real estate loans include owner-occupied commercial

28
<PAGE>
properties occupied by the proprietor of the business conducted on the premises,
and income-producing or farm properties. The primary risks of such loans include
loss of income of the owner or occupier of the property and the inability of the
market to sustain rent levels. The Bank's underwriting standards attempt to
mitigate these risks by requiring a minimum of three consecutive years of
sufficient income generation from the owner or occupier or rental incomes of 1.2
times the combined debt service, insurance and taxes. In addition, the 70%
loan-to-value ratio limitation is expected to provide sufficient protection
against unforeseen circumstances. Other commercial loans include renewable
operating lines of credit, short-term notes, and equipment financing. These
types of loans are principally at risk due to insufficient business income.
Accordingly, the Bank does not lend to start-up businesses or others lacking
operating history, and requires personal guarantees and secondary sources of
repayment. Residential real estate loans include 1-4 family owner- or non-owner
occupied residences, multi-family units, construction and secondary market loans
pending sale. Generally, the risk associated with such loans is the loss of the
borrower's income. The Bank attempts to mitigate the risk by thorough review of
the borrower's credit and employment history, and limits the loan-to-value ratio
to 80% to provide protection in the event of foreclosure. Installment loans
consist of personal, automobile or home equity loans. The Bank also offers
credit cards to its customers. These unsecured loans carry significantly higher
interest rates than secured loans, and the Bank, therefore, maintains strict
credit guidelines when considering loan applications. The following table
presents the composition of the Bank's loan portfolio, at the dates indicated:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
JUNE 30, 1996 1995 1994
-------------- -------------- --------------
<S> <C> <C> <C>
Commercial -- real estate........................................ $ 15,331,267 $ 16,627,336 $ 15,980,024
Commercial -- lines of credit.................................... 24,159,920 23,164,048 20,610,333
Residential -- real estate....................................... 20,338,719 19,231,938 19,964,705
Installment...................................................... 20,309,155 18,662,005 15,669,788
Credit cards & other............................................. 3,059,688 3,058,299 2,879,007
-------------- -------------- --------------
Total loans.................................................. 83,198,749 80,743,626 75,103,857
Deferred loan fees, net.......................................... (148,869) (153,203) (165,084)
Reserve for loan losses.......................................... (1,058,736) (1,062,993) (1,016,770)
-------------- -------------- --------------
Net loans.................................................... $ 81,991,144 $ 79,527,430 $ 73,922,003
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>

At June 30, 1996, the maturities of all loans by category were as follows:

<TABLE>
<CAPTION>
WITHIN ONE ONE TO FIVE AFTER FIVE
YEAR YEARS YEARS TOTAL
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Commercial -- real estate....................... $ 7,603,120 $ 5,109,493 $ 2,618,654 $ 15,331,267
Commercial -- lines of credit................... 18,943,112 3,720,507 1,496,301 24,159,920
Residential -- real estate...................... 9,537,814 1,917,715 8,883,190 20,338,719
Installment..................................... 1,652,805 10,821,868 7,834,482 20,309,155
Credit cards & other............................ 2,975,859 83,829 -- 3,059,688
-------------- -------------- -------------- --------------
$ 40,712,710 $ 21,653,412 $ 20,832,627 $ 83,198,749
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
</TABLE>

Of loans with maturities of one year or more, $31,393,348 were fixed-rate
loans, and $11,092,691 were variable rate loans.

29
<PAGE>
DEPOSIT LIABILITIES

The following table sets forth the average deposit liabilities of and rates
paid by the Bank for the periods indicated:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------
SIX MONTHS ENDED JUNE 30,
1996 1995 1994
--------------------------- --------------------------- ---------------------------
AMOUNT RATE PAID AMOUNT RATE PAID AMOUNT RATE PAID
------------- ------------ ------------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Deposits Liabilities
Demand........................... $ 18,327,838 n/a $ 18,180,478 n/a $ 17,295,202 n/a
Interest-bearing demand.......... 2,270,451 4.14% 1,711,356 4.01% 1,896,760 3.02%
NOW accounts..................... 21,415,977 1.04% 22,634,967 1.18% 22,583,425 1.17%
Money market accounts............ 16,612,349 3.47% 14,712,696 3.23% 14,209,254 2.60%
Savings accounts................. 15,561,738 2.49% 16,345,241 2.52% 17,441,123 2.43%
Time deposits.................... 56,391,647 5.27% 47,691,652 5.01% 38,504,909 4.02%
------------- ----- ------------- ----- ------------- -----
Total deposits................. $ 130,580,000 3.26% $ 121,276,390 2.98% $ 111,930,673 2.38%
------------- ------------- -------------
------------- ------------- -------------
</TABLE>

As of June 30, 1996, the Bank's time deposit liabilities had the following
times remaining to maturity:

<TABLE>
<CAPTION>
TIME DEPOSITS OF ALL OTHER
$100,000 OR MORE (1) TIME DEPOSITS (2)
--------------------------- ---------------------------
<S> <C> <C> <C> <C>
Remaining Time to Maturity
3 months or less........................................ $ 14,713,122 73.33% $ 11,666,199 30.54%
6 months................................................ 2,383,025 11.88% 7,627,396 19.97%
12 months............................................... 1,840,726 9.17% 7,682,018 20.11%
Over 1 year............................................. 1,128,315 5.62% 11,222,114 29.38%
-------------- ----------- -------------- -----------
Total............................................... $ 20,065,188 100.00% $ 38,197,727 100.00%
-------------- --------------
-------------- --------------
</TABLE>

- ------------------------
(1) Time deposits of $100,000 or more represent 15.00% of total deposits as of
June 30, 1996.

(2) All other time deposits represent 28.55% of total deposits as of June 30,
1996.

AVERAGE BALANCES AND AVERAGE RATES EARNED AND PAID

The tables on the following pages present, for the periods indicated,
information regarding average balances of assets and liabilities of the Bank,
the total dollar amounts of interest income from average interest-earning assets
and interest expense on interest-bearing liabilities, the average interest
yields earned or rates paid, net interest income, net interest spread (the
difference between the average yield earned on interest-earning assets and the
average rate paid on interest-bearing liabilities), and the ratio of net
interest income to average earning assets. The table does not reflect any effect
of income taxes. All average balances are based on month-end balances.

30
<PAGE>
The following table presents the Company's average balance sheets as well as
certain yield earned and rates paid for the six months ended June 30, 1996 and
1995:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
SIX MONTHS ENDED JUNE 30, 1996 1995
----------------------------------------- -------------------------
AVERAGE AVERAGE YIELD AVERAGE
BALANCE INTEREST OR RATES (1) BALANCE INTEREST
------------- ---------- -------------- ------------- ----------
<S> <C> <C> <C> <C> <C>
ASSETS
Federal funds sold........................... $ 2,911,036 $ 78,859 5.45% $ 628,457 $ 18,432
Time deposits -- domestic financial
institutions................................ 433,750 12,327 5.72% 1,464,558 34,702
Investment securities -- taxable............. 46,209,564 1,488,136 6.48% 36,396,789 1,199,802
Investment securities -- exempt from federal
income taxes................................ 18,849,944 510,099 5.44% 16,544,788 474,937
Loans, net and mortgage loans held for sale
at cost (2)(3).............................. 79,531,299 4,154,819 10.51% 75,986,743 4,024,719
Net investment in direct financing leases.... 3,428,140 169,385 9.94% 2,357,488 99,561
Federal Home Loan Bank stock, at cost........ 1,754,840 66,786 7.65% 1,856,152 55,683
------------- ---------- ------------- ----------
Total interest-earning assets/interest
income . $ 153,118,573 $6,480,411 8.51% $ 135,234,975 $5,907,746
Cash and due from banks...................... 4,607,789 3,977,361
Premises and equipment, net.................. 3,234,772 3,341,749
Other assets................................. 3,439,050 3,397,763
------------- -------------
Total assets............................... $ 164,400,184 $ 145,951,848
------------- -------------
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing demand...................... $ 2,270,451 $ 46,759 4.14% 1,807,593 34,290
NOW accounts................................. 21,415,978 111,189 1.04% 22,120,426 127,888
Money market accounts........................ 16,612,349 286,515 3.47% 13,812,740 207,418
Savings accounts............................. 15,561,738 192,650 2.49% 16,405,444 200,003
Time deposits................................ 56,391,647 1,478,901 5.27% 46,933,516 1,113,932
Securities sold under agreements
repurchase.................................. 3,664,997 80,134 4.40% 3,542,993 81,506
ESOP debt.................................... 644,000 27,057 8.45% 733,000 33,589
Short-term borrowings........................ 426,643 11,007 5.19% 427,771 11,001
Federal Home Loan Bank borrowings............ 13,456,895 390,823 5.84% 10,619,303 337,873
------------- ---------- ------------- ----------
Total interest-bearing liabilities/interest
expense................................... $ 130,444,698 $2,625,035 4.05% $ 116,402,786 $2,147,500
Demand deposits.............................. 18,327,838 17,302,359
Other liabilities............................ 1,239,230 830,965
------------- -------------
Total liabilities.......................... 150,011,766 134,536,110
Minority Interest in subsidiary.............. 168,637
Shareholders' equity......................... 14,219,781 11,415,738
------------- -------------
Total liabilities, minority interest and
shareholders' equity...................... $ 164,400,184 $ 145,951,848
------------- -------------
------------- -------------
Net interest income.......................... $3,855,376 $3,760,246
---------- ----------
---------- ----------
Net interest spread.......................... 4.46%
-----
-----
Net interest income to earning assets........ 5.06%
-----
-----

AVERAGE YIELD
OR RATES (1)
--------------
<S> <C>
ASSETS
Federal funds sold........................... 5.89%
Time deposits -- domestic financial
institutions................................ 4.78%
Investment securities -- taxable............. 6.65%
Investment securities -- exempt from federal
income taxes................................ 5.79%
Loans, net and mortgage loans held for sale
at cost (2)(3).............................. 10.68%
Net investment in direct financing leases.... 8.52%
Federal Home Loan Bank stock, at cost........ 6.05%

Total interest-earning assets/interest
income . 8.81%
Cash and due from banks......................
Premises and equipment, net..................
Other assets.................................

Total assets...............................

LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing demand...................... 3.83%
NOW accounts................................. 1.17%
Money market accounts........................ 3.03%
Savings accounts............................. 2.46%
Time deposits................................ 4.79%
Securities sold under agreements
repurchase.................................. 4.64%
ESOP debt.................................... 9.24%
Short-term borrowings........................ 5.19%
Federal Home Loan Bank borrowings............ 6.42%

Total interest-bearing liabilities/interest
expense................................... 3.72%
Demand deposits..............................
Other liabilities............................

Total liabilities..........................
Minority Interest in subsidiary..............
Shareholders' equity.........................

Total liabilities, minority interest and
shareholders' equity......................

Net interest income..........................

Net interest spread.......................... 5.09%
-----
-----
Net interest income to earning assets........ 5.61%
-----
-----
</TABLE>

- ------------------------
(1) Annualized.

(2) Average non-accrual loans included in the computation of average loans for
the six months ended June 30, 1996 and 1995 were $478,000 and $111,000,
respectively.

(3) Loan related fees recognized during the period ended June 30, 1996 and
1995, included in the yield calculation, totalled approximately $233,182,
and $216,020, respectively.

31
<PAGE>
The following table presents the Company's average balance sheets as well as
certain yield earned and rates paid for the years ended December 31, 1995 and
1994:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995 YEAR ENDED DECEMBER 31, 1994
----------------------------------------- -----------------------------------------
AVERAGE AVERAGE YIELD AVERAGE AVERAGE YIELD
BALANCE INTEREST OR RATES BALANCE INTEREST OR RATES
------------- ----------- ------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Federal funds sold.......................... $ 1,720,511 $ 108,857 6.33% $ 1,841,942 $ 80,011 4.34%
Time deposits -- domestic financial
institutions............................... 1,234,541 60,785 4.92% 1,868,082 77,375 4.14%
Investment securities -- taxable............ 36,397,912 2,340,964 6.43% 36,044,412 2,262,027 6.28%
Investment securities -- exempt from federal
income taxes............................... 16,207,389 971,872 6.00% 13,963,862 851,311 6.10%
Loans, net and mortgage loans held for sale,
at cost (1)(2)............................. 76,834,887 8,127,412 10.58% 66,696,906 6,718,679 10.07%
Net investment in direct financing leases... 2,763,330 247,626 8.96% 1,651,419 135,023 8.18%
Federal Home Loan Bank stock, at cost....... 1,529,722 99,156 6.48% 1,179,524 78,528 6.66%
------------- ----------- ----- ------------- -----------
Total interest-earning assets/interest
income................................... 136,688,292 $11,956,672 8.75% 123,246,147 $10,202,954 8.28%
Cash and due from banks..................... 4,648,940 4,768,695
Premises and equipment, net................. 3,311,064 2,989,022
Other assets................................ 3,411,986 3,306,784
------------- -------------
Total assets.............................. $ 148,060,282 $ 134,310,648
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing demand..................... $ 1,711,356 $ 68,664 4.01% $ 1,896,760 $ 57,354 3.02%
NOW accounts................................ 22,634,967 268,083 1.18% 22,583,425 264,255 1.17%
Money market accounts....................... 14,712,696 474,658 3.23% 14,209,254 369,441 2.60%
Savings accounts............................ 16,345,841 411,371 2.52% 17,441,123 423,608 2.43%
Time deposits............................... 47,691,652 2,388,050 5.01% 38,504,909 1,547,641 4.02%
Securities sold under agreements to
repurchase................................. 3,417,569 151,772 4.44% 3,226,484 104,370 3.23%
ESOP debt................................... 728,367 62,731 8.61% 808,216 40,296 4.99%
Short-term borrowings....................... 422,741 23,197 5.49% 411,765 16,012 3.89%
Federal Home Loan Bank borrowings........... 9,137,987 572,669 6.27% 6,235,610 311,476 5.00%
------------- ----------- ------------- ----------- -----
Total interest-bearing
liabilities/interest expense............. $ 116,803,176 $ 4,421,195 3.79% $ 105,317,546 $ 3,134,453 2.98%
Demand deposits............................. 18,168,140 17,295,202
Other liabilities........................... 977,111 1,612,013
------------- -------------
Total liabilities......................... 135,948,427 124,224,761
Shareholders' equity........................ 12,111,855 10,085,887
------------- -------------
Total liabilities and shareholders'
equity................................... $ 148,060,282 $ 134,310,648
------------- -------------
------------- -------------
Net interest income......................... $ 7,535,477 $ 7,068,501
----------- -----------
----------- -----------
Net interest spread......................... 4.96% 5.30%
----- -----
----- -----
Net interest income to earnings assets...... 5.51% 5.74%
----- -----
----- -----
</TABLE>

- ------------------------
(1) Average non-accrual loans included in the computation of average loans were
$243,000 for 1995 and $172,000 for 1994.

(2) Loan related fees recognized during the period and included in the yield
calculation, totaled approximately $392,667 in 1995 and $337,817 in 1994.

32
<PAGE>
BUSINESS

COMPANY

The Company, incorporated in 1981, is a multi-bank holding company
registered under the Bank Holding Company Act of 1956. The administrative office
of the Company is located in Coos Bay, Oregon. The Company was organized as a
holding company for its principal banking subsidiary, Security Bank, a state
chartered, FDIC insured commercial bank, through a reorganization completed in
April, 1983. The Company conducts its business primarily through Security Bank,
but has recently embarked on a strategy to diversify through investment in
banking operations outside of Security Bank's primary market area through
wholly- and majority-owned subsidiaries. As part of that strategy, the Company
recently completed the acquisition of a controlling interest in Lincoln Security
Bank, a newly-organized state-chartered commercial bank located in Newport,
Oregon.

As a result of the successful operations of Security Bank, the Company's
return on equity has exceeded 15% for the past two years and return on average
assets was 1.26% in 1995 and 1.25% in 1994, which figures do not include the
results of operations of Lincoln Security which commenced operations on May 30,
1996. At June 30, 1996, total assets were $170.1 million, total loans were $80.6
million and deposits were $133.8 million.

SECURITY BANK

Security Bank operated as a single office in Myrtle Point, Oregon, from its
founding in 1919 until 1971, when the Coquille branch was opened. The bank's
Bandon Branch was opened in 1974. In 1977, Security Bank's fourth branch was
opened in the Bunker Hill area of Coos Bay, and in 1983, the bank merged with
Citizens Bank of North Bend, acquiring its fifth branch in North Bend. In 1985,
the sixth branch was opened as result of the purchase of the office and
assumption of the deposits of a failed institution in the Brookings-Harbor
community in Curry County. Also in 1985, Security Bank moved its headquarters to
downtown Coos Bay and opened its Coos Bay Mall branch. Security Financial
Insurance Agency, a subsidiary of Security Bank organized in 1987, acts as an
insurance agent selling annuities, whole life insurance, and health care
insurance. The Insurance Agency operates from a single office near the head
office of Security Bank. Its services are available to customers at all of
Security Bank's branches. Security Bank also operates a separate mortgage loan
business with an office in Coos Bay, and an office in Eugene, Oregon, opened in
1995.

Security Bank operates in a competitive market which has undergone
significant economic and demographic changes in the past two decades. During the
period 1979 to 1987, Coos and Curry Counties suffered the loss of large numbers
of jobs in the forest products industry. The employment losses led to a 10%
population decline in Coos County from 1980 to 1987. This loss of manufacturing
workers and their families, together with an influx of retirees as a result of
the attractiveness of the southern Oregon coast as a retirement location, has
led to a significant increase in the portion of the population age 65 and older.
The population over age 65 increased by one-third from 1980 to 1990 to 17% of
Coos County's total population, and increased by almost two-thirds to 25% of
Curry County's total population. Curry County has the highest percentage of
residents over age 65 of any Oregon county. At the same time the economy has
shifted to a more diverse base of activity, including a greater role for small
businesses.

The most direct competition faced by Security Bank comes from four large
commercial banks. With the recent acquisition of Western Bank by Washington
Mutual Bank, Security Bank has no community bank competitors, but continues to
compete with multi-state, multi-billion dollar asset institutions. To meet this
competition, Security Bank targets its marketing efforts on individuals and
small businesses who prefer personalized banking services, and is developing
products and services intended to meet the banking needs of people who are age
55 or over.

Security Bank has competed effectively in its current market areas. In Coos
County, Security Bank's principal market area, Security Bank held approximately
$109 million in individual, partnership and corporate deposits as of June 30,
1995, representing 18.63% of such deposits held by

33
<PAGE>
commercial bank, savings and loan association and credit union offices located
in the county, up from 13.76% in 1990. In Curry County, Security Bank held
approximately $12 million in individual, partnership and corporate deposits as
of June 30, 1995, representing 5.20% of such deposits held by commercial banking
and savings association offices located in the county, up from 3.88% in 1990.

LINCOLN SECURITY BANK

Lincoln Security Bank is a newly-organized Oregon state-chartered bank, the
deposits of which are insured by the FDIC. Lincoln Security was organized by a
group of business and professional individuals in the Lincoln County area as a
locally owned commercial bank serving the needs of the city of Newport and
Lincoln County, Oregon. Lincoln Security's principal office is located at 1250
North Coast Highway in Newport, Oregon. The bank commenced operations on May 30,
1996, and currently operates in a temporary office facility pending construction
of its permanent office. Lincoln Security engages in a general commercial
banking business in Lincoln County and offers commercial banking services to
small and medium size businesses, professionals and retail customers in the
bank's market area.

The Company facilitated the organization of Lincoln Security by purchasing
210,390 shares of Lincoln Security's Class B common stock, representing
approximately 68.44% of all outstanding common shares of Lincoln Security Bank
common stock, with the remainder of the outstanding common stock held by local
investors in the bank's Class A common stock. The shares of Class A and Class B
common stock are identical in all respects, except that the Class A and Class B
common stock vote as separate classes in the election of directors with the
Class B shares being entitled to vote for a number of directors constituting a
mere majority of the directors, and the Class A shares being entitled to vote
for the balance of the directors. Pursuant to a shareholders agreement, the
Class A common shareholders, under certain circumstances, have the right to
purchase all of the Class B common stock of Lincoln Security owned by Security
Bank Holding Company, after five years but before 10 years following the date of
Lincoln Security's charter. Conversely, if the Class A shareholders notify the
Company of their intent to exercise their right to purchase the Class B common
stock, but fail to consummate the purchase within 270 days thereafter, the
Company has the right, but not the obligation, to acquire all of the then
outstanding shares of Lincoln Security Class A common stock in exchange for
shares of Company common stock having an aggregate market value equal to the
value of the outstanding Lincoln Security Class A common stock as determined by
an appraisal process set forth in the shareholders agreement. The Company does
not expect to receive dividends on its shares of Class B common stock for the
foreseeable future, as any earnings of the bank are expected to be retained to
fund further growth of the bank.

As a result of the ownership of a majority of Lincoln Security's outstanding
common stock, the Company will be able to control any corporate decisions
requiring approval of Lincoln Security shareholders. At this time, Mr. Brummel,
President and Chief Executive Officer of the Company, and Kenneth Messerle, a
director of the Company, are serving on the Board of Directors of Lincoln
Security, with the balance of the Board of Directors being Lincoln County
residents. The Company believes that, like Security Bank, the success of the
bank depends on being identified as a local bank that knows and understands the
needs of the community it serves. Accordingly, the Company believes it is
important that Lincoln Security have a majority of its board members from the
local community who are familiar with Lincoln County and are known by the
potential customers which the bank seeks to attract. The presence of local
shareholders, and the appointment of predominantly local, Lincoln County
directors, are expected to help ensure that Lincoln Security Bank will have the
same community commitment and ties that distinguish Security Bank from its
larger statewide competitors. Although initially the Company has only two
representatives on the bank's board of directors, the Company expects to
continue to influence major decisions made by the board. Further, it is
anticipated that the bank's management will look to the Company and Security
Bank for guidance in managing the administrative affairs of the bank.
Nonetheless, the Company expects to rely on Lincoln Security officers to oversee
day-to-day operations of the bank without significant involvement of the
Company.

34
<PAGE>
BUSINESS STRATEGY

The Company seeks to achieve growth in its earning assets, while maintaining
a strong return on equity. The strategy for accomplishing those goals is based
upon:

- Personalized Customer Service

- Development of Innovative Products

- Expanding into new Geographic Markets

PERSONALIZED CUSTOMER SERVICE. The Banks pride themselves on being
community banks serving the central and southern Oregon coast. The Banks'
personnel are primarily long-time residents, with many years of banking
experience in their communities. In an era when larger competitors are
minimizing personnel expenses through the use of part-time tellers, centralized
loan centers, and electronic technology, the Banks remain committed to serving
customers through personal service: loan officers and other employees who know
and are known by their customers. From the Boards of Directors, who are all
residents and active members of their respective communities, to branch tellers,
service and accessibility are emphasized. To enhance customer service, Security
Bank provides "platform banking," which gives employees computer access to
customer records and allows them to respond to inquiries efficiently.

To promote employee commitment to customer service, the Company maintains an
Employee Stock Ownership Plan in which all employees other than those of Lincoln
Security are eligible to participate. The Plan enables employees to become
shareholders of the Company and share a common interest with other shareholders.
Thus, employees' efforts to improve the Company's performance provide an
economic benefit to them through potential increases in the value of their share
ownership. The Company also has established a stock option plan for senior
management personnel. See "Management -- Other Benefit Plans."

INNOVATIVE PRODUCTS. The Company seeks to increase market share through
innovative products oriented to the needs of potential customers. As Lincoln
Security is still in the initial stages of business development, and therefore
is concentrating on basic services, these innovative products are currently
being marketed by Security Bank. Security Bank provides, for the population over
age fifty-five, specially designed deposit and insurance products, such as
tax-deferred annuities and a certificate of deposit which features a waiver of
early withdrawal penalties in the event the funds are needed for health care
expenses. To provide services which Security Bank does not provide directly, the
bank partners with other organizations, exemplified by its arrangement with the
Bank of California to provide trust services. Security Bank provides electronic
banking services for those who desire it, and offers a telephone banking system
which allows customers to access their account information and obtain
information about bank services by telephone, 24-hours a day. During banking
hours, however, employees answer customer telephone calls to maintain personal
contact rather than relying upon computerized answering services. Security Bank
also offers bank cards, allowing customers worldwide bank ATM network access.

GEOGRAPHIC MARKET EXPANSION. The Company is acting to diversify and expand
its asset base by moving outside of its traditional market areas without losing
the personal service and community focus which differentiate it from its
competitors. For example, Security Bank has recently opened a mortgage loan
office in Eugene, Oregon, and expects to open offices in other communities in
Oregon in the future. Specific plans for new offices have not been formulated,
and it is not known when, if any, such new offices may be opened.

Prior to the organization of Lincoln Security, the Company had considered
expanding its market
geographically through acquisitions or the opening of branch offices in coastal
communities north of its existing market area. The Company believed, and
continues to believe, however, that retaining a community bank identity is
crucial to Security Bank's and the Company's success, and that branching beyond
the existing market would pose some risk to Security Bank's image as a local
bank. The

35
<PAGE>
Company believed that organizing a new community bank in cooperation with local
business people provided the opportunity for expansion while retaining the
benefits of being identified as a local community bank.

The Company's investment in Lincoln Security Bank is a unique approach to
partner with investors in a new market area, and reflects the Company's
commitment to geographic market expansion. Management believes that the Lincoln
Security Bank investment, if successful, can be a model for investments in other
community banks. The Company is not actively pursuing any other similar
investments or acquisitions of other banks, nor does the Company seek to merge
with any other bank holding companies. However, the Company will consider other
opportunities as they come available.

ECONOMIC CONDITIONS AND DEMOGRAPHICS

The Banks primarily receive deposits and make loans in Coos, Curry and
Lincoln Counties of Oregon. As community banks, the Banks have certain
competitive advantages in their local focus, but the Banks are also more closely
tied to their respective local economies than competitors who serve a number of
geographic markets.

COOS AND CURRY COUNTIES

Coos County had a 1993 population of approximately 62,500, while the
population of Curry County was approximately 21,300. About half of the
population of each county is in an urbanized area, the Coos Bay - North Bend
area in Coos County and the Brookings-Harbor area in Curry County.

The economies of Coos and Curry Counties depend particularly on forest
products, fishing, agriculture and tourism. One of the major features of
economic developments in both counties over the past 15 years has been the
reduction in employment in the forest products industry and the effects on the
local economy. Approximately three-quarters of the land in the two counties is
commercial timberland, with 65% being privately owned in Coos County and 40% in
Curry County. The balance is federal and state forests.

During the period 1979 to 1982, Coos County experienced a 17% decline in the
number of wage and salary jobs, with half of that decline occurring in the
forest products industry. The decline in forest products employment produced
high levels of unemployment and a decline in population. In the late 1980's and
into the 1990's, the population began growing again, and was up 3% from 1990 to
1992. Curry County, while also suffering high unemployment, has recovered, and
is growing at faster rate. The population of Curry County grew 10.5% between
1990 and 1992. Although much improved from the highest levels of the early
1980's, unemployment remains above Oregon and U.S. averages in both counties.

A significant change in the makeup of the population in the two counties has
occurred with the emigration of working families and the immigration of
retirees, particularly into Curry County. With these population shifts, a high
percentage of personal income comes from sources other than net earnings, 54.6%
in Curry County and 43.6% in Coos County in 1992, the latest data available.

The result of these employment and population changes is a shift to an
economic base which is more stable and less dependent on the forest products
industry. The industry remains an important employment source, but no longer
dominates the economy. By the end of 1993, five times as many persons were
employed in non-manufacturing, non-farm jobs as compared to manufacturing.
Retail trade, government and services are the largest employment segments in
both counties. Tourism has become increasingly important to both counties.
Agriculture, although a small industry in terms of employment, remains a
significant economic factor. Cranberries and nursery stock are major crops in
Coos County, while southern Curry County is part of the largest lily bulb
growing area of the U.S. The fishing industry in Coos County, although still
important, has contracted significantly since 1980, particularly due to
reductions in salmon fishing.

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<PAGE>
LINCOLN COUNTY

Lincoln County, the market served by Lincoln Security Bank, is located on
the central Oregon coast and its economy is dependent primarily on the forest
products and fishing industries, tourism and service businesses. Over the past
several years, forest products activity has significantly decreased and some
segments of the fisheries industry have experienced significant declines.
However, Lincoln County is less dependent than Coos or Curry Counties upon
forest products manufacturing. Unemployment rates in Lincoln County have closely
paralleled those of Oregon as a whole, in contrast with Coos and Curry Counties
where they have been significantly higher. Offsetting the decrease in forest
products and fisheries, tourism has emerged as a major industry for the county.
Lincoln County's relative proximity to the population centers of Portland and
the Willamette Valley of Oregon has continued to make it a popular weekend
vacation spot and retirement area. Lincoln County has also embarked on a program
to promote diversification of its economic base through a state-sponsored "Key
Industry Initiative" whereby each county selects three key industries to target
for expansion of employment prospects in return for financial and other forms of
state assistance. Lincoln County has selected software and high technology,
government contract work in research and development, and professional services
as its target industries. Total population of Lincoln County has increased from
35,350 in 1980 to 39,690 in 1992, approximately a 12% increase. This modest
increase belies the changing composition of the job market and economic base in
the county which has shifted markedly during this period. The State of Oregon
Employment Division forecasts population for Lincoln County of approximately
47,500 by the year 2000, assuming the absence of major economic recessions which
might have a negative impact on employment and population growth. As with Coos
and Curry Counties, a significant portion of the Lincoln County population is
over age 65.

COMPETITION

The geographic areas of Oregon served by the Banks are highly competitive
with respect to both deposits and loans. The Banks compete principally with
commercial banks, savings and loan associations, credit unions, mortgage
companies, and other financial institutions. The major commercial bank
competitors are state-wide institutions which are among the largest
Oregon-headquartered commercial and savings banks, and their deposits represent
59.6% of statewide commercial and savings bank deposits as of December 31, 1995.
Each of these competitors is owned by multi-state, multi-billion dollar holding
companies. These banks have the advantages of offering their customers services
and state-wide banking facilities that the Banks do not offer.

The Banks' primary competition for deposits comes from commercial banks, a
savings and loan association, credit unions, and money market funds, some of
which may offer higher rates than the Banks. Secondary competition for funds
comes from issuers of corporate and government securities, insurance companies,
mutual funds, and other financial intermediaries. Other than with respect to
large certificates of deposit, the Banks compete for deposits by offering a
variety of deposit accounts at rates generally competitive with similar
financial institutions in the area.

The Banks' competition for loans comes principally from commercial banks,
savings and loan associations, mortgage companies, finance companies, insurance
companies, and other institutional lenders. Many of the Banks' competitors have
substantially higher lending limits than those of the Banks, individually or in
the aggregate. The Banks compete for loan origination through the level of
interest rates and loan fees charged, the variety of commercial and mortgage
loan products, and the efficiency and quality of services provided to borrowers.
Lending activity can also be affected by the availability of lendable funds,
local and national economic conditions, current interest rate levels, and loan
demand. As described above, the Banks compete with their larger commercial bank
competitors by emphasizing their community bank orientation and efficient
personal service to local customers, particularly local lending. See "Business
- -- Business Strategy."

Lincoln County presents a particularly competitive market. Although Lincoln
County is currently served by seven commercial banks, two thrifts and one credit
union, many of which offer more services and products than offered by Lincoln
Security, only one of the commercial banks has its head office in

37
<PAGE>
Lincoln County and it is owned by a holding company headquartered in the
Portland metropolitan area. Further, in 1994, a second community bank with its
head office in Newport was acquired by a large multi-state bank holding company.
A third community bank previously headquartered in Newport was acquired by a
multi-state holding company in 1990. It is believed that the loss of these local
community banks presents increased opportunities for a new community bank to
compete effectively for business in this market area.

PROPERTIES

COOS BAY MALL FACILITY. Security Bank's Mall Facility is located at 170 S.
Second Street, Coos Bay, Oregon, and is registered on the national register of
historic places. The building and land are owned by the bank. The Mall branch,
consumer lending center, Security Financial Insurance Agency and the Data
Processing center occupy the first floor. The Company's administrative offices
occupy the second floor.

MYRTLE POINT BRANCH. Security Bank's original Main Office was located at
503 Spruce, Myrtle Point, Oregon. The building now serves as a branch of the
bank, which owns the building and land.

COQUILLE BRANCH. The Coquille Branch of Security Bank is located at 479 N.
Central, Coquille, Oregon. The building and land are owned by the bank.

BANDON BRANCH. The Bandon Branch of Security Bank is located at 1125 Hwy
101, Bandon, Oregon. The building and land are owned by the bank.

BUNKER HILL BRANCH. The Bunker Hill Branch of Security Bank is located at
900 Hwy 101 South, Coos Bay, Oregon. The building and land are owned by the
bank. The bank's mortgage lending operation also has an office in this facility.

NORTH BEND BRANCH. The North Bend Branch of Security Bank is located at
3451 Broadway in North Bend, Oregon. The building and land are leased. The lease
term expires in 1998 and has options for two additional periods of five years
each.

BROOKINGS-HARBOR BRANCH. The Brookings-Harbor Branch of Security Bank is
located at 16271 Hwy 101 South, Brookings, Oregon. The building and land are
leased. The lease expires in 2004.

MORTGAGE LENDING OFFICE. Security Bank has a mortgage lending office
located at 200 East 11th Avenue, Suite 14A, Eugene, Oregon. The office is leased
under a lease agreement which expires October 14, 1996, and has options for two
additional one-year terms.

LINCOLN SECURITY BANK. Lincoln Security's principal office is located at
1250 North Coast Highway in Newport, Oregon. The bank currently operates in a
temporary office facility pending construction of its permanent office.
Construction of the permanent facility is being financed internally by Lincoln
Security. The office is situated on land which is leased from an unaffiliated
third party through January, 2011. The lease may be renewed by Lincoln Security
for two additional 10-year periods.

EMPLOYEES

As of June 30, 1996, the Company and its subsidiaries had a total of 123
employees, 108 of whom are full-time equivalent employees. None of the employees
of the Company or the Banks are subject to a collective bargaining agreement.
The Company and Banks considers their relationships with their employees to be
good.

LEGAL PROCEEDINGS

The Banks are from time to time a party to various legal actions arising in
the normal course of business. Management believes that there is no threatened
or pending proceedings against the Company or the Banks, which, if determined
adversely, would have a material effect on the business or financial position of
the Company or the Banks.

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<PAGE>
SUPERVISION AND REGULATION

GENERAL

The Company and the Banks are extensively regulated under federal and state
law. These laws and regulations are intended to protect depositors, not
shareholders. To the extent that the following information describes statutory
or regulatory provisions, it is qualified in its entirety by reference to the
particular statutory or regulatory provisions. Any change in applicable laws or
regulations may have a material effect on the business and prospects of the
Company and the Banks. The operations of the Company and the Banks may be
affected by legislative changes and by the policies of various regulatory
authorities. The Company is unable to predict the nature or the extent of the
effects on its business and earnings that fiscal or monetary policies, economic
control or new federal or state legislation may have in the future.

FEDERAL BANK HOLDING COMPANY REGULATION

The Company is a bank holding company within the meaning of the Bank Holding
Company Act ("BHCA"), and as such, it is subject to regulation, supervision and
examination by the Board of Governors of the Federal Reserve System ("Federal
Reserve"). The Company is required to file annual reports with the Federal
Reserve and to provide the Federal Reserve such additional information as the
Federal Reserve may require.

BHCA requires every bank holding company to obtain the prior approval of the
Federal Reserve before (i) acquiring, directly or indirectly, ownership or
control of any voting shares of another bank or bank holding company it, after
such acquisition, would own or control more than 5% of such shares (unless it
already owns or controls the majority of such shares); (ii) acquiring all or
substantially all of the assets of another bank or bank holding company; or
(iii) merging or consolidating with another bank holding company. The Federal
Reserve will not approve any acquisition, merger or consolidation that would
have a substantial anti-competitive result, unless the anti-competitive effects
of the proposed transaction are clearly outweighed by a greater public interest
in meeting the convenience and needs of the community to be served. The Federal
Reserve also considers capital adequacy and other financial and managerial
factors in reviewing acquisitions or mergers.

With certain exceptions, BHCA also prohibits a bank holding company from
acquiring or retaining direct or indirect ownership or control of more than 5%
of the voting shares of any company which is not a bank or bank holding company,
or from engaging directly or indirectly in activities other than those of
banking, managing or controlling banks, or providing services for its
subsidiaries. The principal exceptions to these prohibitions involve certain
non-bank activities which, by statute or by Federal Reserve regulation or order,
have been identified as activities closely related to the business of banking or
of managing or controlling banks. In making this determination, the Federal
Reserve considers whether the performance of such activities by a bank holding
company can be expected to produce benefits to the public such as greater
convenience, increased competition or gains in efficiency in resources, which
can be expected to outweigh the risks of possible adverse effects such as
decreased or unfair competition, conflicts of interest or unsound banking
practices. The Bank's data processing and insurance subsidiaries are non-bank
companies engaged in activities deemed permissible by the Federal Reserve.

Subsidiary banks of a bank holding company are subject to certain
restrictions imposed by the Federal Reserve Act on extensions of credit to the
bank holding company or its subsidiaries, on investments in their securities and
on the use of their securities as collateral for loans to any borrower. These
regulations and restrictions may limit the Company's ability to obtain funds
from the Banks for its cash needs, including funds for payment of dividends,
interest and operating expenses. Further, under the Federal Reserve Act and
certain regulations of the Federal Reserve, a bank holding company and its
subsidiaries are prohibited from engaging in certain typing arrangements in
connection with any extension of credit, lease or sale of property or furnishing
of services. For example, the Bank

39
<PAGE>
may not generally require a customer to obtain other services from the Bank or
the Company, and may not require that the customer promise not to obtain other
services from a competitor, as a condition to an extension of credit to the
customer.

FEDERAL AND STATE BANK REGULATION

The Banks, as state-chartered banks with deposits insured by the Federal
Deposit Insurance Corporation ("FDIC") that are not members of the Federal
Reserve System, are subject to the supervision and regulation of the Director of
the Oregon Department of Consumer and Business Services, administrated through
the Division of Finance and Corporate Securities ("Oregon Director"), and to the
supervision and regulation of the FDIC. These agencies may prohibit the Banks
from engaging in what they believe constitute unsafe or unsound banking
practices.

As of July 1, 1989, Oregon permits out-of-state banking institutions to
acquire banks or holding companies that have been in existence for a period of
no fewer than three years. Generally, such acquisitions are subject to the
approval of the Federal Reserve Board and the Oregon Director. As a result of
1993 Oregon legislation and 1995 federal law changes, Oregon banks may merge
with out-of-state national or state banks, and out-of-state national and state
banks may acquire Oregon branches or may merger with or acquire branches of
Oregon or federal savings associations. Initial acquisitions must involve
institutions which been engaged in banking in Oregon for at least three years,
but once such an acquisition is made, the resulting bank may add additional
branches.

The Community Reinvestment Act ("CRA") requires that, in connection with
examinations of financial institutions within their jurisdiction, the Federal
Reserve or the FDIC evaluates the record of the financial institutions in
meeting the credit needs of their local communities, including low and moderate
income neighborhoods, consistent with the safe and sound operation of those
banks. These factors are also considered in evaluating mergers, acquisitions and
applications to open a branch or facility. Security Bank's current CRA rating is
"Outstanding," the highest rating awarded. Lincoln Security has not yet been
subjected to a CRA examination.

The Banks are also subject to certain restrictions imposed by the Federal
Reserve Act on extensions of credit to executive officers, directors, principal
shareholders or any related interest of such persons. Extensions of credit (i)
must be made on substantially the same terms, including interest rates and
collateral as, and following credit underwriting procedures that are not less
stringent than, those prevailing at the time for comparable transactions with
persons not covered above and who are not employees, and (ii) must not involve
more than the normal risk of repayment or present other unfavorable features.
The Banks are also subject to certain lending limits and restrictions on
overdrafts to such persons. A violation of these restrictions may result in the
assessment of substantial civil monetary penalties on the affected bank or any
officer, director, employee, agent or other person participating in the conduct
of the affairs of that bank, the imposition of a cease and desist order, and
other regulatory sanctions.

Under the Federal Deposit Insurance Corporation Improvement Act ("FDICIA"),
each Federal banking agency is required to prescribe, by regulation, non-capital
safety and soundness standards for institutions under its authority. These
standards are to cover internal controls, information systems and internal audit
systems, loan documentation, credit underwriting, interest rate exposure, asset
growth, compensation, fees and benefits, such other operational and managerial
standards as the agency determines to be appropriate, and standards for asset
quality, earnings and stock valuation. An institution which fails to meet these
standards must develop a plan acceptable to the agency, specifying the steps
that the institution will take to meet the standards. Failure to submit or
implement such a plan may subject the institution to regulatory sanctions. The
Company believes that the Banks meet all the standards, and therefore does not
believe that these regulatory standards materially affect the Company's business
operations.

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<PAGE>
DEPOSIT INSURANCE

As FDIC member institutions, the deposits of the Banks are currently insured
to a maximum of $100,000 per depositor through the Bank Insurance Fund ("BIF"),
administered by the FDIC. The Banks are required to pay semiannual deposit
insurance premium assessments to the FDIC.

The FDICIA includes provisions to reform the Federal deposit insurance
system, including the implementation of risk-based deposit insurance premiums.
The FDICIA also permits the FDIC to make special assessments on insured
depository institutions in amounts determined by the FDIC to be necessary to
give it adequate assessment income to repay amounts borrowed from the U.S.
Treasury and other sources or for any other purpose the FDIC deems necessary.
Pursuant to the FDICIA, the FDIC implemented a transitional risk based insurance
premium system on January 1, 1993. Generally, under this system, banks are
assessed insurance premiums according to how much risk they are deemed to
present to BIF. Banks with higher levels of capital and a low degree of
supervisory concern are assessed lower premiums than banks with lower levels of
capital or involving a higher degree of supervisory concern. The Banks each have
a current FDIC premium rate of $.00 per $100 of domestic deposits. The premium
range is from $.00, for the highest-rated institutions (subject to a statutory
minimum assessment of $2,000) to $.27 per $100 of domestic deposits.

DIVIDENDS

The principal source of the Company's cash revenues is dividends received
from Security Bank. Lincoln Security Bank does not currently pay dividends and
is not expected to in the near future, as earnings will be retained to fund
future growth. Under the Oregon Bank Act, the Banks are subject to restrictions
on its payment of cash dividends to the Company. A bank may not pay cash
dividends if that payment would reduce the amount of its capital below that
necessary to meet minimum applicable regulatory capital requirements. In
addition, the amount of the dividend may not be greater than its net undivided
profits then on hand, after first deducting (i) all losses; (ii) all bad debts,
unless the debts are well-secured, (a) on which interest for a period of one
year is past due and unpaid, and (b) upon which final judgment has been
obtained, but for more than one year the judgment has been unsatisfied and
interest has not been paid; (iii) all assets or depreciation charged off as
required by the Oregon Director; and (iv) all accrued expenses, interest and
taxes of the bank. Lincoln Security is not able to pay dividends as a result of
the lack of retained earnings. It is not known if or when Lincoln Security would
be able to pay such dividends.

In addition, the appropriate regulatory authorities are authorized to
prohibit banks and bank holding companies from paying dividends which would
constitute an unsafe or unsound banking practice. The Banks and the Company are
not currently subject to any regulatory restrictions on their dividends other
than those noted above.

CAPITAL ADEQUACY

The federal bank regulatory agencies use capital adequacy guidelines in
their examination and regulation of bank holding companies and banks. If the
capital falls below the minimum levels established by these guidelines, the bank
holding company or bank may be denied approval to acquire or establish
additional banks or non-bank businesses or to open facilities.

The FDIC and Federal Reserve have adopted risk-based capital guidelines for
banks and bank holding companies. The risk-based capital guidelines are designed
to make regulatory capital requirements more sensitive to differences in risk
profile among banks and bank holding companies, to account for off-balance sheet
exposure and to minimize disincentives for holding liquid assets. Assets and
off-balance sheet items are assigned to broad risk categories, each with
appropriate weights. The resulting capital ratios represent capital as a
percentage of total risk-weighted assets and off-balance sheet items. The
guidelines are minimums, and the Federal Reserve has noted that bank holding
companies contemplating significant expansion programs should not allow
expansion to diminish their capital ratios and should maintain ratios well in
excess of the minimum. The current guidelines require all bank holding companies
and federally-regulated banks to maintain a minimum risk-based total capital
ratio equal to 8%, of which at least 4% must be Tier 1 capital.

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<PAGE>
Tier 1 capital for bank holding companies includes common shareholders'
equity, qualifying perpetual preferred stock (up to 25% of total Tier 1 capital,
if cumulative; under a Federal Reserve rule, redeemable perpetual preferred
stock may not be counted as Tier 1 capital unless the redemption is subject to
the prior approval of the Federal Reserve) and minority interests in equity
accounts of consolidated subsidiaries, less intangibles except as described
above. Tier 2 capital includes: (i) the allowance for loan losses of up to 1.25%
of risk-weighted assets; (ii) any qualifying perpetual preferred stock which
exceeds the amount which may be included in Tier 1 capital; (iii) hybrid capital
instrument; (iv) perpetual debt; (v) mandatory convertible securities and (vi)
subordinated debt and intermediate term preferred stock of up to 50% of Tier 1
capital. Total capital is the sum of Tier 1 and Tier 2 capital less reciprocal
holdings of other banking organizations, capital instruments and investments in
unconsolidated subsidiaries.

Banks' and bank holding companies' assets are given risk-weights of 0%, 20%,
50%, and 100%. In addition, certain off-balance sheet items are given credit
conversion factors to convert them to asset equivalent amounts to which an
appropriate risk-weight will apply. These computations result in the total
risk-weighted assets.

Most loans are assigned to the 100% risk category, except for first mortgage
loans fully secured by residential property, which carry a 50% rating. Most
investment securities are assigned to the 20% category, except for municipal or
state revenue bonds, which have a 50% risk-weight, and direct obligations of or
obligations guaranteed by the United States Treasury or United States Government
agencies, which have 0% risk-weight. In converting off-balance sheet items,
direct credit substitutes, including general guarantees and standby letters of
credit backing financial obligations, are given 100% conversion factor. The
transaction related contingencies such as bid bonds, other standby letters of
credit and undrawn commitments, including commercial credit lines with an
initial maturity of more than one year, have a 50% conversion factor.
Short-term, self-liquidating trade contingencies are converted at 20%, and
short-term commitments have a 0% factor.

The Federal Reserve also has implemented a leverage ratio, which is Tier 1
capital as a percentage of total assets less intangibles, to be used as a
supplement to risk-based guidelines. The principal objective of the leverage
ratio is to place a constraint on the maximum degree to which a bank holding
company may leverage its equity capital base. The Federal Reserve requires a
minimum leverage ratio of 3%. However, for all but the most highly rated bank
holding companies and for bank holding companies seeking to expand, the Federal
Reserve expects an additional cushion of at least 1% to 2%. As of June 30, 1996,
the Company was in compliance with applicable capital requirements, as shown in
the following tables:

<TABLE>
<CAPTION>
AMOUNT RATIO
-------------- ---------
<S> <C> <C>
RISK-BASED CAPITAL RATIOS
Tier 1 capital............................................................... $ 14,516,000 13.34%
(Minimum Tier 1 capital requirement: 4.00%)

Total capital................................................................ $ 15,575,000 14.31%
(Minimum total capital requirement: 8.00%)

LEVERAGE RATIO
Tier 1 capital............................................................... $ 14,516,000 8.39%
(Minimum leverage requirement: 3.00%)
</TABLE>

The FDICIA also created a new statutory framework of supervisory actions
indexed to the capital level of the individual institution. Under regulations
adopted by the FDIC, an institution is assigned to one of five capital
categories depending on its total risk-based capital ratio, Tier 1 risk-based
capital ratio, and leverage ratio, together with certain subjective factors.
Institutions which are deemed to be "undercapitalized" depending on the category
to which they are assigned are subject to certain mandatory supervisory
corrective actions. The Company does not anticipate that these regulations will
have any material effect on the Banks.

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<PAGE>
EFFECTS OF GOVERNMENT MONETARY POLICY

The earnings and growth of the Banks, and their existing and future
activities, are affected not only by general economic conditions, but also by
the fiscal and monetary policies of the federal government, particularly the
Federal Reserve. The Federal Reserve can and does implement national monetary
policy for such purposes as curbing inflation and combating recession, but its
open market operations in U.S. government securities, control of the discount
rate applicable to borrowings from the Federal Reserve, and establishment of
reserve requirements against certain deposits, influence growth of bank loans,
investments and deposits, and also affect interest rates charged on loans or
paid on deposits. The nature and impact of future changes in monetary policies
and their impact on the Company or the Banks cannot be predicted with certainty.

CHANGING REGULATORY STRUCTURE OF THE BANKING INDUSTRY

The laws and regulations affecting banks and bank holding companies are
currently undergoing significant changes. Bills are now pending or expected to
be introduced in the United States Congress that contain proposals for altering
the structure, regulation, and competitive relationships of the nation's
financial institutions. If enacted into law, these bills could have the effect
of increasing or decreasing the cost of doing business, limiting or expanding
permissible activities (including activities in the insurance and securities
fields), or affecting the competitive balance among banks, savings associations,
and other financial institutions. Some of these bills would reduce the extent of
federal deposit insurance, broaden the powers or the geographical range of
operations of bank holding companies, modify interstate branching restrictions
applicable to national banks, regulate bank involvement in derivative securities
activities, and realign the structure and jurisdiction of various financial
institution regulatory agencies. Whether or in what form any such legislation
may be adopted or the extent to which the business of the Company might be
affected thereby cannot be predicted with certainty.

Of particular note is legislation which has been recently been enacted by
Congress, as referred to above, permitting interstate banking and branching,
which would allow banks to expand nationwide through acquisition, consolidation
or merger. Under this law, an adequately capitalized bank holding company may
acquire banks in any state if permitted by state law. In addition, banks may
acquire branches of out-of-state banks through merger followed by conversion of
the acquired bank branches into branches of the resulting bank. Further, banks
may establish and operate branches in any state subject to the restrictions of
applicable state law. Under Oregon law, an out-of-state bank or bank holding
company may merge with or acquire an Oregon state-chartered bank or bank holding
company if the Oregon bank, or in the case of a bank holding company, the
subsidiary bank, has been in existence for a minimum of three years, and the law
of the state in which the acquiring bank in located permits such merger.

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<PAGE>
MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The following table sets forth information regarding the directors and
executive officers of the Company.

<TABLE>
<CAPTION>
YEAR ELECTED OR APPOINTED
DIRECTOR/EXECUTIVE
NAME AGE POSITION OFFICER
- --------------------------- --- ------------------------------------------- -------------------------
<S> <C> <C> <C>
Charles D. Brummel 57 Director/President/Chief Executive Officer 1974
Michael J. Delvin 48 Executive Vice President 1992
E. Samuel Dement 75 Director/Chairman 1969
Ralph W. Gazeley 68 Director/Secretary 1989
Donald L. Goddard 73 Director 1974
Thomas R. Graham 64 Director/Assistant Secretary 1983
Kathleen M. Kerins 54 Director 1995
William A. Lansing 50 Director 1991
Kenneth C. Messerle 56 Director 1992
Antoinette M. Poole 49 Senior Vice President/Loan Administrator 1995
Harry A. Slack, Jr. 67 Director/Vice Chair 1972
Glenn A. Thomas 55 Director 1995
Marc C. Williams 34 Vice President/Controller 1994
</TABLE>

Directors serve three-year terms. The terms of Slack, Kerins and Goddard
expire in 1997. The terms of Dement, Gazeley, Lansing and Thomas expire in 1998.
The terms of Brummel, Graham and Messerle expire in 1999.

Executive officers are President/Chief Executive Officer Charles D. Brummel,
Executive Vice President Michael J. Delvin, Vice President/Controller Marc C.
Williams, and Senior Vice President/ Loan Administrator Antoinette M. Poole.
Brummel has served since 1974, Delvin since 1992, Williams since 1994, and Poole
since 1995. No director or principal officer of the Company has a direct family
relationship with another director or executive officer of the Company or the
Banks.

EXPERIENCE OF DIRECTORS AND EXECUTIVE OFFICERS

The business experience of each of the directors and executive officers for
the past five years has been as follows:

CHARLES D. BRUMMEL. Executive Officer Brummel has served as a Director and
CEO/President of Security Bank since 1974. He was a director of the Board of the
Oregon Bankers Association from 1977 to 1989 and served as its president in
1986/1987. He is Chairman of the Board of Directors of the OBA Insurance Agency.
He also served as a director of the American Bankers Association from 1986 to
1989 and serves as a member of the Board of Directors of Lincoln Security Bank.
He serves as ex-officio member of all bank committees.

MICHAEL J. DELVIN. Executive Officer Delvin was employed by Security Bank
in 1992 as VP/Loan Administrator. He was promoted to Executive Vice President in
1994. Delvin was previously employed by First Interstate Bank since 1972. He
serves on the Oregon Bankers Association Government Relations Committee and as a
director of OBA Services, Inc.

E. SAMUEL DEMENT. Director Dement is a Myrtle Point, Oregon, cattle
rancher, and former Oregon State Senator. Dement's family were Coos County
pioneers and founders of Security Bank, in Myrtle Point, in 1919. As Chairman of
the Board of Directors, he serves as ex-officio member of all committees of the
Board of Directors and is chairman of the Growth Committee.

44
<PAGE>
RALPH W. GAZELEY. Director Gazeley is a retired high school teacher,
formerly employed by North Bend School District. He serves on Security Bank's
Community Reinvestment Act and Audit Committees.

DONALD L. GODDARD. Director Goddard is a retired oil distributor and former
owner of Goddard Energy Company, in Bandon, Oregon. He serves on Security Bank's
Audit and Community Reinvestment Act Committees.

THOMAS R. GRAHAM. Director Graham is General Manager and Director of Coos
Head Builders Supply, Inc., in North Bend, Oregon, where he has been employed
since 1968. He serves on Security Bank's Loan and Audit Committees, and is
Chairman of the Nominating Committee.

KATHLEEN M. KERINS. Director Kerins is local manager of Pacific Power &
Light. She serves on Security Bank's Compensation & Benefits and Nominating
Committees.

WILLIAM A. LANSING. Director Lansing is Vice President of Menasha
Corporation, in North Bend, Oregon, where he has been employed since 1970.
Lansing serves on the Growth and Nominating Committees and is Chairman of the
Compensation and Benefits Committee.

KENNETH C. MESSERLE. Director Messerle recently sold his share in the
family business of Messerle & Sons, Inc., a cattle and timber corporation, in
Coos County. He is currently in the process of forming a cattle brokerage
business, and is a candidate for State Representative. He serves on Security
Bank's Loan and Growth Committees and is Chairman of the Audit Committee. Mr.
Messerle was recently appointed to serve on the board of directors of Lincoln
Security Bank.

ANTOINETTE M. POOLE. Executive Officer Poole serves as Security Bank's
Senior Commercial Lending Officer and Loan Administrator. She has been employed
by the Bank since 1976, and currently serves as a trustee of the Company's
Employee Stock Ownership Plan. She is a member of the American Institute of
Banking and Financial Women International.

HARRY A. SLACK, JR. Director Slack, of Coquille, Oregon, is a retired
Attorney, who practiced law for 37 years. Currently he is President of Slack
Fisheries. He serves on Security Bank's Loan Committee and is Chairman of the
Community Reinvestment Act Committee.

GLENN A. THOMAS. Director Thomas is the owner of Thomas & Son Beverage,
Inc., and its subsidiaries, Thomas & Son Trucking and Thomas & Son
Transportation Systems, in Coos Bay, Oregon. He has been the Oregon Director for
the Rocky Mountain Wholesalers Association, a director and officer of Oregon
Beer & Wine Distributors Association, and a director of National Beer
Wholesalers. He serves on Security Bank's Loan, Compensation & Benefits, and
Growth Committees.

MARC C. WILLIAMS. Executive Officer Williams has been a Vice President and
Controller of Security Bank since 1994. He was formerly employed by Jackson
County Federal Bank, FSB, and its successor, Key Bank of Oregon, since 1989.

EXECUTIVE COMPENSATION

The following table sets forth compensation earned for the fiscal year ended
December 31, 1995 by each executive officer of the Company receiving over
$100,000 of total compensation during such year:

<TABLE>
<CAPTION>
OTHER TOTAL
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION (1) COMPENSATION
- ------------------------------------------------------- ----------- --------- ----------------- -------------
<S> <C> <C> <C> <C>
Charles D. Brummel .................................... $ 110,585 $ 56,838 $ 4,787 $ 172,210
President/Chief Executive Officer
Director

Michael J. Delvin ..................................... $ 73,899 $ 34,895 -- $ 108,794
Executive Vice President
</TABLE>

- ------------------------

(1) Consisting of company provided auto.

45
<PAGE>
INCENTIVE CASH BONUS PLAN. The Board of Directors of the Bank believes that
an incentive bonus based on earnings motivates management to perform at the
highest levels. Management performance has a direct impact on the short-range
and long-range profitability and viability of the institution and an incentive
bonus promotes the retention of qualified management. Directors also believe
that compensation programs with incentive pay as a significant portion of
compensation allow base salaries to remain relatively constant, even during
highly profitable periods, thereby containing salary costs during any less
profitable periods. The management incentive bonus program is at the discretion
of the Board. Specific performance levels and awards are developed by the
Compensation Committee of the Board and approved annually by the Board of
Directors. For 1995, the plan provided incentives for the three executive
officers, Brummel, Delvin and Williams (Poole became an executive on December 1,
1995 and was therefore not eligible for the 1995 plan). The size of the total
incentive is determined by a formula based upon the earnings of the Bank with a
threshold level of return on equity of 9%. The three officers (Brummel, Delvin
and Williams) received 50%, 30% and 20% of this total respectively during the
course of the year.

PHANTOM STOCK DEFERRED COMPENSATION PLAN. As of January 1, 1996, Security
Bank established a deferred compensation plan for a select group of key
employees to provide for unfunded, non-qualified deferred compensation to assist
in attracting and retaining such key employees and to encourage such employees
to devote their best efforts to the business of the bank. An eligible employee
is permitted to defer up to 20% of that employee's base salary and 100% of any
cash bonus, and is required to defer not less than 2% of base salary and 20% of
any cash bonus. Deferred compensation is credited to the participant's account
in the form of Phantom Stock Units, the number of units being determined by
dividing the amount of the compensation deferred by the base price established
annually by the Board of Directors for that Plan Year's deferrals. The base
price of each unit is the average of the bid and ask prices of the Company's
common stock for the last ten trading days of the preceding calendar year.
Distributions to a participating employee are made in cash only and are made
within 60 days after the earlier of the employee's death, disability,
termination of employment, change of control of the Company or the attainment of
the age specified in the Plan agreement between the employee and Security Bank.
Upon distribution, the deferred compensation amount is valued by multiplying the
cumulative number of Phantom Stock Units by the average of the bid and ask
prices of Company common stock on the date of distribution. Currently, Mr.
Brummel is the only participant in the plan.

SEVERANCE AGREEMENT. In addition to Mr. Brummel's regular compensation, the
Bank has agreed to pay him additional compensation should his employment with
the Bank be terminated under certain conditions. The severance agreement is
effective only if Mr. Brummel's employment is involuntarily terminated in
connection with the merger or sale of the Bank and/or the Company, or if he
elects to terminate his employment within one year of a merger or sale. In the
event of such a termination, the Bank has agreed to pay Mr. Brummel a sum equal
to twelve times his monthly base salary in effect at the time of the merger or
sale. The base salary includes monthly gross salary but does not include bonuses
or other compensation, plus any deferred or unpaid portion of his annual bonus.
If the severance agreement had been triggered as of June 30, 1996, Mr. Brummel
would have been entitled to a payment of $149,279.

OTHER BENEFIT PLANS

GENERAL. The Company believes that loyalty and productivity of employees
are significantly enhanced by the existence of benefit plans. Accordingly, a
number of benefit programs are available to all eligible employees, including
group medical plans, paid sick leave, paid vacation and group life insurance.

EMPLOYEES' SAVINGS AND PROFIT SHARING PLAN. The Bank maintains an
Employees' Savings and Profit Sharing Plan, dated effective January 1, 1978, and
amended and restated most recently in 1991, which serves as an incentive savings
plan for employees ("Savings Plan"). To participate, the employee must have been
employed by the Bank for at least six months and elect to contribute 2% to 10%

46
<PAGE>
of the employee's total compensation. The Bank has in the past matched a portion
of each participant's contributions, but does not do so currently. Interests in
the Bank's contributions become fully vested after six years or in the event of
retirement, disability or death. The Savings Plan is structured to meet the
qualification standards of Internal Revenue Code Section 401(k).

STOCK OPTION PLAN. The Company adopted a combined incentive and
non-qualified stock option plan (the "Plan") effective May 1, 1995, and approved
by the shareholders at the annual shareholders meeting on March 20, 1996.
Pursuant to the Plan, options may be granted at the discretion of the Board of
Directors or such committee as it may designate, to key employees, including
employees who are directors of the Company.

The purpose of the plan is to advance the interests of the Company and its
shareholders by enabling the Company to attract and retain the services of
people with training, experience and ability and to provide additional incentive
to key employees and directors of the Company by giving them an opportunity to
participate in the ownership of the Company.

The Plan reserves 276,000 shares of the Company's unissued common stock for
possible grants to employees. The purchase price of shares issuable upon
exercise of options is not less than 100% of the fair market value per optioned
share at the time of the grant. Each option granted under the plan is
exercisable for up to ten years following the date of grant.

As of June 30, 1996, options to purchase 96,600 shares, adjusted for stock
dividends and splits, have been granted pursuant to the Plan. The following
table sets forth information regarding outstanding options granted pursuant to
the Plan, each of which became exercisable as to 20% of the shares on May 1,
1996, and an additional 20% becoming exercisable each year thereafter.

OPTION GRANTS IN 1995.

The following table sets forth information regarding options granted during
1995:

<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE OF EXERCISE
NAME SHARES TOTAL OPTIONS PRICE EXPIRATION DATE
- ----------------------------------------------- ----------- --------------- ----------- ------------------
<S> <C> <C> <C> <C>
Charles D. Brummel............................. 69,000 71.4% $ 5.67 April 30, 2005
Michael J. Delvin.............................. 27,600 28.6% $ 5.67 April 30, 2005
</TABLE>

STOCK AWARD PLAN. Although not embodied in a formal plan, the Company has
made a practice of issuing shares of Common Stock as a bonus to employees upon
their fifth anniversary as an employee and each subsequent five years
thereafter. At that time each employee receives one share for each year of
service then completed. The program is intended to increase the employee's
awareness of the Company's performance and instill an "ownership" commitment to
the Company.

EMPLOYEE STOCK OWNERSHIP PLAN. The Company and the Bank have maintained a
retirement plan known as the Security Bank Holding Company Employee Stock
Ownership Plan (the "ESOP") that is primarily invested in the common stock of
the Company. The ESOP was established in 1986 and has been amended from time to
time to comply with the changes in the legal requirements for retirement plans.
Employees who are age 21 or older and have worked at least 1,000 hours during a
year will become ESOP participants. Common stock is allocated to participant
accounts in the ESOP each year, based on the amount of Company contributions
made and cash dividends paid on stock held by the ESOP. Participants do not
contribute to the ESOP. After two years of service, 20% of the amounts allocated
to a participant's account become "vested." An additional 20% becomes vested for
each additional year of service so that the participant is 100% vested in their
account after 6 years of service.

Stock is acquired by the ESOP using contributions made by the Bank and
revenues from investment income (primarily dividends). In addition, the ESOP has
acquired common stock from the Company in a number of separate transactions with
borrowed funds. In those transactions, the shares were purchased at their fair
market value at the time of the transactions and were pledged to secure
repayment of the loans. The pledged shares are held in an ESOP collateral
account until payments on

47
<PAGE>
the loans are made. Shares are released from the collateral account and
allocated to participant accounts at the end of each plan year (December 31)
according to formulas prescribed by the Department of Labor.

As of June 30, 1996, the total ESOP indebtedness, all of which is owed to
the Company, equalled $2,173,643, and the ESOP trust held a total of 978,728
shares of the Company's common stock, or 35.43% of the total number of shares
outstanding. Of those shares, 456,257 (16.52% of total outstanding) have been
allocated to participant accounts. The remaining 522,471 shares (18.91% of total
outstanding) are held in the collateral account. Both allocated and unallocated
shares are considered legally outstanding, may be voted by the ESOP trustees and
are entitled to receive dividends. The ESOP trustees are generally required to
vote the shares in a manner that is calculated to result in the best financial
return to the ESOP participants. However, ESOP participants, under the
circumstances, are entitled to direct the trustees on how to vote the shares
allocated to their respective accounts.

In four transactions between 1986 and 1993, the Company's ESOP borrowed a
total of $1,394,800 from third party lenders, which debt was guaranteed by the
Company, and used the proceeds to purchase a total of 619,230 shares of the
Common Stock from the Company. Substantially all of the stock purchase proceeds
were contributed to the Bank to increase its lending limits and strengthen its
capital position and ratios. On April 1, 1994, the ESOP borrowed $816,000 from
the Company and used the proceeds to pay off the then remaining balance of the
prior loans. The outstanding balance of this loan at June 30, 1996, was
$644,000. The Company acquired the funds loaned to the ESOP from a third party
lender on comparable terms. Interest on such loan is payable quarterly at a rate
equal to the Reference Rate announced from time to time by Bank of America
Oregon, less 0.5%. Principal is payable by the Company annually each December 15
in varying amounts. Payments from the ESOP to the Company are due 14 days
earlier. The Company currently intends to prepay its loan from the third party
lender, Bank of America Oregon, with proceeds from the Offering. The ESOP loan
to the Company will remain outstanding until paid in accordance with its
original terms.

One purchase by the ESOP of Company common stock did not involve a third
party lender. On December 22, 1993, the ESOP purchased 365,355 shares of stock
from the Company for $1,583,205 and gave a note in that amount to the Company.
This note requires interest payments quarterly at a rate equal to the Wall
Street Journal published prime rate, adjusted annually each December 15.
Principal is payable annually each December 15 in varying amounts through 2003.

The Company accounts for its ESOP loan in accordance with SOP 93-6 issued by
the American Institute of Certified Public Accountants. The Bank of America
Oregon loan is reflected on the Company's balance sheet as a liability, recorded
as "ESOP Debt." Neither of two loans from the Company to the ESOP are recorded
on the balance sheet of the Company as assets. In order to account for the
unallocated shares acquired at the time of these loans (shares held in the
collateral account), the Company's balance sheet reflects a contra equity
account titled "Unallocated ESOP Shares" in an amount equal to the cost of the
shares. Until released, the shares are not treated as outstanding for purposes
of net income and book value per share calculations. Cash dividends paid by the
Company on ESOP shares may be used by the ESOP to pay debt services on loans due
to the Company. Dividends paid on unallocated shares do not directly affect the
Company's shareholders' equity, while dividends on allocated shares result in a
reduction of retained earnings.

As shares are released from the collateral account and allocated to
participants, the Company reports compensation expense in an amount equal to the
then current market value of the shares less dividends on allocated shares used
to pay debt service. However, the Company's tax deduction only equals the amount
of ESOP contributions it makes and dividends used to pay ESOP debt or allocated
to participants, subject to an overall limitation. If the Company's stock price
increases, this accounting treatment would have the effect of increasing the
charge to income for compensation expense, thus reducing reported earnings
without a corresponding increase in the amount deductible from taxable income.
Offsetting for balance sheet purposes the charge against income, is a
corresponding increase

48
<PAGE>
to the shareholder equity account by the reduction in the unearned ESOP shares
account with the balance accounted for as an increase in surplus. The neutral
effect on shareholders' equity is one of the results sought in adopting the ESOP
as a benefit plan; the expense which provides a retirement benefit to employees
remains in the Company's equity since the contributions are invested in Company
stock.

Although there is a dilutive effect on the book value and earnings of
existing shares when shares are released from the collateral account, accounting
treatment computes earnings per share by treating as outstanding only the
allocated ESOP shares, and therefore has the effect of delaying any dilutive
effect until such shares are ultimately paid for and allocated.

Unallocated shares held in the ESOP are released based upon the debt service
payment schedule under the existing notes and are to be allocated to eligible
employees on December 31 of each year in the following amounts:

<TABLE>
<CAPTION>
YEAR SHARE RELEASES
- ---------------------------------------------------------- --------------
<S> <C>
1996...................................................... 67,310
1997...................................................... 68,923
1998...................................................... 72,456
1999...................................................... 74,724
2000...................................................... 54,241
2001...................................................... 57,649
2002...................................................... 61,685
2003...................................................... 65,483
--------------
TOTAL..................................................... 522,471
--------------
--------------
</TABLE>

DIRECTOR COMPENSATION

Pursuant to a Board of Directors Merit Compensation Plan, directors of the
Company each receive $300 in compensation for each meeting of the Board of
Directors attended, and $100 for each committee meeting attended. Directors may
also receive shares of Company stock as additional compensation if the return on
average equity for the Company exceeds 13%, with the fair market value of the
stock to be issued to each director being a percentage of the cash compensation
otherwise earned by such director, ranging from a low of 15% (if a 13% return on
average equity is achieved) to a high of 110% of the cash compensation (if a 17%
return average equity is achieved).

RELATED TRANSACTIONS WITH DIRECTORS AND OFFICERS

Some of the directors and officers of the Company and of Security Bank, and
members of their immediate families and firms and corporations with which they
are associated, have had transactions with Security Bank, including borrowings
and investments in time deposits. All such loans and investments in time
deposits have been made in the ordinary course of business, have been made on
substantially the same terms, including interest rates paid or charged and
collateral required, as those prevailing at the time for comparable transactions
with unaffiliated persons, and did not involve more than the normal risk of
collectibility or present other unfavorable features. As of June 30, 1996, the
aggregate outstanding amount of all loans to officers and directors was
approximately $1,055,669, which represented approximately 7.11% of the Company's
consolidated shareholders' equity at that date. All such loans are currently in
good standing and are being paid in accordance with their terms.

49
<PAGE>
PRINCIPAL SHAREHOLDERS

SHARE OWNERSHIP OF MANAGEMENT

The following table sets forth as of June 30, 1996, the shares of common
stock beneficially owned by all of the directors and officers of the Company. As
of that date there were 2,762,325 shares of the Company's Common Stock issued
and outstanding. All shares are held directly unless otherwise indicated.

<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
NAME (1) SHARES CLASS
- ------------------------------------------------------------------------ ------------------ ------------
<S> <C> <C>
Charles D. Brummel (Director/Officer) (2)............................... 39,964(2) 1.45%
Michael J. Delvin (Officer) (3)......................................... 2,187(3) 0.08%
E. Samuel Dement (Director) (4)......................................... 81,126(4) 2.94%
Ralph W. Gazeley (Director) (5)......................................... 75,657(5) 2.74%
Donald L. Goddard (Director) (6)........................................ 27,240(6) 0.99%
Thomas R. Graham (Director) (7)......................................... 1,561(7) 0.06%
William A. Lansing (Director) (8)....................................... 12,219(8) 0.44%
Kenneth C. Messerle (Director) (9)...................................... 2,000(9) 0.07%
Antoinette M. Poole (Officer) (10)...................................... 978,967(10) 35.44%
Harry A. Slack, Jr. (Director) (11)..................................... 17,714(11) 0.64%
Glenn A. Thomas (Director) (12)......................................... 1,500(12) 0.05%
Marc C. Williams (Officer).............................................. -- 0.00%
All Directors and Executive Officers as a Group
(12 persons)........................................................... 1,201,009(2)(12) 43.48%
</TABLE>

- ------------------------
(1) The business address of all directors and officers is 170 S. Second Street,
Coos Bay, Oregon 97420.

(2) Charles D. Brummel's holdings include 3,025 shares held jointly with spouse
and 36,939 shares vested in the ESOP (93 of which vested shares are
allocated to Mr. Brummel's spouse who is also an employee of Security Bank).

(3) Michael J. Delvin holds 5,474 shares in the ESOP, 2,187 of which have been
vested as of this date.

(4) E. Samuel Dement's shares are held jointly with his spouse.

(5) Ralph W. Gazeley's shares are held in a Gazeley Revocable Living Trust.

(6) Donald L. Goddard's holdings include 25,896 shares held jointly with his
spouse.

(7) Thomas R. Graham's holdings include 72 shares held jointly with his spouse.

(8) William A. Lansing's shares are held jointly with his spouse.

(9) Kenneth C. Messerle's holdings include 1,922 shares held jointly with his
spouse and 78 shares held jointly with his grandchildren.

(10) Antoinette M. Poole is a Trustee of the ESOP, all of whose shares (978,728)
are included herein. Individually, she holds 239 shares and 15,943 shares
vested in the ESOP.

(11) Harry A. Slack, Jr.'s holdings include 2,413 shares held jointly with his
spouse, 2,647 held in the Slack Marital Fund Trust, 3,652 held in the Slack
Residuary Fund Trust, and 9,000 shares held jointly with his mother.

(12) Glenn A. Thomas' shares are held jointly with his spouse.

50
<PAGE>
The following table sets forth as of June 30, 1996, the shares of common
stock beneficially owned by the only persons known to own more than 5% of the
Company's Common Stock.

<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
NAME AND ADDRESS SHARES CLASS
- ------------------------------------------------------------------------------ ------------- ------------
<S> <C> <C>
Ronald C. La Franchi.......................................................... 510,866 18.49%
580 North Central
Coquille, OR 97423

Security Bank Holding Company
Employee Stock Ownership Plan Trust (2)...................................... 978,728(1) 35.43%
170 S. Second Street
Coos Bay, Oregon 97420
</TABLE>

- ------------------------
(1) Includes 522,471 shares held of record by the Security Bank Holding Company
Employee Stock Ownership Plan Trust which are not allocated to employees and
are pledged to secure repayment of indebtedness to the Company.

(2) Trustees of the Trust are appointed by the Board of Directors of the Company
and currently consists of Martin Stone, attorney, Coquille, Oregon, Tim
Salisbury, Chief Financial Officer of Bay Area Hospital, and Antoinette M.
Poole, Senior Vice President/Loan Administrator with the Bank, North Bend,
Oregon.

DESCRIPTION OF COMMON STOCK

SHARES AUTHORIZED AND OUTSTANDING OR SUBJECT TO OPTION

The Articles of Incorporation of the Company authorize the issuance of up to
20 million shares of stock, divided into three classes as follows:

1. 10,000,000 shares of Common Stock having a par value of $5.00 per share.
As of June 30, 1996, there were 2,762,270 shares of Common Stock issued and
outstanding.

2. 5,000,000 shares of Voting Preferred Stock having a par value of $5.00
per share, none of which is issued.

3. 5,000,000 shares of Non-voting Preferred Stock having a par value of
$5.00 per share, none of which is issued. Non-voting stock has no voting rights
except as provided by Oregon law.

Subject to the rights of holders of any preferred stock which may be
outstanding, the holders of the Common Stock are entitled to receive dividends
if and when declared by the Board of Directors from any funds legally available
therefor. See "Supervision and Regulation -- Dividends." Each outstanding share
of Common Stock has the same relative rights and preferences as each other share
of Common Stock, including the rights to the net assets of the corporation upon
liquidation. Each share is entitled to one vote on matters submitted to a vote
of shareholders. Holders of Common Stock are not entitled to conversion,
redemption or preemptive rights and may not cumulate votes in the election of
directors.

All issued and outstanding shares are, and all shares to be issued in this
offering will be, fully paid and non-assessable. The Board of Directors is
authorized to issue or sell additional capital stock of the Company, at its
discretion and for fair value, and to issue future cash or stock dividends,
without subsequent shareholder approval.

A total of 276,000 shares of Common Stock have been reserved for issuance
under the Company's combined incentive and non-qualified stock option plan, of
which 96,600 shares were subject to options as of June 30, 1996. See "Management
- -- Other Benefit Plans."

The Company's Employee Stock Ownership Plan Trust currently holds a total of
978,728 shares of the Company's common stock, or 35.43% of the total number of
shares outstanding. Of those

51
<PAGE>
shares, 522,471 are not yet allocated to employees. The unallocated shares are
considered legally outstanding, may be voted and are entitled to receive
dividends. However, the unallocated shares are excluded for certain financial
statement purposes. See "Management -- Other Benefit Plans."

The Board of Directors is expressly authorized to designate by resolution
one or more series of preferred stock, voting or non-voting, and to fix and
determine the relative rights and preferences of the designated series, subject,
however, to the limitation that, unless required by law, the preferred stock has
no voting rights. The Board has not designated any series of preferred stock at
this time, and has no present intention of doing so or of issuing any preferred
stock.

SHARES AVAILABLE FOR TRADING

Exclusive of shares held by the ESOP, directors and executive officers hold
222,281 shares of Common Stock (8.05% of all shares outstanding). As a condition
to the Offering, each will agree that they will not sell any shares held or
controlled by them in the open market for a period of 180 days after the Closing
of the Offering without the prior written approval of Black & Company, Inc., the
Underwriter in this Offering. Upon expiration of the 180 day period, resale of
shares held by executive officers and directors will be restricted by certain
terms of Rule 144 promulgated by the Securities and Exchange Commission.

The allocated, unencumbered shares held by the Company's ESOP (456,257
shares representing 16.52% of the total outstanding) are available for sale in
the trading markets; however, the primary purpose of the ESOP is to hold shares
of the Company. Nonetheless, the trustees could determine to sell some of these
shares in the exercise of their fiduciary duty. As employees retire, leave the
Bank or are otherwise entitled to distribution from the ESOP and if the trustees
elect to issue to the participant Company shares rather than pay such
participant cash equal to the fair market value of the allocated shares, such
participant (other than executive officers) would be free to sell such shares in
the open markets.

All remaining shares, including those held by Ronald C. La Franchi, the
Company's largest individual shareholder, are available for sale; however, Mr.
La Franchi may be considered an affiliate of the Company based upon the size of
his holdings, and if so considered, the volume and terms of his sales would be
restricted by the provisions of Rule 144 under the Securities Act of 1933.

ANTI-TAKEOVER PROVISIONS

The Company is subject to the Oregon Control Share Act (Oregon Revised
Statutes Sections 60.801-60.816)(the "Control Share Act"). The Control Share Act
generally provides that a person (the "Acquiring Person") who acquires voting
stock of an Oregon corporation in a transaction which results in such Acquiring
Person holding more than 20%, 33 1/3% or 50% of the total voting power of such
corporation (a "Control Share Acquisition") cannot vote the shares it acquires
in the Control Share Acquisition ("control shares") unless voting rights are
accorded to such control shares by the holders of a majority of the outstanding
voting shares, excluding the control shares held by the Acquiring Person and
shares held by the Company's officers and inside directors ("interested
shares"), and by the holders of a majority of the outstanding voting shares,
including interested shares. The foregoing vote would be required at the time an
Acquiring Person's holdings exceed 20% of the total voting power of a company,
and again at the time the Acquiring Person's holdings exceed 33 1/3% and 50%,
respectively. The term "Acquiring Person" is broadly defined to include persons
acting as a group. A transaction in which voting power is acquired solely by
receipt of an immediately revocable proxy does not constitute a "Control Share
Acquisition."

The Acquiring Person may, but is not required to, submit to the Company an
"Acquiring Person Statement" setting forth certain information about the
Acquiring Person and its plans with respect to the Company. The Acquiring Person
Statement may also request that the Company call a special meeting of
shareholders to determine whether the control shares will be allowed to retain
voting rights. If the Acquiring Person does not request a special meeting of
shareholders, the issue of voting

52
<PAGE>
rights of control shares will be considered at the next annual meeting or
special meeting of shareholders that is held more than 60 days after the date of
the Control Share Acquisition. If the Acquiring Person's control shares are
accorded voting rights and represent a majority or more of all voting power,
shareholders who do not vote in favor of the restoration of such voting rights
will have the right to receive the appraised "fair value" of their shares, which
may not be less than the highest price paid per share by the Acquiring Person
for the control shares.

Upon completion of this offering, the Company also will become subject to
the Oregon Business Combination Act (Oregon Revised Statutes Sections
60.825-60.845)(the "Business Combination Act"). The Business Combination Act
generally provides that in the event a person or entity acquires 15% or more of
the voting stock of an Oregon corporation (an "Interested Shareholder"), the
corporation and the Interested Shareholder, or any affiliated entity, may not
engage in certain business combination transactions for a period of three years
following the date the person became an Interested Shareholder. Business
combination transactions for this purpose include (a) a merger or plan of share
exchange, (b) any sale, lease, mortgage or other disposition of the assets of
the corporation where the assets have an aggregate market value equal to 10% or
more of the aggregate market value of the corporation's assets or outstanding
capital stock, and (c) certain transactions that result in the issuance of
capital stock of the corporation to the Interested Shareholder. These
restrictions do not apply if (i) the Interested Shareholder, as a result of the
transaction in which such person became an Interested Shareholder, owns at least
85% of the outstanding voting stock of the corporation (disregarding shares
owned by directors who are also officers, and certain employee benefit plans),
(ii) the Board of Directors approves the share acquisition or business
combination before the Interested Shareholder acquired 15% or more of the
corporation's voting stock, or (iii) the Board of Directors and the holders of
at least two-thirds of the outstanding voting stock of the corporation
(disregarding shares owned by the Interested Shareholder) approve the
transaction after the Interested Shareholder acquires 15% or more of the
corporation's voting stock.

The Control Share Act and the Business Combination Act will have the effect
of encouraging any potential acquiror to negotiate with the Company's Board of
Directors and will also discourage certain potential acquirors unwilling to
comply with its provisions. A corporation may provide in its articles of
incorporation or bylaws that the laws described above do not apply to its
shares. The Company has not adopted such a provision and does not currently
intend to do so. The law may make the Company less attractive for takeover, and
thus shareholders may not benefit from a rise in the price of the Common Stock
that a takeover could cause. The limitations of the Acts are in addition to
regulatory restrictions on acquisitions of stock of banks and bank holding
companies under the federal Bank Holding Company Act.

In addition to the statutory provisions discussed above, the Company's
articles of incorporation and bylaws contain certain provisions that could make
more difficult the acquisition of the Company by means of a tender offer, proxy
contest, merger or otherwise. The articles of incorporation authorize the
issuance of up to 5,000,000 shares of voting preferred stock, which, although
intended primarily as a financing tool and not as a defense against takeovers,
could potentially be used by management to make more difficult uninvited
attempts to acquire control of the Company by, for example, diluting the
ownership interest of a substantial shareholder, increasing the consideration
necessary to effect an acquisition, or selling authorized but unissued shares to
a friendly third party. In addition, the articles of incorporation authorize the
issuance of warrants, rights, options or other obligations convertible into, or
entitling the holder thereof, to purchase shares of any class of stock, the
issuance of which may also have the effect of diluting the ownership interest of
a shareholder or increasing the consideration necessary to effect an acquisition
of a controlling interest in the Company.

The Company's bylaws provide for a staggered board of directors whereby
approximately one-third of the director positions are filled each year. This
provision makes it more difficult for a dissident shareholder to remove the
entire board of directors at one time. Such a provision may have the effect of
discouraging potential acquirors, and may be considered an anti-takeover
defense.

53
<PAGE>
UNDERWRITING

The Underwriter, Black & Company, Inc. has agreed to purchase from the
Company 350,000 shares of Common Stock, subject to the terms and conditions set
forth in the Underwriting Agreement. The Underwriting Agreement provides for the
obligation of the Underwriter to pay for and accept delivery of the shares of
Common Stock subject to certain conditions precedent, and that the Underwriter
will be obligated to purchase all of the shares offered if any of such shares
are purchased. Pursuant to the Underwriting Agreement, the Company has granted
to Black & Company, Inc., an option to purchase as additional 52,500 shares on
the same terms and conditions as the other shares being offered solely for the
purpose of covering over-allotments.

The Underwriter proposes to offer the shares of Common Stock directly to the
public at the initial public offering price set forth on the cover of the
Prospectus.

The Company has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act of 1933 (the "Act").
The Underwriter has been granted the option, for a period of three years after
the closing of this offering, to sell for the account of the Company or any of
its senior officers, any securities of the Company that may be offered for sale
by them. For a period of 180 days after the effective date of this Offering,
each of the Company's directors has agreed not to sell, assign or otherwise
transfer any of their previously acquired shares of the Company without the
Underwriter's consent.

The following persons are directors and officers of the Underwriter. The
business address of each person listed is Black & Co., Inc., One S.W. Columbia,
Suite 1200, Portland, Oregon 97258:

<TABLE>
<S> <C>
Herbert D. Black John F. Lillicrop
Lawrence S. Black Laurie R. Miller
Kevin M. Director Dennis B. Reiter
Theresa C. Duffy Jeffrey L.
William E. Frerichs Salzwedel
Jennifer Black Groves Ronald A. Sauer
Thomas M. Savinar
</TABLE>

LEGAL MATTERS

Certain legal matters will be passed upon for the Company by Foster Pepper &
Shefelman, 101 S.W. Main, 15th Floor, Portland, Oregon 97204, and for the
Underwriter by Ater Wynne Hewitt Dodson & Skerritt LLP, Suite 1800 KOIN Center,
222 S.W. Columbia, Portland, Oregon 97201.

EXPERTS

The consolidated financial statements of Security Bank Holding Company and
subsidiaries at December 31, 1994 and 1995, and for each of the years then
ended, have been included in this Prospectus in reliance on the reports of KPMG
Peat Marwick LLP, independent certified public accountants, given on the
authority of said firm as experts in auditing and accounting. Such report refers
to a change in accounting for investments in debt and equity securities.

TRANSFER AGENT

The Transfer Agent for the Common Stock of the Company is Security Bank, its
subsidiary.

SECURITIES AND EXCHANGE COMMISSION POLICY ON INDEMNIFICATION
FOR SECURITIES ACT LIABILITIES

Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the Company pursuant to the Company's

54
<PAGE>
Articles of Incorporation, contractual agreements, or otherwise, the Company has
been advised that in the opinion of the Securities and Exchange Commission
("SEC") such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable.

ADDITIONAL INFORMATION

The Company has filed a registration statement on Form SB-1 with the SEC
under the Act with respect to the Common Stock being offered hereby. As
permitted by the rules and regulations of the SEC, this Prospectus does not
contain all of the information set forth in the Registration Statement. For
further information with respect to the Company and the Common Stock offered
hereby, reference is made to the Registration Statement, which may be obtained
from the Public Reference Section of the SEC at Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20459. Statements contained in this Prospectus as
to the contents of any contract or other document are not necessarily complete
and, in such instance, reference is made to the copy of such contract or
document filed as an exhibit to the Registration Statement, each such statement
being qualified in all respects by such reference.

55
<PAGE>
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report.............................................. F-2

Consolidated Balance Sheets at December 31, 1994 and 1995 and at June 30,
1996 (unaudited)......................................................... F-4

For the Years Ended December 31, 1994 and 1995 and for the Six Months
Ended June 30, 1995 and 1996 (unaudited):

Consolidated Statements of Income......................................... F-6

Consolidated Statements of Shareholders' Equity......................... F-7

Consolidated Statements of Cash Flows................................... F-8

Notes to Consolidated Financial Statements.............................. F-9
</TABLE>

F-1
<PAGE>
[LOGO]

INDEPENDENT AUDITORS' REPORT

The Board of Directors and Shareholders
Security Bank Holding Company:

We have audited the accompanying consolidated balance sheets of Security
Bank Holding Company and Subsidiaries as of December 31, 1994 and 1995, and the
related consolidated statements of income, shareholders' equity, and cash flows
for the years then ended. These consolidated 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 financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Security
Bank Holding Company and Subsidiaries as of December 31, 1994 and 1995, and the
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.

As discussed in note 1 to the consolidated financial statements, the Bank
changed its method of accounting for certain debt and equity securities in 1994
to adopt the provisions of the Financial Accounting Standards Board's Statement
of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain
Investments in Debt and Equity Securities".

KPMG PEAT MARWICK LLP

Portland, Oregon
January 19, 1996

F-2
<PAGE>
(This page has been left blank intentionally.)

F-3
<PAGE>
SECURITY BANK HOLDING COMPANY
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------- JUNE 30,
1994 1995 1996
------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Cash and cash equivalents:

Cash and due from banks (notes 2 and 15)...... $ 4,217,071 $ 5,012,995 $ 4,454,948

Federal funds sold............................ 1,057,686 3,083,714 740,774
------------- ------------- -------------

Total cash and cash equivalents........... 5,274,757 8,096,709 5,195,722

Time deposits -- domestic financial
institutions................................... 1,649,681 549,741 370,060

Investment securities available for sale (note
3)............................................. 24,585,468 58,227,575 70,028,458

Investment securities held to maturity (notes 3
and 15)........................................ 29,274,692 -- --

Loans, net (notes 4, 5 and 15).................. 72,457,969 76,911,398 80,571,952

Mortgage loans held for sale, at cost which
approximates market (note 4)................... 1,464,034 2,616,032 1,419,192

Net investment in direct financing leases (note
6)............................................. 2,051,152 3,541,804 3,630,902

Premises and equipment, net (note 7)............ 3,261,184 3,241,153 3,281,482

Federal Home Loan Bank stock, at cost (note
15)............................................ 1,563,700 1,494,600 1,753,600

Other assets.................................... 3,987,922 3,909,321 3,816,883
------------- ------------- -------------

Total assets.............................. $ 145,570,559 $ 158,588,333 $ 170,068,251
------------- ------------- -------------
------------- ------------- -------------
</TABLE>

See accompanying notes to consolidated financial statements.

F-4
<PAGE>
SECURITY BANK HOLDING COMPANY
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES, MINORITY INTEREST AND SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------- JUNE 30,
1994 1995 1996
------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C>

Liabilities:
Deposits:
Demand...................................... $ 18,468,585 $ 19,492,203 $ 19,506,213
Interest-bearing demand..................... 1,909,217 2,415,886 2,741,564
NOW accounts................................ 22,729,504 21,485,781 20,625,964
Money market accounts....................... 15,241,288 15,368,474 17,635,797
Savings accounts............................ 16,993,234 15,363,678 15,028,617
Time deposits (note 9)...................... 45,776,327 53,164,393 58,262,915
------------- ------------- -------------
Total deposits............................ 121,118,155 127,290,415 133,801,070
Securities sold under agreements to repurchase
(notes 3 and 8)................................ 2,812,800 2,874,619 5,083,511
ESOP debt (note 10)............................. 733,000 644,000 644,000
Short-term borrowings........................... 510,200 500,937 659,049
Federal Home Loan Bank borrowings (note 15)..... 8,785,700 11,500,000 13,720,500
Other liabilities............................... 981,908 1,406,508 1,308,170
------------- ------------- -------------
Total liabilities......................... 134,941,763 144,216,479 155,216,300
------------- ------------- -------------
Minority interest in subsidiary................. -- -- 962,702
------------- ------------- -------------

Shareholders' equity:
Nonvoting preferred stock, $5 par value.
Authorized 5,000,000 shares; none issued..... -- -- --
Voting preferred stock, $5 par value.
Authorized 5,000,000 shares; none issued..... -- -- --
Common stock, $5 par value. Authorized
10,000,000 shares; issued and outstanding
2,762,195 shares (2,761,967 shares in 1994
and 2,762,325 shares at June 30, 1996) (note
1)........................................... 13,809,835 13,810,975 13,811,625
Surplus....................................... (145,042) 965 164,862
Retained earnings (note 11)................... 144,730 1,688,954 2,289,352
Unearned ESOP shares at cost (note 1)......... (2,203,078) (1,980,914) (1,853,314)
Unrealized (loss) gain on investment
securities available for sale (note 1)....... (977,649) 851,874 (523,276)
------------- ------------- -------------
Total shareholders' equity................ 10,628,796 14,371,854 13,889,249
Commitments and contingent liabilities (note
12)............................................
------------- ------------- -------------
Total liabilities, minority interest and
shareholders' equity..................... $ 145,570,559 $ 158,588,333 $ 170,068,251
------------- ------------- -------------
------------- ------------- -------------
</TABLE>

See accompanying notes to consolidated financial statements.

F-5
<PAGE>
SECURITY BANK HOLDING COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
YEARS ENDED SIX-MONTH PERIODS
DECEMBER 31, ENDED JUNE 30,
------------------------ ----------------------
1994 1995 1995 1996
----------- ----------- ---------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Interest income:
Interest on loans......................................... $ 6,718,679 $ 8,127,412 $4,024,719 $4,154,819
Interest and dividends on securities:
Taxable................................................. 2,262,027 2,340,964 1,199,802 1,488,136
Exempt from Federal income taxes........................ 851,311 971,872 474,937 510,099
Interest on time deposits -- domestic financial
institutions........................................... 77,375 60,785 34,702 12,327
Dividend income on Federal Home Loan Bank stock......... 78,528 99,156 55,683 66,786
Interest on Federal funds sold.......................... 80,011 108,857 18,342 78,859
Income on direct financing leases....................... 135,023 247,626 99,561 169,385
----------- ----------- ---------- ----------
Total interest income................................. 10,202,954 11,956,672 5,907,746 6,480,411
----------- ----------- ---------- ----------

Interest expense:
Deposits:
Interest-bearing demand................................. 57,354 68,664 34,290 46,759
NOW..................................................... 264,255 268,083 127,888 111,189
Money market............................................ 369,441 474,658 207,418 286,515
Savings................................................. 423,608 411,371 200,003 192,650
Time (note 9)........................................... 1,547,641 2,388,050 1,113,932 1,478,901
Securities sold under agreements to repurchase (note 8)... 104,370 151,772 81,506 80,134
ESOP debt................................................. 40,296 62,731 33,589 27,057
Short-term borrowings..................................... 16,012 23,197 11,001 11,007
Federal Home Loan Bank borrowings......................... 311,476 572,669 337,873 390,823
----------- ----------- ---------- ----------
Total interest expense................................ 3,134,453 4,421,195 2,147,500 2,625,035
----------- ----------- ---------- ----------
Net interest income................................... 7,068,501 7,535,477 3,760,246 3,855,376
Provision for loan losses (note 5).......................... 200,000 160,000 95,000 90,000
----------- ----------- ---------- ----------
Net interest income after provision for loan losses... 6,868,501 7,375,477 3,665,246 3,765,376
----------- ----------- ---------- ----------

Other income:
Service charges on deposit accounts....................... 847,362 910,208 457,922 474,087
Gain (loss) on sales of investment securities available
for sale, net............................................ (168,155) 12,517 4,076 18,492
Loan servicing fees....................................... 262,619 305,671 120,915 161,304
Sold real estate loan fees................................ 627,882 610,757 241,725 484,311
Other..................................................... 390,937 405,293 215,352 260,618
----------- ----------- ---------- ----------
Total other income.................................... 1,960,645 2,244,446 1,039,990 1,398,812
----------- ----------- ---------- ----------

Other expense:
Salaries and employee benefits............................ 3,554,272 3,933,862 1,917,263 2,335,073
Occupancy of bank premises................................ 417,193 404,785 200,782 207,956
Furniture and equipment................................... 442,583 604,558 274,451 342,389
Professional fees......................................... 362,211 408,231 205,763 245,614
FDIC assessment........................................... 246,156 136,728 132,596 2,000
Supplies.................................................. 247,750 288,093 156,038 117,304
Other..................................................... 1,121,903 1,346,557 736,608 808,718
----------- ----------- ---------- ----------
Total other expense................................... 6,392,068 7,122,814 3,623,501 4,059,054
----------- ----------- ---------- ----------
Income before provision for income taxes.............. 2,437,078 2,497,109 1,081,735 1,105,134
Provision for income taxes (note 13)........................ 761,700 633,000 323,000 280,000
----------- ----------- ---------- ----------
Net income............................................ $ 1,675,378 $ 1,864,109 $ 758,735 $ 825,134
----------- ----------- ---------- ----------
----------- ----------- ---------- ----------
Net income per share (note 1)......................... $ .77 $ .83 $ .35 $ .36
----------- ----------- ---------- ----------
----------- ----------- ---------- ----------
</TABLE>

See accompanying notes to consolidated financial statements.

F-6
<PAGE>
SECURITY BANK HOLDING COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1994 AND 1995
AND SIX-MONTH PERIOD ENDED JUNE 30, 1996

<TABLE>
<CAPTION>
UNEARNED UNREALIZED
COMMON STOCK ESOP GAIN TOTAL
---------------------- RETAINED SHARES, (LOSS) ON SHAREHOLDERS'
SHARES AMOUNT SURPLUS EARNINGS AT COST SECURITIES EQUITY
--------- ----------- --------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993............. 2,761,577 $13,807,885 $(260,110) $(1,246,558) $(2,387,883) $ (296,631) $9,616,703
Net income............................. -- -- -- 1,675,378 -- -- 1,675,378
Dividends.............................. -- -- -- (284,090) -- -- (284,090)
Sale of common stock................... 399 1,995 (317) -- -- -- 1,678
Redemption of common stock............. (9) (45) 2 -- -- -- (43)
Release of ESOP shares................. -- -- 115,383 -- 184,805 -- 300,188
Unrealized loss on securities available
for sale.............................. -- -- -- -- -- (681,018) (681,018)
--------- ----------- --------- ----------- ----------- ----------- ------------
Balance, December 31, 1994............. 2,761,967 13,809,835 (145,042) 144,730 (2,203,078) (977,649) 10,628,796
Net income............................. -- -- -- 1,864,109 -- -- 1,864,109
Dividends.............................. -- -- -- (319,885) -- -- (319,885)
Sale of common stock................... 273 1,365 291 -- -- -- 1,656
Redemption of common stock............. (45) (225) 62 -- -- -- (163)
Release of ESOP shares................. -- -- 145,654 -- 222,164 -- 367,818
Unrealized gain on securities available
for sale.............................. -- -- -- -- -- 1,829,523 1,829,523
--------- ----------- --------- ----------- ----------- ----------- ------------
Balance, December 31, 1995............. 2,762,195 13,810,975 965 1,688,954 (1,980,914) 851,874 14,371,854
Unaudited:
Net income........................... -- -- -- 825,134 -- -- 825,134
Dividends............................ -- -- -- (224,736) -- -- (224,736)
Sale of common stock................. 130 650 383 -- -- -- 1,033
Release of ESOP shares............... -- -- 163,514 -- 127,600 -- 291,114
Unrealized loss on securities
available for sale.................. -- -- -- -- -- (1,375,150) (1,375,150)
--------- ----------- --------- ----------- ----------- ----------- ------------
Balance at June 30, 1996 (unaudited)... 2,762,325 $13,811,625 $ 164,862 $ 2,289,352 $(1,853,314) $ (523,276) $13,889,249
--------- ----------- --------- ----------- ----------- ----------- ------------
--------- ----------- --------- ----------- ----------- ----------- ------------
</TABLE>

See accompanying notes to consolidated financial statements.

F-7
<PAGE>
SECURITY BANK HOLDING COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEARS ENDED SIX-MONTH PERIODS
DECEMBER 31, ENDED JUNE 30,
-------------------------- --------------------------
1994 1995 1995 1996
------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows provided by operating activities:
Net income........................................................ $ 1,675,378 $ 1,864,109 $ 758,735 $ 825,134
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization................................... 589,600 643,626 323,860 300,847
Provision for loan losses....................................... 200,000 160,000 95,000 90,000
Origination of mortgage loans held for sale..................... (20,133,917) (32,076,359) (11,313,171) (28,387,693)
Proceeds from mortgage loans sold............................... 22,465,660 30,924,361 11,141,574 29,584,533
Net (gain) loss on sale of fixed assets......................... (679) (573) (1,238) 11,214
Net gain on call of investment securities held to maturity...... (1,841) (2,783) -- --
Net (gain) loss on sale of investment securities available for
sale........................................................... 168,155 (12,517) (4,076) (18,492)
Federal Home Loan Bank stock dividend........................... (90,300) (98,900) (55,500) (66,600)
ESOP related compensation expense............................... 300,188 367,818 173,962 291,114
Decrease (increase) in other assets............................. (534,306) 78,601 (55,252) 92,438
(Decrease) increase in other liabilities........................ (322,906) (298,365) 2,138 660,749
------------ ------------ ------------ ------------
Net cash provided by operating activities..................... 4,315,032 1,549,018 1,066,032 3,383,244
------------ ------------ ------------ ------------

Cash flows from investing activities:
Net decrease in time deposits -- domestic financial
institutions..................................................... 360,319 1,099,940 280,903 179,681
Purchase of investment securities held to maturity................ (17,135,111) (4,595,144) (460,236) --
Purchase of investment securities available for sale.............. (4,052,473) (10,079,490) (897,079) (25,130,133)
Proceeds from sales of investment securities available for sale... 6,228,896 5,612,195 2,433,088 7,016,462
Proceeds from maturities of investment securities held to
maturity......................................................... 761,144 1,916,467 691,215 --
Proceeds from maturities of investment securities available for
sale............................................................. 4,237,959 5,144,345 1,085,155 4,138,813
Net loan originations............................................. (11,080,544) (4,561,868) (3,061,582) (3,730,866)
Purchase of participations........................................ (855,625) (51,561) (103,125) (19,688)
Additions to premises and equipment............................... (595,099) (427,156) (268,003) (311,690)
Purchase of Federal Home Loan Bank stock.......................... (2,019,800) (1,997,700) (982,600) (1,127,800)
Redemption of Federal Home Loan Bank stock........................ 917,000 2,165,700 750,000 935,400
Proceeds from sales of premises and equipment..................... 31,098 6,134 5,122 17,530
Originations of direct financing leases........................... (1,146,922) (1,734,943) (801,808) (596,719)
Gross payments on direct financing leases......................... 479,197 244,291 221,329 507,621
Minority interest in subsidiary................................... -- -- -- 962,702
------------ ------------ ------------ ------------
Net cash used in investing activities......................... (23,869,961) (7,258,790) (1,107,621) (17,158,687)
------------ ------------ ------------ ------------

Cash flows from financing activities:
Net increase (decrease) in deposits............................... 10,627,331 6,172,260 (75,863) 6,510,655
Increase (decrease) in securities sold with agreements to
repurchase....................................................... 648,564 61,819 399,187 2,208,892
Repayment of ESOP debt............................................ (83,000) (89,000) -- --
Increase in Federal Home Loan Bank borrowings..................... 8,785,700 2,714,300 -- 2,220,500
Payment of dividends.............................................. (284,090) (319,885) (159,936) (224,736)
Other............................................................. 11,835 (7,770) 34,564 159,145
------------ ------------ ------------ ------------
Net cash provided by financing activities..................... 19,706,340 8,531,724 197,952 10,874,456
------------ ------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents.......... 151,411 2,821,952 156,363 (2,900,987)
Cash and cash equivalents at beginning of year...................... 5,123,346 5,274,757 5,274,757 8,096,709
------------ ------------ ------------ ------------
Cash and cash equivalents at end of year............................ $ 5,274,757 $ 8,096,709 $ 5,431,120 $ 5,195,722
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------

Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest........................................................ $ 3,101,486 $ 4,329,506 $ 2,116,247 $ 2,543,842
Income taxes.................................................... 990,050 662,000 306,000 175,000

Supplemental disclosures of investing activities:
Unrealized gain (loss) on investment securities available for
sale, net of tax................................................. (681,018) 1,829,523 (635,713) (1,375,150)
Loans transferred to other real estate owned...................... 42,920 -- -- --
</TABLE>

See accompanying notes to consolidated financial statements.

F-8
<PAGE>
SECURITY BANK HOLDING COMPANY
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 1994 AND 1995 AND JUNE 30, 1995 AND 1996
(INFORMATION AS OF JUNE 30, 1996 AND FOR THE SIX-MONTH
PERIODS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED)

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(A) PRINCIPLES OF CONSOLIDATION

The accompanying consolidated financial statements include the accounts of
Security Bank Holding Company (SBHC), a bank holding company, its wholly-owned
subsidiary, Security Bank (the Bank), its majority-owned subsidiary, Lincoln
Security Bank (Lincoln Security), and the Bank's wholly-owned subsidiaries,
Alland, Inc. and Security Financial Insurance Agency. Significant intercompany
accounts and transactions have been eliminated in consolidation.

(B) DESCRIPTION OF BUSINESS

The Bank conducts a general banking business. Its activities include the
usual deposit functions of a commercial bank: commercial, real estate and
installment loans; equipment leasing; checking and savings accounts; collection
and escrow services and safe deposit facilities. The Bank's primary market area
consists of cities and communities along the southern Oregon coast. The Bank is
subject to the regulations of certain Federal agencies and undergoes periodic
examinations by these regulatory authorities.

Security Financial Insurance Agency is in the business of selling annuities,
mutual funds, single premium whole life policies and long-term health care
insurance.

Alland, Inc. holds title to certain assets of the Bank.

Lincoln Security is a newly organized state chartered bank located in
Newport, Oregon in which SBHC holds a majority interest. SBHC facilitated the
organization of Lincoln Security by purchasing 68.44% of all outstanding common
shares of Lincoln Security common stock, with the remainder of the outstanding
common stock held by local investors. Lincoln Bank commenced operations in May
of 1996, and engages in general commercial banking business. Lincoln Bank offers
commercial banking services to small and medium size businesses, professionals
and retail customers in the Bank's market area.

The financial statements have been prepared in conformity with generally
accepted accounting principles. The interim consolidated financial statements
are unaudited, but include all adjustments consisting of only normal accruals,
which the Company considers necessary for a fair presentation of the results of
operations for such interim periods. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the date of the balance sheet
and revenues and expenses for the period. Actual results could differ
significantly from those estimates.

Estimates that are particularly susceptible to significant change in the
near-term relate to the determination of the reserve for loan losses and the
valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with the determination of the reserve for
loan losses and real estate owned, management obtains independent appraisals for
significant properties.

The Bank is located in Coos and Curry Counties of Oregon. The result of
doing business in this geographic region has been growth in loan demand. A large
portion of the Bank's loans are collateralized by real estate in this geographic
area and, accordingly, the ultimate collectibility of this portion of the Bank's
loan portfolio is susceptible to changes in the local market conditions.
However, the loan

F-9
<PAGE>
SECURITY BANK HOLDING COMPANY
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
portfolio is diversified and management believes there is no concentration of
loans exceeding 10% for any particular industry. It is management's opinion that
the reserve for loan losses on loans and real estate owned is adequate to absorb
known and inherent risks in the loan portfolio. While management uses available
information to recognize losses on loans and real estate owned, future additions
to the reserve may be necessary based on changes in economic conditions. In
addition, various regulatory agencies, as an integral part of their examination
processes, periodically review the Bank's reserve for losses on loans and real
estate owned. Such agencies may require the Bank to recognize additions to the
reserve based on their judgments about information available to them at the time
of their examinations.

(D) INVESTMENT SECURITIES

On January 1, 1994, the Bank adopted Statement of Financial Accounting
Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity
Securities". Under this pronouncement, securities held to maturity are stated at
cost, adjusted for amortization of premiums and accretion of discounts.
Securities available for sale and trading account securities are stated at
market value. Gains and losses on sale of securities, recognized on a specific
identification basis, and valuation adjustments of trading account securities
are included in noninterest income. Net unrealized gain or loss on securities
available for sale are included, net of tax, as a component of shareholders'
equity.

In November 1995, the Financial Accounting Standards Board issued Special
Report No. 115-B, "A Guide to Implementation of Statement 115 on Accounting for
Certain Investments in Debt and Equity Securities." Special Report No. 115-B
allowed for a one-time reclassification among investment categories. In light of
the Special Report, the Bank reclassified all held to maturity securities to
available for sale. Total amortized cost of securities transferred and the
related unrealized gains at the date of transfer totaled $32,016,917 and
$276,531, respectively.

(E) INCOME RECOGNITION

Interest is accrued on a simple interest basis. The accrual of interest on
loans is discontinued when, in management's judgment, the future collectibility
of interest or principal is in serious doubt. Loans are generally placed on
nonaccrual status when they are 90 days past due.

Loan origination and commitment fees, net of certain direct loan origination
costs, are generally recognized over the life of the related loan as an
adjustment of the yield.

(F) RESERVE FOR LOAN LOSSES

The reserve for loan losses represents management's recognition of the
assumed risks of extending credit and its evaluation of the quality of the loan
portfolio. The reserve is maintained at a level considered adequate to provide
for potential loan losses based on management's assessment of various factors
affecting the loan portfolio, including a review of problem loans, business
conditions, loss experience and an overall evaluation of the quality of the
portfolio. The reserve is increased by provisions charged to operations and
reduced by loans charged off, net of recoveries. Loans which are 120 days
delinquent are charged off. Uncollectible interest on loans is charged off or an
allowance established by a charge to income equal to all interest previously
accrued and interest is subsequently recognized only to the extent cash payments
are received until delinquent interest is paid in full and, in management's
judgment, the borrower's ability to make periodic interest and principal
payments is back to normal in which case the loan is returned to accrual status.

The Bank adopted Statement of Financial Standards No. 114, "Accounting by
Creditors for Impairment of a Loan" as amended by SFAS No. 118 (collectively
referred to as SFAS No. 114) on January 1, 1995. SFAS No. 114 does not apply to
the Bank's credit card, residential real estate, or

F-10
<PAGE>
SECURITY BANK HOLDING COMPANY
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
consumer installment loans as these are considered large groups of smaller
balance homogeneous loans which are collectively evaluated for impairment. SFAS
No. 114 requires entities to measure certain impaired loans based on the present
value of future cash flows discounted at the loan's effective interest rate, or
at the loan's market value or the fair value of collateral if the loan is
secured. A loan is considered impaired when, based on current information and
events, it is probable that the Bank will be unable to collect all amounts due
according to the contractual terms of the loan agreement, including scheduled
interest payments. If the measurement of the impaired loans is less than the
recorded investment in the loan, impairment is recognized by creating or
adjusting an existing allocation of the allowance for loan losses. Impaired
loans are charged off once they are 120 days delinquent. Prior periods have not
been restated. The Bank does not aggregate loans for the measurement of impaired
loans as loans have been evaluated individually for collectibility under the
provisions of these statements. When a loan is impaired, interest is not accrued
on the loan as interest income is only recognized as received on a cash basis.
Cash receipts are first applied to past-due principal payments before
recognizing interest income.

(G) DIRECT FINANCING LEASES

The aggregate lease payments to be received over the term of the leases plus
the estimated residual values are capitalized as the Bank's net investment in
the leases. The excess of the investment in the leases over the cost of the
equipment (unearned income) is recognized as income over the term of the lease.

(H) PREMISES AND EQUIPMENT

Premises and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are charged to expense over the
estimated useful lives of the assets (buildings -- thirty-one and one-half to
forty years; furniture and equipment -- five to seven years) and are computed
using an accelerated method for assets acquired in 1991 and after and the
straight-line method for assets acquired prior to 1991.

(I) OTHER REAL ESTATE

Other real estate, acquired through foreclosure or deed in lieu of
foreclosure, is carried at the lower of cost or estimated fair value, not to
exceed 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. Subsequent write-downs, if any, are charged to the
reserve for other real estate losses.

(J) INCOME TAXES

Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.

(K) NET INCOME PER SHARE

Net income per share is based on the weighted average number of common share
and common stock equivalents outstanding during each period and the effect of
stock options to the extent they are deemed to be dilutive (2,180,990,
2,269,517, 2,180,763 and 2,251,483 shares at June 30, 1995 and 1996 and December
31, 1994 and 1995, respectively). For the years ended December 31, 1994 and
1995, the

F-11
<PAGE>
SECURITY BANK HOLDING COMPANY
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
weighted average number of common shares outstanding did not include 581,052
shares and 522,471 shares, respectively, sold to SBHC's ESOP as these shares
have not been allocated to participant accounts nor have they been committed to
be released.

(L) CASH AND CASH EQUIVALENTS

For purposes of reporting cash flows, cash and cash equivalents include cash
on hand, amounts due from banks and federal funds sold. Generally, federal funds
are sold for one-day periods.

(M) RECLASSIFICATIONS

Certain amounts previously reported on the December 31, 1994 consolidated
financial statements have been reclassified to conform to classifications on the
December 31, 1995 consolidated financial statements.

(N) RECENTLY ISSUED ACCOUNTING STANDARDS

In May 1995, the FASB issued SFAS No. 122, "Accounting for Mortgage
Servicing Rights". SFAS No. 122 amends certain provisions of SFAS No. 65 to
eliminate the accounting distinction between rights to service mortgage loans
for others that are acquired through loan origination activities and those
acquired through purchase transactions. The provision of SFAS No. 122 shall be
applied prospectively in fiscal years beginning after December 15, 1995 to
transactions in which a mortgage banking enterprise sells or securitizes
mortgage loans with servicing rights retained and to impairment evaluations of
all amounts capitalized as mortgage servicing rights, including those purchased
before the adoption of this statement. The Bank plans to implement SFAS No. 122
in fiscal 1996 and does not expect implementation to have a material impact on
the Bank's financial position or results of operations.

In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation", which applies to all transactions in which an entity acquires
goods or services issuing equity instruments or by incurring liabilities where
the payment amounts are based on the entity's common stock price, except for
employee stock ownership plans (ESOP's). The SFAS covers transactions with
employees and non-employees and is applicable to both public and non-public
entities.

SFAS No. 123 requires that, except for transactions with employees that are
within the scope of APB Opinion No. 25, all transactions in which goods or
services are the consideration received for the issuance of equity instruments
are to be accounted for based on the fair value of the consideration received or
the fair value of the equity instrument issued, whichever is more reliably
measurable. However, it also allows an entity to continue to measure
compensation costs for those plans using the intrinsic value based method of
accounting prescribed by APB Opinion No. 25, "Accounting for Stock Issued to
Employees". Entities electing to follow the accounting methods in Opinion No. 25
must make pro forma disclosures of net income and, if presented, earnings per
share, as if the fair value method of accounting defined in the statement had
been applied.

SFAS No. 123 is effective for years beginning after December 15, 1995, or
for an earlier fiscal year for which this statement is initially adopted for
recognizing compensation costs. Pro forma disclosures required for entities that
elect to continue to measure compensation cost using Opinion No. 25 must include
the effects of all awards granted in fiscal years that begin after December 15,
1994. SBHC has elected to continue pursuing Opinion No. 25 and will make
necessary SFAS No. 123 pro forma disclosures.

F-12
<PAGE>
SECURITY BANK HOLDING COMPANY
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(O) STOCK SPLIT

On September 20, 1995, SBHC's Board of Directors approved a three-for-two
common stock split in the form of a 50% stock dividend paid during January 1996.
The par value of the new shares issued totaled $4,603,445, the majority of which
was transferred from retained earnings after transferring substantially all of
surplus. Accordingly, all share and per share data have been restated to reflect
the stock split. SBHC's Board of Directors approved a two-for-one common stock
split in the form of a 100% stock dividend paid during 1994. Accordingly, all
share and per share data have been restated to reflect the stock split.

(2) CASH AND DUE FROM BANKS
The Bank is required to maintain an average reserve balance with the Federal
Reserve Bank, or maintain such reserve balance in the form of cash. The amount
of this required reserve balance at December 31, 1994 and 1995 was approximately
$1,034,000 and $1,020,000, respectively, and was met by holding cash and
maintaining an average reserve balance with the Federal Reserve Bank.

(3) INVESTMENT SECURITIES
The Bank changed its method of accounting for certain investments in debt
and equity securities in connection with the issuance of SFAS No. 115 as
described in note 1. Upon the adoption of SFAS No. 115, the Bank classified
fixed maturity securities with amortized costs and estimated market value of
$43,242,659 and $43,723,618, respectively, as available-for-sale and recorded
the securities at fair value. Previously those securities were recorded at
amortized cost. The effect of the adoption was a $324,647 credit to
shareholders' equity which has been combined with 1994 changes in unrealized
losses on securities available for sale to arrive at a net decrease in
shareholders' equity of $681,018 during 1994.

F-13
<PAGE>
SECURITY BANK HOLDING COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(3) INVESTMENT SECURITIES (CONTINUED)
The amortized costs, unrealized gains, unrealized losses, and estimated
market values of investment securities at December 31, 1994 and 1995 and June
30, 1996 are summarized as follows:

<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED MARKET UNREALIZED UNREALIZED
COST VALUE GAINS LOSSES
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
December 31, 1994:
Available for sale:
U.S. Government and Federal agencies.............. $ 499,701 $ 499,215 $ -- $ 486
Mortgage-backed securities........................ 1,698,229 1,578,227 3,231 123,233
U.S. Treasury..................................... 6,051,604 5,850,290 10,404 211,718
Corporate obligations............................. 15,861,574 15,292,099 21,768 591,243
U.S. Federal securities mutual bond funds......... 1,740,818 1,365,637 -- 375,181
----------- ----------- ---------- ----------
Total available for sale........................ $25,851,926 $24,585,468 $ 35,403 $1,301,861
----------- ----------- ---------- ----------
----------- ----------- ---------- ----------
Held to maturity:
U.S. Government and Federal agencies.............. 1,063,647 1,021,250 -- 42,397
Mortgage-backed securities........................ 10,005,308 9,407,067 -- 598,241
U.S. Treasury..................................... 1,990,889 1,921,560 -- 69,329
Corporate obligations............................. 514,605 501,585 -- 13,020
Obligations of state and political subdivisions... 15,700,243 15,819,038 348,475 229,680
----------- ----------- ---------- ----------
Total held to maturity.......................... $29,274,692 $28,670,500 $ 348,475 $ 952,667
----------- ----------- ---------- ----------
----------- ----------- ---------- ----------
December 31, 1995:
Available for sale:
U.S. Government and Federal agencies.............. $ 4,050,026 $ 4,124,050 $ 74,024 $ --
Mortgage-backed securities........................ 19,832,982 20,120,370 305,801 18,413
U.S. Treasury..................................... 6,008,416 6,110,595 111,216 9,037
Corporate obligations............................. 9,605,693 9,566,990 63,764 102,467
U.S. Federal securities mutual bond funds......... 984,550 937,350 -- 47,200
Obligations of state and political subdivision.... 16,461,146 17,368,220 914,907 7,833
----------- ----------- ---------- ----------
Total available for sale........................ $56,942,813 $58,227,575 $1,469,712 $ 184,950
----------- ----------- ---------- ----------
----------- ----------- ---------- ----------
June 30, 1996:
Available for sale:
U.S. Government and Federal agencies.............. 15,043,238 14,665,358 11,260 389,140
Mortgage-backed securities........................ 30,298,756 29,758,717 19,335 559,374
U.S. Treasury..................................... 1,993,956 2,015,620 21,664 --
Corporate obligations............................. 5,253,424 5,212,562 14,337 55,199
U.S. Federal securities mutual bond funds......... 984,550 749,850 -- 234,700
Obligations of state and political subdivision.... 17,303,072 17,626,351 452,962 129,683
----------- ----------- ---------- ----------
Total available for sale........................ $70,876,996 $70,028,458 $ 519,558 $1,368,096
----------- ----------- ---------- ----------
----------- ----------- ---------- ----------
</TABLE>

Gross realized gains and gross realized losses on sales of securities
available for sale for the years ended December 31, 1994 and 1995 were:

<TABLE>
<CAPTION>
1994 1995
---------------------- ----------------------
REALIZED REALIZED REALIZED REALIZED
GAINS LOSSES GAINS LOSSES
--------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
U.S. Government and Federal agencies.................. $ 1,163 -- 21,829 --
U.S. Treasury......................................... -- 292 5,086 --
Corporate obligations................................. 13,492 33,639 24,966 12,888
U.S. Federal securities mutual bond funds............. -- 153,125 -- 80,008
Obligations of state and political subdivisions....... 4,246 -- 53,532 --
--------- ----------- ----------- ---------
$ 18,901 $ 187,056 $ 105,413 $ 92,896
--------- ----------- ----------- ---------
--------- ----------- ----------- ---------
</TABLE>

F-14
<PAGE>
SECURITY BANK HOLDING COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(3) INVESTMENT SECURITIES (CONTINUED)
Approximate investment portfolio maturities at December 31, 1995 are as
follows:

<TABLE>
<CAPTION>
SECURITIES AVAILABLE FOR SALE
------------------------------
ESTIMATED
AMORTIZED COST MARKET VALUE
-------------- --------------
<S> <C> <C>
One year or less....................................................... $ 7,178,071 $ 7,147,555
After one year through five years...................................... 18,853,408 19,201,760
After five years through ten years..................................... 11,483,485 12,010,496
After ten years........................................................ 19,427,849 19,867,764
-------------- --------------
Total................................................................ $ 56,942,813 $ 58,227,575
-------------- --------------
-------------- --------------
</TABLE>

The following table represents the carrying value of securities pledged to
secure public deposits as required or permitted by law and securities sold under
agreements to repurchase at December 31, 1994 and 1995:

<TABLE>
<CAPTION>
1994 1995
-------------- --------------
<S> <C> <C>
U.S. Government and Federal agencies................................... $ 1,017,365 $ 5,215,999
U.S. Treasury.......................................................... 6,882,119 6,110,595
Obligations of state and political subdivisions........................ 2,608,940 2,397,856
-------------- --------------
$ 10,508,424 $ 13,724,450
-------------- --------------
-------------- --------------
</TABLE>

(4) LOANS
Major categories of loans at December 31, 1994 and 1995 and June 30, 1996
included in the portfolio are as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1994 1995 JUNE 30, 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Commercial -- real estate.............................. $ 15,980,024 $ 16,627,336 $ 15,331,267
Commercial -- lines of credit.......................... 20,610,333 23,164,048 24,159,920
Residential -- real estate............................. 19,964,705 19,231,938 20,338,719
Installment............................................ 15,669,788 18,662,005 20,309,155
Credit cards and other................................. 2,879,007 3,058,299 3,059,688
-------------- -------------- --------------
Total loans.......................................... 75,103,857 80,743,626 83,198,749
Deferred loan fees, net................................ (165,084) (153,203) (148,869)
Reserve for loan losses................................ (1,016,770) (1,062,993) (1,058,736)
-------------- -------------- --------------
Net loans............................................ $ 73,922,003 $ 79,527,430 $ 81,991,144
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>

F-15
<PAGE>
SECURITY BANK HOLDING COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(4) LOANS (CONTINUED)
Approximate loan portfolio maturities on fixed rate loans and repricing on
variable rate loans at December 31, 1995 and June 30, 1996 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
--------------------------------------------------------------
WITHIN ONE ONE TO FIVE AFTER FIVE
YEAR YEARS YEARS TOTAL
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Commercial -- real estate................ $ 8,820,211 $ 4,771,674 $ 3,035,451 $ 16,627,336
Commercial -- lines of credit............ 18,156,836 3,537,461 1,469,751 23,164,048
Residential -- real estate............... 12,069,155 1,611,831 5,550,952 19,231,938
Installment.............................. 1,769,210 9,770,160 7,122,635 18,662,005
Credit cards and other................... 2,965,164 93,135 -- 3,058,299
-------------- -------------- -------------- --------------
$ 43,780,576 $ 19,784,261 $ 17,178,789 $ 80,743,626
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------

JUNE 30, 1996
--------------------------------------------------------------
WITHIN ONE ONE TO FIVE AFTER FIVE
YEAR YEARS YEARS TOTAL
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Commercial -- real estate................ $ 7,603,120 $ 5,109,493 $ 2,618,654 $ 15,331,267
Commercial -- lines of credit............ 18,943,112 3,720,507 1,496,301 24,159,920
Residential -- real estate............... 9,537,814 1,917,715 8,883,190 20,338,719
Installment.............................. 1,652,805 10,821,868 7,834,482 20,309,155
Credit cards and other................... 2,975,859 83,829 -- 3,059,688
-------------- -------------- -------------- --------------
$ 40,712,710 $ 21,653,412 $ 20,832,627 $ 83,198,749
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
</TABLE>

Mortgage loans held for sale are included above as real estate - mortgage
loans maturing within one year.

Loans on nonaccrual status were approximately $432,000 and $483,000 at
December 31, 1995 and June 30, 1996, respectively. There were no nonaccrual
status loans at December 31, 1994. Interest income which would have been
realized on nonaccrual loans if they had remained current was insignificant.
There were no loans past due greater than 90 days but not on nonaccrual status
at December 31, 1995 or 1994 or June 30, 1996.

Renegotiated loans were approximately $499,999, $463,000 and $447,000 at
December 31, 1994 and 1995 and June 30, 1996, respectively. At December 31, 1995
and June 30, 1996, these loans, under their renegotiated terms, are not
considered impaired under SFAS No. 114.

The Bank had no commitments to extend additional credit on loans which are
renegotiated, non accrual or impaired at December 31, 1995 or June 30, 1996.

At December 31, 1994 and 1995 and June 30, 1996, the Bank serviced
approximately $118,664,000, $141,649,000 and $159,415,896, respectively, of
loans owned by others.

The Bank's lending activities are concentrated in southern Oregon.

F-16
<PAGE>
SECURITY BANK HOLDING COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(5) RESERVE FOR LOAN LOSSES
Transactions in the reserve for loan losses for the years ended December 31,
1994 and 1995 and the six months ended June 30, 1996 were as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------- JUNE 30,
1994 1995 1996
------------- ------------- -------------
<S> <C> <C> <C>
Balance, beginning of year................................. $ 909,131 $ 1,016,770 $ 1,062,993
Provision for loan losses.................................. 200,000 160,000 90,000
Loans charged off.......................................... (148,638) (185,158) (108,235)
Recoveries of loans previously charged off................. 56,277 71,381 13,978
------------- ------------- -------------
Balance, end of year....................................... $ 1,016,770 $ 1,062,993 $ 1,058,736
------------- ------------- -------------
------------- ------------- -------------
</TABLE>

The recorded investment in loans for which an impairment has been recognized
at December 31, 1995 and June 30, 1996 were $111,475 and $78,509, respectively.
The related allowance for doubtful accounts at December 31, 1995 and June 30,
1996 was $36,400 and $52,200, respectively. The average recorded investment in
impaired loans during 1995 and during the six months ended June 30, 1996 was
$159,482 and $102,901, respectively. Interest income recognized on impaired
notes receivable during 1995 and the six months ended June 30, 1996, was
insignificant.

(6) DIRECT FINANCING LEASES
Following are the components of the net investment in direct financing
leases at December 31, 1994 and 1995:

<TABLE>
<CAPTION>
1994 1995
------------- -------------
<S> <C> <C>
Total minimum lease payments receivable................................... $ 1,449,788 $ 2,998,730
Add:
Estimated unguaranteed residual values of leased equipment.............. 105,378 274,609
Equipment acquired for lease, under interim rent........................ 729,196 865,357
Less:
Unearned income......................................................... 233,210 596,892
------------- -------------
Net investment in direct financing leases............................. $ 2,051,152 $ 3,541,804
------------- -------------
------------- -------------
</TABLE>

Future minimum lease payments to be received on direct financing leases are
as follows:

<TABLE>
<S> <C>
Year ending December 31:
1996......................................................... $ 932,202
1997......................................................... 775,078
1998......................................................... 563,320
1999......................................................... 447,395
2000......................................................... 169,807
Thereafter................................................... 110,928
----------
Total...................................................... $2,998,730
----------
----------
</TABLE>

F-17
<PAGE>
SECURITY BANK HOLDING COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(7) PREMISES AND EQUIPMENT
The composition of premises and equipment at December 31, 1994 and 1995 is
as follows:

<TABLE>
<CAPTION>
1994 1995
-------------- --------------
<S> <C> <C>
Land.................................................................... $ 100,000 $ 100,000
Buildings and leasehold improvements.................................... 3,713,369 3,807,449
Furniture and equipment................................................. 2,552,753 2,826,730
-------------- --------------
6,366,122 6,734,179
Less accumulated depreciation and amortization.......................... (3,104,938) (3,493,026)
-------------- --------------
Net premises and equipment............................................ $ 3,261,184 $ 3,241,153
-------------- --------------
-------------- --------------
</TABLE>

(8) SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE

<TABLE>
<CAPTION>
CARRYING
WEIGHTED VALUE OF MARKET VALUE
REPURCHASE AVERAGE UNDERLYING OF UNDERLYING
AMOUNT INTEREST RATE ASSETS ASSETS
------------- --------------- ------------- -------------
<S> <C> <C> <C> <C>
December 31, 1994:
Overnight.................................... $ 2,812,800 3.11% $ 2,940,485 $ 2,940,485
December 31, 1995:
Overnight.................................... $ 2,874,619 4.10% $ 3,620,660 $ 3,620,660
</TABLE>

The securities underlying agreements to repurchase entered into by the Bank
are for the same securities originally sold. In all cases, the creditor
maintains control over the securities. Securities sold under agreements to
repurchase averaged approximately $2,797,000 for the year ended December 31,
1995 and the maximum amount outstanding at any month-end for the year ended
December 31, 1995 was approximately $3,555,000.

(9) TIME DEPOSITS
Time certificates of deposit in excess of $100,000 aggregated approximately
$12,728,000 and $18,305,000 at December 31, 1994 and 1995, respectively.
Interest expense on these certificates amounted to approximately $232,000 and
$855,000 for the years ended December 31, 1994 and 1995, respectively.

F-18
<PAGE>
SECURITY BANK HOLDING COMPANY
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(10) EMPLOYEE BENEFIT PLANS

EMPLOYEE SAVINGS PLAN

The Bank has a qualified profit sharing 401(k) plan covering all half-time
or greater personnel with at least twelve months of service. Actual
contributions to the plan are determined by the Board of Directors and are not
to exceed the amount deductible for federal income tax purposes. Actual
contributions amounted to 0% of voluntary employee contributions (up to 6% of
salaries) in 1995 and 25% in 1994. Profit sharing contributions charged to
operations were approximately $32,000 in 1994. There were no profit sharing
contributions charged to operations in 1995.

EMPLOYEE STOCK OWNERSHIP PLAN (ESOP)

SBHC sponsors a leveraged employee stock ownership plan (ESOP) that covers
all employees who meet the eligibility requirements. To be eligible, an employee
must be age twenty-one or older and have completed one year of service during
which the employee has at least 1,000 hours of service. The ESOP is
noncontributory. Employees are 20% vested after two years of service and vesting
increases at the rate of 20% each year thereafter such that employees are 100%
vested after six years of service. SBHC makes annual contributions to the ESOP
at a minimum, sufficient to pay; interest due on outstanding loans, required
principal repayments; operating expenses and administrative fees. In certain
years, SBHC has also deposited additional funds to enable the ESOP to repurchase
shares from participants. All dividends received by the ESOP are used to pay
debt service. The ESOP shares initially were pledged as collateral for its debt.
As the debt is repaid, shares are released from collateral based on the
proportion of debt service paid in the year and allocated to active employees.

The debt related to the ESOP is recorded as debt and the shares pledged as
collateral are reported as unearned ESOP shares on the consolidated balance
sheets. As shares are committed to be released from collateral, SBHC reports
compensation expense equal to the current market price of the shares, and the
shares become outstanding for per share computations. Dividends on allocated
ESOP shares are recorded as a reduction of retained earnings; dividends on
unallocated ESOP shares are recorded as a reduction of debt and accrued
interest.

SBHC has ESOP related debt of $733,000 and $644,000 at December 31, 1994 and
1995, respectively. The ESOP debt consists of a note payable to Bank of America
with a variable interest rate payable quarterly of 8.0% at December 31, 1995. In
addition, during 1993, SBHC loaned the ESOP $1,583,205 to purchase 365,355
shares of its common stock. This loan is not reflected on SBHC's consolidated
balance sheets at December 31, 1995 and 1994.

The ESOP shares as of December 31, 1994 and 1995 were as follows:

<TABLE>
<CAPTION>
1994 1995
------------- -------------
<S> <C> <C>
Allocated................................................................. 346,338 397,675
Shares released for allocation............................................ 57,213 58,581
Unreleased shares......................................................... 581,052 522,471
------------- -------------
Total ESOP shares....................................................... 984,603 978,727
------------- -------------
------------- -------------
Fair value of unreleased shares........................................... $ 3,389,470 $ 4,134,487
------------- -------------
------------- -------------
</TABLE>

STOCK OPTION PLANS

The Bank maintains an Employee Stock Option Plan (the "Employee Plan"),
adopted in 1995, under which 276,000 shares of common stock are reserved for
issuance to key employees. The Employee Plan provides for the grant of options
to purchase shares to selected employees. The purchase price of shares for which
stock options are granted shall not be less than 100% of the fair

F-19
<PAGE>
SECURITY BANK HOLDING COMPANY
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(10) EMPLOYEE BENEFIT PLANS (CONTINUED)
market value of such shares on the date of grant. Options granted under the
Employee Plan are exercisable in installments and expire on such date as the
Compensation Committee of the Board of Directors may determine, but not later
than ten years from the date of grant.

The following table summarizes stock option activity for the year ended
December 31, 1995:

<TABLE>
<CAPTION>
EMPLOYEE PLAN
----------------------
AVERAGE
EXERCISE
SHARES PRICE
--------- -----------
<S> <C> <C>
Granted........................................................................ 96,600 $ 5.67
--------- -----
Outstanding options at December 31, 1995....................................... 96,600 $ 5.67
--------- -----
--------- -----
Exercisable at December 31, 1995............................................... -- $ --
--------- -----
--------- -----
Shares available for future grant at December 31, 1995......................... 179,400
---------
---------
</TABLE>

PHANTOM STOCK DEFERRED COMPENSATION PLAN

As of January 1, 1996, Security Bank established a deferred compensation
plan for a select group of key employees to provide for unfunded, nonqualified
deferred compensation to assist in attracting and retaining such key employees
and to encourage such employees to devote their best efforts to the business of
the Bank. An eligible employee is permitted to defer up to 20% of that
employee's base salary and 100% of any cash bonus, and is required to defer not
less than 2% of base salary and 20% of any cash bonus. Deferred compensation is
credited to the participant's account in the form of phantom stock units, the
number of units being determined by dividing the amount of the compensation
deferred by the base price established annually by the Board of Directors for
that plan year's deferrals. The base price of each unit is the average of the
bid and ask prices of SBHC's common stock for the last ten trading days of the
preceding calendar year. Compensation expense is recognized for the amount
credited to the participant's account each year. For the six-month period ended
June 30, 1996, SBHC recognized $4,337 in compensation expense related to this
plan. Distributions to a participating employee are made in cash only and are
made within sixty days after the earlier of the employee's death, disability,
termination of employment, change of control of SBHC or the attainment of the
age specified in the Plan agreement between the employee and the Bank. Upon
distribution, the deferral compensation amount is valued by multiplying the
cumulative number of phantom stock units by the average of the bid and ask
prices of SBHC common stock on the date of distribution. At June 30, 1996, there
is only one participant in the Plan.

(11) RETAINED EARNINGS
The Bank, as a state-chartered bank, is prohibited from declaring or paying
any dividends in an amount greater than undivided profits. At December 31, 1994
and 1995, undivided profits of approximately $5,454,681 and $3,708,787,
respectively, were available for the payment of dividends to SBHC with prior
regulatory approval.

F-20
<PAGE>
SECURITY BANK HOLDING COMPANY
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(12) COMMITMENTS AND CONTINGENT LIABILITIES
The Bank is leasing three of its branches under operating leases which
include various renewal and purchase options. The approximate future minimum
rental payments under these leases are as follows:

<TABLE>
<S> <C>
Year ending December 31:
1996................................................... $ 94,300
1997................................................... 81,000
1998................................................... 74,300
1999................................................... 40,800
2000................................................... 40,800
Thereafter............................................. 132,500
---------
$ 463,700
---------
---------
</TABLE>

Rental expense for all operating leases was approximately $93,000 and
$94,000 for the years ended December 31, 1994 and 1995, respectively.

At December 31, 1995, the Bank has $20,816,000 of unused lines of credit.

The Bank is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers and
to ensure performance of certain commercial customer obligations. These
financial instruments include commitments outstanding to extend credit and
commercial standby letters of credit and involve varying degrees of credit risk
and market risk.

Credit risk, as defined by SFAS No. 105, "Disclosure of Information about
Financial Instruments with Off-Balance-Sheet Risk and Financial Instruments with
Concentration of Credit Risk" represents the maximum potential accounting loss
due to possible non-performance by obligors and counterparties under the terms
of their contracts. Market risk represents the potential loss due to the
decrease in the value of a financial instrument caused primarily by changes in
interest rates or foreign exchange rates, or the prices of equities or
commodities (or related indices).

The Bank uses the same policies in making commitments and conditional
obligations as it does for on-balance sheet instruments.

At December 31, 1994 and 1995, these commitments and obligations were as
follows:

<TABLE>
<CAPTION>
1994 1995
---------------------------- ----------------------------
CONTRACT CREDIT RISK CONTRACT CREDIT RISK
AMOUNT AMOUNT AMOUNT AMOUNT
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Commitments to extend credit......................... $ 5,515,000 $ 5,515,000 $ 6,274,000 $ 6,274,000
Standby letters of credit and similar arrangements... 401,000 401,000 424,000 424,000
------------- ------------- ------------- -------------
$ 5,916,000 $ 5,916,000 $ 6,698,000 $ 6,698,000
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>

At December 31, 1994 and 1995 commitments and obligations at fixed and
variable rates were as follows:

<TABLE>
<CAPTION>
1994 1995
------------- -------------
<S> <C> <C>
Fixed rates......................................................................... $ 5,480,000 $ 5,633,000
Variable rates...................................................................... 436,000 1,065,000
------------- -------------
$ 5,916,000 $ 6,698,000
------------- -------------
------------- -------------
</TABLE>

F-21
<PAGE>
SECURITY BANK HOLDING COMPANY
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(12) COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment 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
deemed necessary by the Bank upon extension of credit is based on management's
credit evaluation of the counterparty. Collateral held varies but may include
accounts receivable, inventory, property, plant, and equipment and income
producing commercial properties.

Standby letters of credit written 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, including commercial paper, bond financing, and similar
transactions. The standby letters of credit will expire within one year.

For standby letters of credit and commitments to extend credit, the credit
risk amount represents the contractual amount. Standby letters of credit and
commitments to extend credit would have market risk if issued or extended at a
fixed rate of interest. However, these contracts are primarily made at a
floating rate. Fees received are generally recognized as revenue over the life
of the commitment.

The Bank is a defendant in legal proceedings arising in the normal course of
business. In the opinion of management, the disposition of pending litigation
will not have a material effect on the Bank's financial statements.

(13) PROVISION FOR INCOME TAXES
The provision for income taxes for the years ended December 31, 1994 and
1995 and the six months ended June 30, 1996 consists of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ JUNE 30,
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Current.................................................................... $ 761,700 $ 633,000 $ 280,000
Deferred................................................................... -- -- --
----------- ----------- -----------
$ 761,700 $ 633,000 $ 280,000
----------- ----------- -----------
----------- ----------- -----------
</TABLE>

The provision for income taxes results in effective tax rates which are
different from the Federal income tax statutory rate. The nature of the
differences for the years ended December 31, 1994 and 1995 are as follows:

<TABLE>
<CAPTION>
1994 1995
------------ ------------
<S> <C> <C>
Computed expected Federal tax at statutory rate of 34%................................ $ 828,607 $ 849,017
State taxes, net of Federal effect.................................................... 116,017 57,878
Tax exempt interest................................................................... (280,910) (315,202)
Change in valuation allowance......................................................... 27,500 7,273
ESOP fair value adjustment and dividends.............................................. 23,530 29,545
Other, net............................................................................ 46,956 4,489
------------ ------------
$ 761,700 $ 633,000
------------ ------------
------------ ------------
</TABLE>

F-22
<PAGE>
SECURITY BANK HOLDING COMPANY
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(13) PROVISION FOR INCOME TAXES (CONTINUED)
The tax effects of temporary differences which give rise to significant
portions of deferred tax assets and deferred tax liabilities at December 31,1994
and 1995 are as follows:

<TABLE>
<CAPTION>
1994 1995
------------- ------------
<S> <C> <C>
Deferred tax assets:
Investment securities, due to reserve for unrealized losses........................ $ 434,522 $ --
Loans receivable, due to allowances for possible loan losses....................... 255,263 273,059
Other liabilities, due to deferred compensation reserve............................ 167,469 199,323
Deferred loan fees................................................................. 63,557 58,984
Other.............................................................................. 104,720 112,423
------------- ------------
Total gross deferred tax assets.................................................. 1,025,531 643,789
Less valuation allowance........................................................... (356,000) (237,000)
------------- ------------
Net deferred tax assets.......................................................... 669,531 406,789
------------- ------------
Deferred tax liabilities:
Investment securities, due to reserve for unrealized gains......................... -- 414,716
Investment securities, due to accretion of discount................................ 47,341 75,899
Premises and equipment, due to differences in depreciation......................... 248,980 278,351
Other.............................................................................. 70,012 57,590
------------- ------------
Total gross deferred tax liabilities............................................. 366,333 826,556
------------- ------------
Net deferred tax asset (liability)............................................... $ 303,198 $ (419,767)
------------- ------------
------------- ------------
</TABLE>

The valuation allowance for deferred tax assets as of January 1, 1994 was
$328,500. The net changes in the total valuation allowance for the years ended
December 31, 1994 and 1995 were an(increase) decrease of $(27,500) and $119,000,
respectively. Of the net change in the valuation allowance for 1995, $126,273
was credited to equity in 1995.

SBHC has determined that the valuation allowance of $237,000 as of December
31, 1995 is reasonable as it is more likely than not that the net deferred tax
asset of $406,789 as of that date will be principally realized through carryback
to taxable income in prior years, and future reversals of existing taxable
temporary differences, and to a minor extent, future taxable income. Management
believes that future taxable income will be sufficient to realize the benefits
of temporary differences that cannot be realized through carryback to prior
years or through the reversal of future temporary taxable differences.

(14) TRANSACTIONS WITH RELATED PARTIES
Some of the directors, executive officers and principal shareholders of
SBHC, and the companies with which they are associated, are customers of and
have had banking transactions with the Bank in the ordinary course of business,
and the Bank expects to have such transactions in the future. All loans and
commitments to loan included in such transactions were made on substantially the
same terms (including interest rates and collateral) as those prevailing at the
time for comparable transactions with other persons and, in the opinion of the
management of the Bank, do not involve more than the normal risk of
collectibility or present any other unfavorable features.

F-23
<PAGE>
SECURITY BANK HOLDING COMPANY
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(14) TRANSACTIONS WITH RELATED PARTIES (CONTINUED)
An analysis of activity with respect to loans to directors, executive
officers and principal shareholders of SBHC for the years ended December 31,
1994 and 1995 is as follows:

<TABLE>
<CAPTION>
1994 1995
------------- --------------
<S> <C> <C>
Balance, beginning of year......................................................... $ 1,206,216 $ 1,427,207
Additions.......................................................................... 345,263 2,499,964
Repayments......................................................................... (124,272) (1,385,222)
------------- --------------
Balance, end of year............................................................... $ 1,427,207 $ 2,541,949
------------- --------------
------------- --------------
</TABLE>

(15) FEDERAL HOME LOAN BANK BORROWINGS
At December 31, 1995, the Bank had outstanding advances from the Federal
Home Loan Bank (FHLB) of $11,500,000 with a weighted average rate of 5.82% and a
weighted average maturity of 226 days. These advances were collateralized by
certain investment securities, certain residential first mortgage loans,
deposits with the FHLB and FHLB stock totaling approximately $11,500,000 at
December 31, 1995. The FHLB requires the Bank to maintain a required level of
investment of FHLB stock.

(16) FAIR VALUE OF FINANCIAL INSTRUMENTS
Pursuant to the SFAS No. 107, "Disclosures about Fair Value of Financial
Instruments", the following information is presented.

F-24
<PAGE>
SECURITY BANK HOLDING COMPANY
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Financial instruments have been construed to generally mean cash or a
contract that implies an obligation to deliver cash or another financial
instrument to another entity. The estimated fair values of SBHC's financial
instruments are as follows:

<TABLE>
<CAPTION>
DECEMBER 31, 1995
----------------------------------
CARRYING AMOUNT FAIR VALUE
---------------- ----------------
<S> <C> <C>
Financial assets:
Cash equivalents and time deposits................................ $ 8,646,450 $ 8,646,450
Investment securities............................................. 58,227,575 58,227,575
Loans, net........................................................ 76,911,398 77,515,006
Mortgage loans held for sale...................................... 2,616,032 2,616,032
Federal Home Loan Bank stock...................................... 1,494,600 1,494,600
Financial liabilities:
Deposits.......................................................... 127,290,415 127,420,591
Securities sold under agreements to repurchase.................... 2,874,619 2,874,619
ESOP debt......................................................... 644,000 644,000
Short-term borrowings............................................. 500,937 500,937
Federal Home Loan Bank borrowings................................. 11,500,000 11,517,557
Off balance sheet financial instruments:
Loan commitments.................................................. 6,274,000 6,274,000
Letters of credit................................................. 424,000 424,000
</TABLE>

Financial assets and financial liabilities other than securities are not
traded in active markets. The above estimates of fair value require subjective
judgments and are approximate. Changes in the following methodologies and
assumptions could significantly affect the estimates. These estimates may also
vary significantly from the amounts that could be realized in actual
transactions.

- Financial Assets -- The estimated fair value approximates the book value
of cash equivalents and time deposits. For investment securities, the fair
value is based on quoted market prices. The fair value of loans is
estimated by discounting future cash flows using current rates at which
similar loans would be made. The fair value of mortgage loans held for
sale and Federal Home Loan Bank stock approximates the book value.

- Financial Liabilities -- The estimated fair value of deposits and
securities sold under agreements to repurchase are estimated by
discounting the future cash flows using current rates at which similar
deposits would be made. The estimated fair value approximates the book
value of ESOP debt and short-term borrowings. The estimated fair value of
Federal Home Loan Bank borrowings is estimated by discounting the future
cash flows using current rates at which similar borrowings would be made.

- Off Balance Sheet Financial Instruments -- Fair value considers the
difference between current levels of interest rates and committed rates.
See note 12 to the consolidated financial statements.

The Bank did not hold any derivative financial instruments in its investment
portfolio at or during the year ended December 31, 1995, with the exception of
collateralized mortgage obligations.

F-25
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION AND
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR THE UNDERWRITER. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO WHICH IT RELATES. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS
UNLAWFUL.
--------------------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary............................. 3
Selected Consolidated Financial Data........... 5
Risk Factors................................... 7
Use of Proceeds................................ 11
Market for Common Stock........................ 12
Capitalization................................. 13
Dilution....................................... 14
Dividends...................................... 14
Selected Quarterly Financial Data.............. 15
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 16
Business....................................... 33
Supervision and Regulation..................... 39
Management..................................... 44
Principal Shareholders......................... 50
Description of Common Stock.................... 51
Underwriting................................... 54
Legal Matters.................................. 54
Experts........................................ 54
Transfer Agent................................. 54
Securities and Exchange Commission Policy on
Indemnification............................... 54
Additional Information......................... 55
Index to Consolidated Financial Statements..... F-1
</TABLE>

--------------------------

UNTIL DECEMBER 12, 1996, ALL DEALERS EFFECTING TRANSACTIONS IN THE
REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE
REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO
THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.

350,000 SHARES

SECURITY BANK
HOLDING COMPANY

COMMON STOCK

---------------------

PROSPECTUS

---------------------

BLACK & COMPANY, INC.

SEPTEMBER 13, 1996

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------