As filed with the Securities and Exchange Commission on August 5, 1997.
Securities Act Registration No. 333 -
Securities and Exchange Commission
Washington, D.C. 20549
Form S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
SECURITY BANK HOLDING COMPANY
(Exact name of registrant as specified in its charter)
Oregon 6022 93-0800253
(State or jurisdiction of (Classification Code Number) (I.R.S. Employer
incorporation or organization) Identification No.)
170 S. Second St., P.O. Box 1350
Coos Bay, Oregon 97420 541-267-5356
(Address and telephone number of registrant's principal executive offices)
Charles D. Brummel, President and Chief Executive Officer
170 S. Second St., P.O. Box 1350
Coos Bay, Oregon 97420
541-267-5356
(Name, address and telephone number of agent for service)
Copies of all communications to:
Gordon E. Crim, Esq.
Kenneth E. Roberts, Esq.
Foster Pepper & Shefelman PLLC
101 S.W. Main St., 15th Floor
Portland, Oregon 97204
Approximate date of commencement of proposed sale of the securities to the
public: As soon as practicable after the Registration Statement becomes
effective
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box: |_|
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
===================================================================================================================
Title of each class of Proposed maximum Amount of
securities to be registered aggregate offering price1 registration fee
===================================================================================================================
<S> <C> <C>
Common Stock
$5.00 Par Value $6,999,546 $2,121.07
===================================================================================================================
(1) Calculated in accordance with Rule 457(f)(2) based on the book value as
of June 30, 1997, of the Company to be acquired.
</TABLE>
The registrant hereby amends this registration statement on such date
or dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
CROSS REFERENCE SHEET
Showing Location of Information Required by Form S-4
<TABLE>
<CAPTION>
S-4 Item Prospectus/Proxy Statement Heading
<S> <C>
A. INFORMATION ABOUT THE TRANSACTION
1. Forepart of Registration Statement and Facing Page; Outside Front Cover of
Outside Front Cover Page of Prospectus Prospectus/Proxy Statement
2. Inside Front and Outside Back Cover Available Information; Table of Contents
Pages of Prospectus
3. Risk Factors; Ratio of Earnings to Fixed Prospectus/Proxy Statement Summary; Stock
Charges, and Other Information Price and Dividend Information; Equivalent Per
Share Data; Risk Factors
4. Terms of the Transaction Prospectus/Proxy Statement Summary; Equivalent
Per Share Data; Special Meeting of PSB
Shareholders; Special Meeting of SBHC
Shareholders; The Merger; Unaudited Pro Forma
Combined Financial Statements
5. Pro Forma Financial Information Equivalent Per Share Data; Unaudited Pro
Forma Combined Financial Statements
6. Material Contracts with the Company Summary
7. Additional Information Required for Not Applicable
Reoffering by Persons and Parties Deemed
to be Underwriters
8. Interests of Named Experts and Counsel Not Applicable
9. Disclosure of SEC Position on Indemnifi- Not Applicable
cation for Securities Act Liabilities
B. INFORMATION ABOUT THE REGISTRANT
10. Information with Respect to S-3 Registrants Not Applicable
11. Incorporation of Certain Information by Not Applicable
Reference
12. Information with Respect to S-2 or S-3 Not Applicable
Registrants
13. Incorporation of Certain Information by Not Applicable
Reference
14. Information with Respect to Registrants Prospectus/Proxy Statement Summary; Stock
Other than S-3 or S-2 Registrants Price and Dividend Information; Equivalent Per
Share Data; The Merger; Unaudited Pro Forma
Combined Financial Statements; Information About
Security Bank Holding Company; SBHC
Management's Discussion and Analysis of Financial
<PAGE>
Condition and Results of Operations; Management;
Supervision and Regulation; SBHC Financial
Statements
C. INFORMATION ABOUT THE COMPANY BEING ACQUIRED
15. Information with Respect to S-3 Companies Not Applicable
16. Information with Respect to S-2 or S-3 Not Applicable
Companies
17. Information with Respect to Companies Other Prospectus/Proxy Statement Summary; Stock Price
Than S-3 or S-2 Companies and Dividend Information; Equivalent Per Share
Data; The Merger; Unaudited Pro Forma Combined
Financial Statements; Information About Pacific State
Bank; Supervision and Regulation; Financial
Statements
D. VOTING AND MANAGEMENT INFORMATION
18. Information if Proxies, Consents or Prospectus/Proxy Statement Summary; Special
Authorizations are to be Solicited Meeting of PSB Shareholders; Special Meeting of
SBHC Shareholders; The Merger; Information About
Pacific State Bank; Information About Security Bank
Holding Company
</TABLE>
<PAGE>
PACIFIC STATE BANK 1975
Winchester Ave.
Reedsport, Oregon 97467
Dear Shareholder:
The banking industry in Oregon, as in the entire United States, is
undergoing significant changes, among which is the continuing consolidation
through mergers and acquisitions involving both community banks and large,
regional banks. After a review of the business and economic outlook for our
community and our bank, and after careful consideration of strategic
alternatives available to the Bank, the Board of Directors has decided that it
would be appropriate and timely to align itself with one of the stronger
community banking organizations in southern Oregon. The Bank has entered into a
definitive agreement to be acquired by Security Bank Holding Company, whose
principal subsidiary is Security Bank, with head offices in Coos Bay, Oregon.
The Board of Directors believe that by becoming part of the Security Bank
Holding Company organization, Pacific State Bank would have available the
considerable resources of a larger organization to better serve our customers,
while continuing to operate as a local, community Bank.
As more fully discussed in the accompanying proxy materials, the
transaction will be accomplished by an exchange of Pacific State Bank common
stock for newly issued shares of Security Bank Holding Company common stock.
Following the transaction, Pacific State Bank will operate as a separate
subsidiary of Security Bank Holding Company with its own directors and
management. Under the Oregon Bank Act, the transaction is subject to the
approval of the shareholders of Pacific State Bank. The Bank's Board of
Directors has unanimously approved and is recommending a vote in favor of the
transaction.
You are cordially invited to attend a special meeting of shareholders
of Pacific State Bank to consider and vote on the proposed acquisition by
Security Bank Holding Company. The meeting will be held at [the office of the
bank] on , , 1997 at :00 p.m.
The Notice of Special Meeting of Shareholders, Prospectus/Proxy
Statement and form of Proxy are enclosed. Even if you plan to attend the Special
Meeting in person, it is important that you return the enclosed Proxy to ensure
that your shares are voted at the meeting. Please mark, date, sign, and return
your Proxy promptly in the enclosed postage-paid return envelope.
The directors, officers, and employees of Pacific State Bank look
forward to seeing you at the Special Meeting.
Sincerely,
Thomas S. Tymchuk
Chairman of the Board of Directors
R.T. Green
President and Chief Executive Officer
<PAGE>
PACIFIC STATE BANK 1975
Winchester Ave.
Reedsport, Oregon 97467
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON , , 1997
NOTICE IS HEREBY GIVEN that the Special Meeting of Shareholders (the
"Meeting") of Pacific State Bank will be held at [the office of the Bank at 1975
Winchester Ave.], Reedsport, Oregon, at :00 p.m., Pacific Time, , 1997, for the
following purposes, all of which are more completely set forth in the
accompanying Prospectus/Proxy Statement:
1. To consider and vote on an Agreement and Plan of
Reorganization and accompanying Plan of Merger pursuant to
which Security Bank Holding Company would acquire Pacific
State Bank by means of a statutory merger in which
approximately 1,244,607 shares of Security Bank Holding
Company common stock would be issued in exchange for all of
the outstanding common stock of Pacific State Bank.
2. To transact such other business as may properly come before
the Meeting.
Only holders of record of common stock of Pacific State Bank at the
close of business on , 1997, are entitled to notice of, and to vote at, the
Meeting or any adjournment or adjournments thereof.
Shareholders who dissent from the transaction are entitled to receive
the fair value of their shares in cash if certain procedures are followed. To be
entitled to exercise dissenters' rights, a dissenting shareholder must give
written notice, prior to the vote on the transaction, of the shareholder's
intent to demand payment for his or her shares if the transaction is
consummated, or vote against the transaction at the special shareholders
meeting. Within 30 days after the shareholder vote on the matter, a dissenting
shareholder must give written demand for payment to Pacific State Bank together
with the certificate or certificates representing all of the shareholders
shares, properly endorsed. A shareholder may not dissent as to fewer than all of
his or her shares. For a complete explanation of dissenters' rights and the
procedures required to obtain cash payment for dissenting shares, shareholders
are urged to carefully read the applicable sections of the Prospectus/Proxy
Statement.
All shareholders are cordially invited to attend the Meeting
personally. Whether or not you are able to attend, it is important that you
complete, sign, date and promptly return the accompanying Proxy in the enclosed
pre-paid envelope so that your shares can be voted at the Meeting. Any
shareholder may revoke a proxy previously submitted by submitting a later-dated
proxy, by written revocation delivered to the president of the Bank at or prior
to the Meeting, or by appearing and voting in person at the Meeting. Attendance
at the meeting will not, of itself, revoke a previously submitted proxy.
By order of the Board of Directors
R.T. Green
President and Chief Executive Officer
, 1997
Reedsport, Oregon
YOU ARE CORDIALLY INVITED TO ATTEND THE MEETING. IT IS IMPORTANT THAT
YOUR SHARES BE REPRESENTED REGARDLESS OF THE NUMBER YOU OWN. EVEN IF YOU PLAN TO
BE PRESENT, YOU ARE URGED TO COMPLETE, SIGN, DATE AND PROMPTLY RETURN THE
ATTACHED PROXY USING THE ENVELOPE PROVIDED. IF YOU ATTEND THE MEETING, YOU MAY
VOTE EITHER IN PERSON OR BY YOUR PROXY. ANY PROXY GIVEN MAY BE REVOKED BY YOU IN
WRITING OR IN PERSON AT ANY TIME PRIOR TO THE EXERCISE THEREOF.
<PAGE>
SECURITY BANK HOLDING COMPANY
170 S. Second St.
Coos Bay, Oregon 97420
Dear Shareholder:
As you may have heard, Security Bank Holding Company has entered into a
definitive agreement to acquire Pacific State Bank, an Oregon state bank
headquartered in Reedsport, Oregon. After careful consideration of the proposed
transaction, the Board of Directors determined that this addition to the
Security Bank Holding Company organization would constitute a major step in
implementing our growth strategy and would improve the company's competitive
position in southern Oregon. As more fully discussed in the accompanying proxy
materials, the transaction will be accomplished by an exchange of newly issued
shares of Security Bank Holding Company common stock for all of the outstanding
shares of Pacific State Bank common stock. As the transaction will entail the
issuance of a significant number of new shares of company stock, we are asking
for the approval of Security Bank Holding Company shareholders as a condition to
completing the transaction. The Board of Directors has unanimously approved the
agreement and urges you to vote in favor of the transaction.
A special meeting of shareholders of Security Bank Holding Company to
consider and vote on the proposed acquisition of Pacific State Bank will be held
at [our head offices on] , , 1997 at
____:00 p.m.
The Notice of Special Meeting of Shareholders, Prospectus/Proxy Statement
and form of Proxy are enclosed. Even if you plan to attend the Special Meeting
in person, it is important that you return the enclosed Proxy to ensure that
your shares are voted at the meeting. Please mark, date, sign, and return your
Proxy promptly in the enclosed postage-paid return envelope.
The directors, officers, and employees of Security Bank Holding Company
look forward to seeing you at the Special Meeting.
Sincerely,
Chuck Brummel
Chairman of the Board of Directors
President and Chief Executive Officer
<PAGE>
SECURITY BANK HOLDING COMPANY
170 S. Second St.
Coos Bay, Oregon 97420
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON , , 1997
NOTICE IS HEREBY GIVEN that the Special Meeting of Shareholders (the
"Meeting") of Security Bank Holding Company will be held at [Security Bank's
head office at 170 S. Second St.], Coos Bay, Oregon, at :00 p.m., Pacific Time,
, 1997, for the following purposes, all of which are more completely set forth
in the accompanying Prospectus/Proxy Statement:
1. To consider and vote on an Agreement and Plan of
Reorganization and related Plan of Merger pursuant to which
Security Bank Holding Company would acquire all of the
outstanding stock of Pacific State Bank in exchange for
approximately 1,244,607 newly issued shares of Security Bank
Holding Company common stock.
2. To transact such other business as may properly come before
the Meeting.
Only holders of record of common stock of Security Bank Holding Company at
the close of business on , 1997, are entitled to notice of, and to vote at, the
Meeting or any adjournment or adjournments thereof.
All shareholders are cordially invited to attend the Meeting personally.
Whether or not you are able to attend, it is important that you complete, sign,
date and promptly return the accompanying Proxy in the enclosed pre-paid
envelope so that your shares can be voted at the Meeting. Any shareholder may
revoke a proxy previously submitted by submitting a later-dated proxy, by
written revocation delivered to the corporate secretary of Security Bank Holding
Company at or prior to the Meeting, or by appearing and voting in person at the
Meeting. Attendance at the Meeting will not, of itself, revoke a previously
submitted proxy.
By order of the Board of Directors
Chuck Brummel, Chairman
President and Chief Executive Officer
, 1997
Coos Bay, Oregon
YOU ARE CORDIALLY INVITED TO ATTEND THE MEETING. IT IS IMPORTANT THAT YOUR
SHARES BE REPRESENTED REGARDLESS OF THE NUMBER YOU OWN. EVEN IF YOU PLAN TO BE
PRESENT, YOU ARE URGED TO COMPLETE, SIGN, DATE AND PROMPTLY RETURN THE ATTACHED
PROXY USING THE ENVELOPE PROVIDED. IF YOU ATTEND THE MEETING, YOU MAY VOTE
EITHER IN PERSON OR BY YOUR PROXY. ANY PROXY GIVEN MAY BE REVOKED BY YOU IN
WRITING OR IN PERSON AT ANY TIME PRIOR TO THE EXERCISE THEREOF.
<PAGE>
PROSPECTUS/PROXY STATEMENT
SECURITY BANK HOLDING COMPANY
170 S. Second St.
Coos Bay, Oregon 97420
Telephone: 541-267-5356
PACIFIC STATE BANK
1975 Winchester Avenue
Reedsport, Oregon 97467
Telephone: 541-271-2176
This Prospectus/Proxy Statement is being furnished to the shareholders of
Pacific State Bank ("PSB"), an Oregon state-chartered bank, in connection with
the solicitation of proxies by the Board of Directors of PSB for use at a
special meeting of PSB shareholders to be held on ________, 1997, at ______:00
a.m.(p.m.), local time, at the located at _______________, Reedsport, Oregon,
and at any adjournments or postponements thereof (the "PSB Meeting").
This Prospectus/Proxy Statement is also being furnished to the shareholders
of Security Bank Holding Company ("SBHC"), an Oregon corporation and registered
bank holding company under the Bank Holding Company Act of 1956, as amended, in
connection with the solicitation of proxies by the Board of Directors of SBHC
for use at a special meeting of SBHC shareholders to be held on __________,
1997, at ___:00a.m. (p.m.), local time, at the located at ___________, Coos Bay,
Oregon, and at any adjournments or postponements thereof (the "SBHC Meeting").
At the PSB Meeting and the SBHC Meeting, holders of PSB and SBHC common
stock, respectively, will consider and vote on a proposal to approve the
acquisition of PSB by SBHC pursuant to an Agreement and Plan of Reorganization,
(the "Agreement"), dated July 9, 1997, and related Plan of Merger. Under the
terms of the Agreement and the Plan of Merger, copies of which are attached to
this Prospectus/Proxy Statement as Appendix A, PSB Interim, a wholly-owned
subsidiary of SBHC, will merge with and into PSB (the "Merger"), resulting in
the acquisition of PSB by SBHC. All of the outstanding shares of common stock of
PSB will be exchanged for newly-issued shares of SBHC common stock. See "The
Merger."
This Prospectus/Proxy Statement also serves as a prospectus in connection
with the offer and sale of the shares of SBHC Common Stock, $5.00 par value,
("SBHC Common Stock" or the "Common Stock") to be issued to PSB shareholders in
the Merger pursuant to a registration statement on Form S-4 filed with the
Securities and Exchange Commission. Since September, 1996, the Common Stock has
been listed on the National Market System of the Nasdaq Stock Market under the
symbol "SBHC," and has traded in the range of $8.00 to $12.50. The last reported
sale price was $_______ as of ____________, 1997, the most recent trading day
prior to the date of this Prospectus/Proxy Statement.
See "Risk Factors" on page 8 for certain information that should be
considered by shareholders.
AVAILABLE INFORMATION
SBHC is subject to the information and reporting requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). In accordance
with the Exchange Act, SBHC files reports, proxy statements and other
information with the Securities and Exchange Commission ("SEC"). Under the rules
and regulations promulgated by the SEC, the solicitation of proxies from PSB
shareholders in connection with a shareholder vote on the proposed Merger
constitutes an offering by SBHC of securities to be issued in the Merger. SBHC
has filed a registration statement on Form S-4 (the "Registration Statement")
with the SEC under the Exchange Act with respect to the Common Stock to be
issued to PSB shareholders in the Merger. This Prospectus/Proxy Statement is
part of the Registration Statement. As permitted by the rules and regulations of
the SEC, this Prospectus/Proxy
<PAGE>
Statement does not contain all of the information set forth in the Registration
Statement. For further information with respect to SBHC 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, or from the internet website
maintained by the Commission at www.sec.gov. Statements contained in this
Prospectus/Proxy Statement 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.
All information contained in this Prospectus/Proxy Statement relating
to SBHC has been furnished by SBHC, and PSB is relying on the accuracy of that
information. All information contained in this Prospectus/Proxy Statement
relating to PSB has been furnished by PSB, and SBHC is relying on the accuracy
of that information.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION
NOT CONTAINED IN THIS PROSPECTUS/PROXY STATEMENT AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION SHOULD NOT BE RELIED ON AS HAVING BEEN AUTHORIZED
BY EITHER SBHC OR PSB. THIS PROSPECTUS/PROXY STATEMENT DOES NOT CONSTITUTE AN
OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO PURCHASE, THE SECURITIES OFFERED
BY THIS PROSPECTUS/PROXY STATEMENT, OR THE SOLICITATION OF A PROXY, IN ANY
JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER, SOLICITATION OF AN
OFFER, OR PROXY SOLICITATION.
NEITHER THE DELIVERY OF THIS PROSPECTUS/PROXY STATEMENT NOR ANY DISTRIBUTION OF
THE SECURITIES OFFERED PURSUANT HERETO SHALL, UNDER ANY CIRCUMSTANCES, CREATE
THE IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE INFORMATION SET FORTH
HEREIN OR IN THE AFFAIRS OF SBHC OR PSB SINCE THE DATE HEREOF, OR THAT THE
INFORMATION HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
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.
THE SECURITIES OFFERED HEREBY 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.
The date of this Prospectus/Proxy Statement is __________, 1997.
<PAGE>
TABLE OF CONTENTS
<TABLE>
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<S> <C>
PROSPECTUS/PROXY STATEMENT SUMMARY..............................................................................-1-
STOCK PRICE AND DIVIDEND INFORMATION............................................................................-6-
EQUIVALENT PER SHARE DATA.......................................................................................-7-
RISK FACTORS....................................................................................................-8-
SPECIAL MEETING OF PSB SHAREHOLDERS............................................................................-13-
SPECIAL MEETING OF SBHC SHAREHOLDERS...........................................................................-14-
THE MERGER.....................................................................................................-15-
UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS.............................................................-26-
INFORMATION ABOUT PACIFIC STATE BANK...........................................................................-30-
INFORMATION ABOUT SECURITY BANK HOLDING COMPANY................................................................-33-
MANAGEMENT.....................................................................................................-40-
PRINCIPAL SHAREHOLDERS.........................................................................................-45-
SBHC MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...............................................................-46-
SUPERVISION AND REGULATION.....................................................................................-60-
CERTAIN LEGAL MATTERS..........................................................................................-64-
EXPERTS ......................................................................................................-64-
OTHER MATTERS..................................................................................................-64-
FINANCIAL STATEMENTS OF SBHC....................................................................................F-1
FINANCIAL STATEMENTS OF PSB....................................................................................F-26
Appendix A - Agreement and Plan of Reorganization and Plan of Merger...............................................
Appendix B - Opinion of Columbia Financial Advisors................................................................
Appendix C - Dissenters' Rights ORS 711.042 - 711.047..............................................................
</TABLE>
<PAGE>
PROSPECTUS/PROXY STATEMENT SUMMARY
The following summary is qualified in its entirety by the more detailed
information, including pro forma financial information and consolidated
financial statements, and the notes thereto, appearing elsewhere in this
Prospectus/Proxy Statement. Except as otherwise indicated all pro forma
information in this Prospectus/Proxy Statement assumes the Merger occurred on
March 31, 1997.
Overview
Security Bank Holding Company ("SBHC") has agreed to acquire Pacific
State Bank ("PSB") pursuant to an Agreement and Plan of Reorganization (the
"Agreement"), dated July 9, 1997, by and between SBHC and PSB, pursuant to which
PSB and PSB Interim Bank ("PSB Interim"), a wholly-owned subsidiary bank of SBHC
will enter into a Plan of Merger (the "Plan of Merger"), joined into by SBHC. In
accordance with the terms of the Agreement and the Plan of Merger, PSB Interim
will be merged with and into PSB (the "Merger"), and the outstanding shares of
common stock of PSB will be exchanged for newly-issued shares of common stock of
SBHC, with the result that PSB will become a wholly-owned subsidiary bank of
SBHC, and PSB shareholders will become shareholders of SBHC.
This Prospectus/Proxy Statement is being sent to shareholders of SBHC
and of PSB in connection with the solicitation of proxies to be used at the
respective special meetings of shareholders. At the PSB Meeting, PSB
shareholders will be asked to approve, in accordance with the requirements of
the Oregon Bank Act, the Agreement and the Plan of Merger pursuant to which PSB
Interim would merge with and into PSB. At the SBHC Meeting, SBHC shareholders
will be asked to approve, in accordance with the rules of the Nasdaq Stock
Market, the Agreement and the Plan of Merger which would result in the issuance
of additional shares of SBHC common stock under the terms of the Plan of Merger.
In addition to shareholder approvals, the transaction is subject to the approval
of the Director of the Oregon Department of Consumer and Business Services
through the Division of Finance and Corporate Securities (the "Oregon
Director"), the Federal Deposit Insurance Corporation ("FDIC") and the Board of
Governors of the Federal Reserve System (the "Federal Reserve"). This
Prospectus/Proxy Statement is part of a registration statement filed by SBHC
with the Securities and Exchange Commission to register the shares of SBHC
common stock to be issued to PSB shareholders in the Merger.
Parties to the Merger
Security Bank Holding Company
Security Bank Holding Company ("SBHC") is an Oregon corporation and a
bank holding company registered under the Bank Holding Company Act of 1956, as
amended. SBHC maintains its principal offices in Coos Bay, Oregon, at the main
office of SBHC's principal subsidiary, Security Bank ("Security Bank"). Security
Bank is a state-chartered, FDIC-insured commercial bank organized in 1919, which
serves Coos and Curry Counties, Oregon, from seven offices. SBHC's only other
subsidiary bank is Lincoln Security Bank ("Lincoln Security"), a state-chartered
bank located in Newport, Oregon, in which SBHC holds a majority interest. SBHC
is currently planning the formation of a new banking subsidiary consisting of
the current Brookings-Harbor branch of Security Bank, which, although not yet
formally organized, is referred to herein as "Brookings Bank." SBHC, through its
banking subsidiaries, offers a broad range of commercial and personal banking
services to its customers, who are primarily individuals, small and medium-sized
businesses, and professionals. SBHC's lending activities include commercial,
real estate construction and consumer loans, as well as 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, SBHC 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 March 31, 1997, SBHC had consolidated total assets of $197.3
million, net loans of $98.1 million and total deposits of $152.6 million.
-1-
<PAGE>
Pacific State Bank
Pacific State Bank ("PSB") is an Oregon state-chartered commercial
bank, organized in November, 1962, under the name of Pacific Security Bank, and
adopted its present name in February, 1989. PSB conducts its business from its
office in Reedsport, Oregon. As of March 31, 1997, the Bank had assets of $52.1
million, net loans of $29.9 million and deposits of $44.7 million.
PSB Interim Bank
PSB Interim Bank ("PSB Interim") is an Oregon bank organized by SBHC as
a wholly-owned subsidiary of SBHC in July, 1997, solely for the purpose of
effecting the Merger. PSB Interim has minimal capital, no operations and will
not be authorized to conduct a banking business. Following consummation of the
Merger, the separate existence of PSB Interim will cease.
Special Meeting of PSB Shareholders
A special meeting of PSB shareholders will be held at 7:00 p.m. on
________________________, 1997, at the [main office located at 1975 Winchester
Avenue], Reedsport, Oregon, for the purpose of considering and voting on the
proposed Merger. Only PSB shareholders of record as of _______, 1997 (the
"Record Date") will be entitled to notice of and to vote at the meeting. As of
the Record Date, there were of 406,875 shares of PSB common stock outstanding
held by 247 shareholders of record. Shareholders may vote in person or by proxy.
The Merger must be approved by the holders of not less than two-thirds of the
outstanding shares of PSB common stock. See "Special Meeting of PSB
Shareholders."
Special Meeting of SBHC Shareholders
A special meeting of SBHC shareholders will be held at ____ p.m. on
___________________,1997, at the [main office of Security Bank, located at 170
S. Second Street], Coos Bay, Oregon, for the purpose of considering and voting
on the issuance of shares of Common Stock pursuant to the Agreement and the Plan
of Merger which would result in the issuance of approximately 1,244,607
additional shares of SBHC Common Stock. Only SBHC shareholders of record as
of________, 1997 (the "Record Date") will be entitled to notice of and to vote
at the meeting. As of the Record Date, there were shares of SBHC common stock
outstanding held by _____ shareholders of record. Shareholders may vote in
person or by proxy. The proposal to authorized the issuance of shares will be
approved if the number of shares voted in favor exceeds the number of shares
voted against, provided that a majority of the outstanding shares of SBHC common
stock is represented at the meeting. See "Special Meeting of SBHC Shareholders."
Background and Reasons for the Merger; Recommendation of the Boards of Directors
In 1995, SBHC embarked upon a strategic plan calling for
diversification through expansion of its markets by forming or acquiring
subsidiary banks serving identified communities and market areas. The investment
in Lincoln Security in Newport was part of the implementation of that plan, as
is the planned formation of Brookings Bank. SBHC believes that retaining a
community bank identity is crucial to the success of its banking subsidiaries,
and that branching beyond existing markets would pose some risk to the image
each has created of being a local bank. Accordingly, SBHC believes that
acquiring a community bank in a market not yet served by its current
subsidiaries provides an opportunity for expansion while retaining the benefits
of being identified as a local community bank.
PSB appeared to be an attractive opportunity to continue the expansion
contemplated in SBHC's business strategy. The acquisition of PSB would allow
SBHC to expand into Douglas County and increase its market presence along the
Oregon coast, while preserving the benefits of local community banking. PSB is
one of only two banks in Reedsport, and has a well-established customer base,
with approximately 64% of the deposits in the Reedsport community. Although PSB
has been a strong, profitable bank, with approximately 1.80% return on assets,
and has consistently received excellent ratings by regulatory examiners, PSB has
experienced slow growth
-2-
<PAGE>
of its assets and profits. Both PSB and SBHC believe that as a subsidiary of
SBHC, PSB could realize significant operational cost savings while continuing to
operate as a local community bank, which could lead to higher profit margins. In
addition, as part of a larger financial institution, PSB would have access to
more capital and more advanced technology than would otherwise be available as
an independent bank. PSB would thus be afforded an opportunity to enhance its
local business and to extend its market area beyond the community through
electronic banking and the increased variety of available products and services.
In January, 1996, the executive officers of SBHC and PSB began
discussions relating to the possible merger or acquisition of PSB by SBHC.
Following an evaluation by an independent investment advisory firm of an initial
merger proposal, discussions were terminated in early 1996 without any agreement
having been reached. In September, 1996, SBHC completed a public offering of
402,500 shares of its common stock, the proceeds of which were intended for
working capital and to replenish the capital invested in Lincoln Security. In
March, 1997, SBHC approached PSB about commencing negotiations of the terms
under which an acquisition could take place, and, following a series of meetings
between senior representatives of both companies, the principal economic terms
were agreed upon. Thereafter, due diligence materials were exchanged and
reviewed, and a definitive agreement was negotiated between the parties with
assistance of counsel. The Agreement received final approval by the Boards of
Directors of both companies and was executed on July 9, 1997.
The Boards of Directors of both SBHC and PSB, having determined the
proposed Merger to be in the best interests of their respective shareholders,
have unanimously approved the proposed transaction, and recommend a vote in
favor of the Merger. In addition, the directors of PSB have agreed to support
the proposal and to vote their shares in favor of the Merger.
Opinion of Investment Advisor
PSB retained Columbia Financial Advisors ("CFA") as its exclusive
financial advisor pursuant to an engagement letter dated May 22, 1997 in
connection with the Merger. CFA is a regionally recognized investment banking
firm that is regularly engaged in the valuation of businesses and securities in
connection with mergers and acquisitions. The PSB Board selected CFA to act as
PSB's exclusive financial advisor based on CFA's experience in mergers and
acquisitions and in securities valuation generally.
CFA has delivered a written opinion ("CFA Opinion") to the PSB Board of
Directors to the effect that, as of the date of this Prospectus/Proxy Statement,
the consideration to be received by PSB shareholders in the Merger is fair to
the shareholders from a financial point of view. The CFA Opinion is directed
only to the fairness, from a financial point of view, of the consideration to be
received and does not constitute a recommendation to any PSB stockholder as to
how such shareholder should vote at the PSB Meeting. For a more complete
discussion of CFA's analysis and opinion, see "The Merger -- Opinion of PSB
Financial Advisor."
Conditions to the Merger; Regulatory Approvals
The Merger is subject to certain conditions, including (a) approval by
the shareholders of PSB and SBHC, (b) receipt of all necessary regulatory
approvals, including the FDIC, Federal Reserve and the Oregon Director, (c)
receipt by each party of favorable tax opinion of Foster Pepper & Shefelman
PLLC, (d) receipt by SBHC of a letter from KPMG Peat Marwick LLP that, based on
certain material facts and certain representations and warranties described in
such letter, the Merger will qualfiy for treatment as a pooling of interests,
(e) the performance of certain obligations of each party, and (f) the continued
accuracy of the representations and warranties of each party. See "The Merger --
Conditions to the Merger."
Terms of the Merger
General
The Plan of Merger provides that on the effective date of the Merger
(the "Effective Date"), PSB Interim will merge with and into PSB, with PSB being
the resultant bank surviving as a wholly-owned subsidiary of SBHC. SBHC will
acquire all of the outstanding shares of PSB common stock in exchange for newly
issued shares of
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<PAGE>
SBHC, the number of which will be determined according to a formula. Generally
it is anticipated that approximately three shares of SBHC stock will be issued
for each PSB share, although the exact amount will not be determined until the
Merger is completed. See "The Merger -- Exchange of Shares."
Operation of PSB Following the Merger
Following the Merger, PSB will operate as a wholly-owned subsidiary
bank of SBHC, with its own board of directors and executive officers, although
SBHC is expected to appoint Chuck Brummel, President of SBHC and one other
director of SBHC or Security Bank, to serve on the PSB board. PSB will continue
to operate under the name Pacific State Bank, and substantially all of the
current directors, executive officers and employees are expected to be retained.
SBHC does, however, anticipate that certain administrative and data processing
services will be provided by SBHC or Security Bank.
Tax treatment
As a condition of the Merger, each party will receive an opinion of
Foster Pepper & Shefelman PLLC, special counsel to SBHC, to the effect that the
Merger will be treated as a tax-free reorganization under section 368(a) of the
Internal Revenue Code. Accordingly, PSB will recognize no income for tax
purposes as a result of the transaction. Further, shareholders of PSB will
recognize no income as a result of receiving shares of SBHC common stock in
exchange for their shares of PSB common stock. Each PSB shareholder will have
the same cost basis for tax purposes in the shares of SBHC common stock as he or
she had in the shares of PSB common stock exchanged in the Merger. Shareholders
are urged to consult their own tax advisor concerning the tax treatment of the
Merger under federal and state laws. See "The Merger -- Tax Treatment of the
Merger."
Accounting treatment
The Merger is intended to be accounted for as a pooling of interests,
and as a condition to the Merger, SBHC will receive a letter from KPMG Peat
Marwick LLP, independent public accountants, that, based on certain material
facts and certain representations and warranties described in such letter, the
Merger will qualify for such accounting treatment. Accordingly, the financial
statements of SBHC will be restated to reflect the combined results of SBHC and
PSB as if PSB had been acquired by SBHC prior to the periods for which such
financial statements are presented. See "The Merger -- Accounting Treatment of
the Merger" and "Pro Forma Financial Information."
Waiver of Conditions; Amendment and Termination
Either SBHC or PSB may waive conditions required of the other party,
except those conditions required by law. The parties may also grant extensions
of time to satisfy an obligation or condition. The Agreement may be amended or
supplemented at any time by written agreement of the parties before the special
shareholders meetings, and may be amended or modified after the special
shareholder meetings if the amendment or modification does not change the amount
or type of consideration to be given in exchange for the outstanding shares of
PSB stock. The Agreement may be terminated by mutual agreement of the parties,
by either party upon a material breach by the other party of any of its
representations, warranties or covenants, if such breach is not cured within 30
days notice of such breach, by either party if shareholder approval is not
obtained by the other party prior to December 31, 1997, by either of the parties
if the conditions to closing have not been satisfied prior to March 31, 1998, by
PSB upon advice of counsel in fulfilling the director's fiduciary duties, and by
SBHC for any reason upon written notice. See "The Merger -- Waiver of
Conditions; Amendment and Termination."
Interests of Certain Persons in the Merger
Certain directors and executive officers of PSB and SBHC may be deemed
to have an interest in the Merger. The Agreement provides that two current
directors of SBHC or Security Bank will be appointed to the Board of Directors
of PSB and two current PSB directors will be appointed to serve on the Board of
Directors of SBHC; one current director of PSB will be appointed to the board of
directors of Security Bank. Further, all of the current directors and executive
officers of PSB are expected to continue to serve in the same capacities
following the Merger. See "The Merger -- Interests of Certain Persons in the
Merger."
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<PAGE>
Rights of Dissenting Shareholders
The Agreement provides that shareholders of PSB who dissent from the
proposed merger are entitled to receive the value of their shares in cash,
provided that they (i) either give notice, prior to or at the special meeting of
PSB shareholders, of their intent to demand payment for their shares, or vote
against the proposed merger, and (ii) deliver a written demand for payment to
PSB or SBHC within 30 days following the PSB shareholder vote on the Merger. If
the holders of more than 7% of PSB's shares vote against the Merger or otherwise
perfect their dissenter appraisal rights under the Agreement, SBHC may terminate
the Agreement. See "Special Meeting of PSB Shareholders" and "The Merger --
Rights of Dissenting Shareholders."
Comparison of Shareholder Rights
Shareholders of PSB who receive shares of SBHC in the Merger will be
governed, with respect to their rights as shareholders, by SBHC's articles of
incorporation and bylaws, as well as by the Oregon Business Corporations Act.
Prior to the Merger, the rights of PSB shareholders are determined by PSB's
articles of incorporation and bylaws and the Oregon Bank Act. For a discussion
of the material differences in the rights of shareholders of PSB and SBHC, and
an explanation of certain anti-takeover effects of SBHC's articles of
incorporation and bylaws, see "The Merger -- Comparison of Relative Rights of
Shareholders of PSB and SBHC."
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<PAGE>
STOCK PRICE AND DIVIDEND INFORMATION
SBHC
The Common Stock of SBHC is traded on the National Market System of the
Nasdaq Stock Market under the symbol "SBHC." Prior to the third quarter of 1996,
SBHC Common Stock was traded in the over-the-counter market through the Bulletin
Board Service of the Nasdaq Stock Market. The Common Stock is registered under
the Securities Exchange Act of 1934 and is eligible to be held in margin
accounts. The following lists the closing bid prices, prior to the third quarter
of 1996, as reported by Black & Company, Inc., the principal market maker in
SBHC stock, and last reported sales prices beginning with the third quarter of
1996, at the end of each period, as reported by the Nasdaq Stock Market, and as
adjusted for prior stock dividends. Prices do not include retail mark-ups,
mark-downs or commissions. On ____, 1997, the Common Stock was held of record by
approximately ________shareholders, a number which does not include beneficial
owners who hold shares in "street name." As of _____, 1997, the most recent date
prior to the date of this Prospectus/Proxy Statement, the last sale price of the
Common Stock was $ ____ per share.
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------- -------------------------- ---------------------------
Cash Cash Cash
Market Price Dividends Market Price Dividends Market Price Dividends
High Low Declared High Low Declared High Low Declared
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1st Quarter $ 11.75 $ 8.50 $ 0.11 $ 8.75 $ 7.75 $ 0.10 $ 6.00 $ 5.33 $ 0.07
2nd Quarter $ 12.50 $11.00 -- $ 9.50 $ 8.00 -- $ 6.34 $ 5.50 --
3rd Quarter $ 8.75 $ 8.00 $ 0.10 $ 7.34 $ 6.17 $ 0.07
4th Quarter $ 9.00 $ 8.25 -- $ 8.17 $ 7.34 --
</TABLE>
In addition to cash dividends, SBHC issued a 100% stock dividend in August,
1994, and a 50% stock dividend in January, 1996.
PSB
No registered broker/dealers make a market in PSB common stock and the
stock is not listed on any stock exchange. Trading is infrequent and those
transactions that have taken place in PSB common stock cannot be characterized
as an established public market. Generally PSB common stock is traded by
individuals on a personal basis, and prices reported reflect only the
transactions known to management. Due to the limited information available, the
following data may not accurately reflect the actual market value of PSB common
stock.
<TABLE>
<CAPTION>
Number of Shares PSB Common Stock Prices Cash Dividends
Period Reported as Traded High Low Declared
<S> <C> <C> <C> <C> <C>
Year to Date 1997 2,050 19.00 17.00 $ 0.56
Year Ended 1996 56,610 17.00 15.50 1.12
Year Ended 1995 30,845 16.00 14.00 .91
</TABLE>
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<PAGE>
EQUIVALENT PER SHARE DATA
(unaudited)
The following table sets forth the historical earnings, book value and cash
dividends per share as of March 31, 1997 and for the three months then ended,
and December 31, 1996 and for the year then ended, for SBHC and PSB and the pro
forma amounts for SBHC, and the pro forma equivalent amounts for PSB after
giving effect to the Merger on a pooling-of-interests basis; the closing price
per share for SBHC common stock as reported by the Nasdaq Stock Market on July
9, 1997, the last full trading day prior to the public announcement of the
Agreement, and as of , 1997, the most recent date prior to the date of this
Prospectus Proxy Statement; the price for PSB common stock as of both dates; and
the pro forma equivalent market value of PSB for such dates after giving effect
to the Merger. The pro forma data assume the issuance of 1,244,607 shares of
SBHC common stock as a result of the merger, but are not necessarily indicative
of actual or future operating results or the financial position that would have
occurred or will occur upon the consummation of the Merger. The pro forma
equivalent per share data is calculated by multiplying the pro forma per share
data for SBHC by 3.06, the estimated number of SBHC shares to be issued for each
outstanding PSB share. As the exact number of SBHC shares to be issued will not
be determined until the Merger is completed, the actual per share equivalent
amounts may vary from the figures below. See "The Merger -- Exchange of Shares."
This data should be read in conjunction with the financial statements and other
financial and pro forma financial information included elsewhere in this
Prospectus/Proxy Statement.
<TABLE>
<CAPTION>
SBHC PSB
----------------------------- ------------------------------
Pro Forma
Historical Pro Forma Historical Equivalent
<S> <C> <C> <C> <C>
Market Value per share at July 9, 1997 $11.50 - $19.00(1) $35.19
35.19
Market Value per share at , 1997 - 19.00(1)
Earnings per share for the periods ended:
March 31, 1997 $ 0.14 $ 0.15 $ 0.58 $ 0.46
December 31, 1996 0.85 0.84 2.49 2.57
Book Value per share at:
March 31, 1997 $ 6.73 $6.37 $ 17.03 $ 19.49
December 31, 1996 6.85 6.40 16.66 19.58
Cash Dividends per share declared
for the periods ended:
March 31, 1997 $ 0.11 $ 0.11 $ 0.00 $ 0.34
December 31, 1996 0.20 0.20 1.12 0.61
(1) The historical market value of PSB common stock is based on the price
per share for the most recently reported transaction prior to announcement of
the Agreement.
</TABLE>
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<PAGE>
RISK FACTORS
Shareholders should carefully consider the following risk factors as well
as the other information contained in this Prospectus.
Exposure to Local Economy
SBHC's performance is substantially dependent on the banking operations of
its subsidiary banks, whose operations, as well as those of PSB, are materially
dependent upon and sensitive to the economy of their respective market areas
along the central and southern Oregon coast. Adverse economic developments can
impact the collectibility of loans and have a negative effect on earnings and
financial condition. The economies of Coos, Curry and Douglas Counties depend
primarily on forest products manufacturing, retail trade, tourism, government,
services and agriculture. Particularly in the 1980's, Security Bank's and PSB's
market areas 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 Security 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 PSB and SBHC.
Lincoln Security Bank 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, Curry or Douglas 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 "Information about Security Bank Holding Company - Business," and
"Information about Pacific State Bank -- Business."
Credit Risk
SBHC and PSB, like other lenders, are 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. On a consolidated basis, SBHC's net
charge-offs, past-due loans and non-performing loans for the three months ended
March 31, 1997, represented 0.018% and 0.27% respectively, of total assets at
March 31, 1997. PSB's net charge-offs, past due loans and non-performing assets
for the same period represented less than one percent of assets at March 31,
1997.
SBHC, through its subsidiary banks, and PSB 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 March 31, 1997, SBHC had
approximately 42% of its loan portfolio in real estate related loans which
included a mix of commercial, residential and construction real estate loans.
Similarly, approximately 60% of PSB's loan portfolio consisted of 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
"Information about Security Bank Holding Company -- Management's Discussion and
Analysis of Financial Condition" and "Results of Operations and Information
about Pacific State Bank -- Business."
Interest Rate Risk
Earnings of SBHC and PSB 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'
management, 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
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between the amounts of interest-sensitive assets and interest-sensitive
liabilities, measured over various time periods, are referred to as sensitivity
gaps. Although each bank strives to minimize risk through asset/liability
management policies, 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 between the interest rates earned on assets and the rates
of interest paid on liabilities, and therefore on the results of operations. See
"Information about Security Bank Holding Company -- Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Lincoln Security Bank
As part of SBHC's strategic plan for growth through geographical
diversification, SBHC assisted with the organization of Lincoln Security Bank, a
commercial bank in Newport, Oregon, which received its charter and commenced
operations on May 30, 1996. SBHC invested approximately $2.3 million of Lincoln
Security's $3.0 million initial capital through the purchase of all of the
shares of Lincoln Security's Class B Common Stock, and provides administrative
and operational support to the bank. SBHC owns a majority of Lincoln Security's
voting stock and can elect a majority of its Board of Directors. The current
Board of Directors, however, consists of local Lincoln County representatives in
addition to Chuck Brummel and Kenneth Messerle from the SBHC Board of Directors.
Although SBHC, through its ownership of a controlling interest, retains the
prerogative of replacing Lincoln Security's directors and otherwise influencing
management decisions, SBHC permits the bank to operate as an independent
community bank provided that the bank's performance is deemed satisfactory by
SBHC'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 Security'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 SBHC, in
accordance with a shareholders agreement, during a five year period beginning on
May 30, 2001, and ending May 30, 2006. Accordingly, SBHC's return on its
investment in Lincoln Security could be limited to a pre-determined price for
the Class B Common Stock in accordance with the terms of the shareholders
agreement. See "Information about Security Bank Holding Company -- Business."
As a commercial bank, Lincoln Security faces not only the same risks faced
by most community banks, but also has only recently commenced its operations and
is currently working to develop depositors, loan customers and other business
relationships. Although Lincoln Security to date has been successful in
implementing its business plan, it has incurred losses and will likely generate
no more than minimal profits during the first years of operation. As of March
31, 1997, Lincoln Security had realized $141,867 in accumulated losses since
commencement of operations and for the first three months of 1997 incurred a net
loss of $24,392. As SBHC owns 68.33% of Lincoln Security, approximately $97,000
of these accumulated losses is includable in SBHC's financial statements.
Moreover, as the ability of Lincoln Security to pay dividends to its
shareholders is limited by regulatory restrictions, SBHC is unlikely to receive
dividends from the bank in the foreseeable future. See "Information about
Security Bank Holding Company -- Business," and "Supervision and Regulation --
Dividends."
Further Acquisitions
In furtherance of SBHC's strategic plan, it is conducting research and
preliminary discussions regarding the organization of new banks in other
communities which it believes present attractive opportunities and local
support. It is expected that the majority of the capital for any such new banks
would come from SBHC with the balance from other investors resident in or with
ties to each local community. Organizing and capitalizing new banks will likely
require an investment greater than opening a branch in such locations and, as
noted above with respect to Lincoln Security, would be expected to result in
losses during the bank's earlier months of operation. Furthermore, eventual
profitability could not be assured.
Brookings Bank Formation
As part of SBHC's drive to strengthen its identity as the parent of local
community banks, the company is in the process of forming a new bank in
Brookings, Oregon, consisting of what is currently the Brookings-Harbor branch
of Security Bank. The new bank, not yet incorporated but referred to herein as
"Brookings Bank", is to be
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<PAGE>
capitalized with the assets currently allocated to that branch office, and
it is anticipated that it will assume the deposits and other liabilities
associated with that office. The formation of Brookings Bank is not expected to
have a material effect on the financial condition or results of operations of
SBHC on a consolidated basis, although the earnings of that bank will not
contribute to the net income of Security Bank; accordingly, Security Bank's
ability to upstream dividends to SBHC could be adversely affected by the absence
of the Brookings Bank contribution to income. However, SBHC expects that, as
Brookings Bank will not be a typical start-up bank, it will be able to upstream
dividends to SBHC, although no assurances can be made in that regard. Moreover,
as a separate banking subsidiary, Brookings Bank will be more susceptible to
changes in the economy of the local community, as well as local competitive
factors. If Brookings Bank is unable to successfully compete on its own in its
local market, SBHC may be required to invest additional capital to maintain
regulatory minimum capital levels. See "Risk Factors -- Competition; -- Exposure
to Local Economy; and -- Growth Strategy and Dependence on Subsidiary
Operations." See also "Information about Security Bank Holding Company --
Business" and "Supervision and Regulation."
Mortgage Lending Operation's Contribution to Income
SBHC, through Security Bank, derives a significant amount of its income
from originating mortgage loans and selling them into the secondary market. The
contribution to SBHC's consolidated net income from this activity represented
approximately 35% for the year ended December 31, 1996, and approximately 25% of
consolidated net income for the three months ended March 31, 1997. 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 of SBHC Common Stock
As of March 31, 1997, 30.88% of SBHC's outstanding shares were held by
SBHC's Employee Stock Ownership Plan ("ESOP"). Approximately 46.57% of those
shares are pledged by the ESOP to secure borrowings from SBHC and are not
allocated to employees. Unallocated shares are therefore excluded from earnings
and book value per share calculations. Although the percentage of total
outstanding shares held by the ESOP is expected to decrease to 22.17% after the
Merger, the ESOP will remain SBHC's largest shareholder. The ESOP is under the
supervision of a three-member Board of Trustees appointed by the Board of
Directors of SBHC. 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 SBHC. See "Information about Security Bank Holding Company
- -- Management and -- Security Ownership of Certain Beneficial Owners and
Management."
In addition, the directors of SBHC currently own an additional 593,105
shares, or 18.71% of SBHC's outstanding shares (in addition to certain shares in
the ESOP), which will decrease to 13.44% after the Merger. Each of the directors
of SBHC are expected to vote in favor of the Merger.
ESOP Indebtedness
Approximately 455,824 shares held by the ESOP are pledged to secure
indebtedness to SBHC incurred in the acquisition of such shares. As the debt is
repaid, and shares are released and allocated to employee participants, SBHC
recognizes a charge against earnings relating to compensation expense. This
charge is calculated based on the average fair market value of the shares so
allocated for the year in which the shares are released. As SBHC shares increase
in market value, the charge for compensation expense increases accordingly. This
increase, together with the additional shares used in calculating per share book
value and earnings, can have an adverse effect on reported earnings and,
consequently, the stock price. SBHC has requested a private letter ruling from
the Internal Revenue Service to extend the repayment schedule, thereby reducing
the compensation expense associated with the release of unallocated shares. No
assurance can be made that SBHC will be successful in obtaining a favorable
ruling from the Internal Revenue Service, and failure to do so may have an
adverse effect on the reported earnings of SBHC and on the market value of SBHC
shares.
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<PAGE>
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
offices with many offices operating over a wide geographic area. As of March 31,
1997, there were four other commercial banks in SBHC's primary service areas,
one of which banks has an office in PSB's market area, and all of which are
financial institutions 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 those service areas. A
similar competitive environment exists in Lincoln County where Lincoln Security
operates. Among the advantages possessed by the SBHC's and PSB's 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 either SBHC or PSB, a situation that would likely continue
to exist after the Merger, although the Merger would increase the amount of
total capital available to support higher lending limits to SBHC and PSB
borrowers through loan participations among the subsidiary banks. Additionally,
such banks offer certain services, such as international banking services, which
are not offered directly by either SBHC or PSB, although SBHC offers such
services to its customers 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. The
competitors are reducing costs by combining what were 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 or Brookings Bank will
effectively compete in their respective market areas. Further, the ability of
PSB to compete effectively in its market area may not materially improve as a
result of the Merger. See "Information about Pacific State Bank -- Business" and
"Information about Security Bank Holding Company - Business."
Dependence on Key Personnel
SBHC's success is dependent on the services of Charles D. Brummel,
President and Chief Executive Officer, and Michael J. Delvin, Executive Vice
President and Chief Financial Officer. R.T. Green currently serves as President
and CEO of PSB, but neither he nor Messrs. Brummel or Delvin have employment
contracts. The loss of services of any of these executives, or of certain other
key officers, could adversely affect SBHC, Security Bank and PSB. No assurance
can be given that replacement officers of comparable abilities could be found.
Neither SBHC nor PSB maintains key person life insurance on these individuals.
See "Information about Security Bank Holding Company -- Management."
Market for the Shares
SBHC's common stock trades on the National Market System of the Nasdaq
Stock Market under the symbol "SBHC", but is not generally actively traded. The
market price could be subject to significant fluctuations in response to
variations in quarterly operating results of SBHC, general conditions of the
banking industry and other factors. In addition, the price of the shares may
fluctuate substantially due to the effect of supply and demand in a limited
market. See "Information about Security Bank Holding Company -- Market Price and
Dividends on Common Stock."
Dependence on Subsidiary Operations
Unlike many multi-bank holding companies that are currently seeking to
consolidate their commonly-owned subsidiary banks, SBHC believes it can prosper
by supporting independent affiliated community banks. Consequently, operational
costs involved with maintaining separate banking units may be higher than could
otherwise be realized if SBHC were to combine its banking operations into a
single subsidiary bank. Such costs could adversely affect SBHC's consolidated
earnings, and although the company believes that each banking subsidiary can be
more profitable and garner a larger share of its local market by maintaining an
identity as a local community bank, no assurances can be made in that regard. As
a bank holding company, SBHC is substantially dependent upon dividends from its
subsidiary banks for revenues to pay its expenses, and to pay dividends to
shareholders. The subsidiary banks, including PSB if the Merger is consummated,
are subject to regulatory limitations upon the payment of dividends, and the
receipt of dividends from the subsidiary banks cannot be
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assumed. Further, no cash dividends are anticipated from Lincoln Security Bank
during that bank's initial years of operation and dividends, if any, from
Brookings Bank are likely to be limited during its initial phase of independent
operations. Although SBHC expects to continue to receive dividends from Security
Bank, and would expect to receive dividends from PSB if the Merger is
consummated, no assurances as to the timing or amount of future dividends can be
made. See "Information about Security Bank Holding Company -- Business" and
"Supervision and Regulation -- Dividends."
Regulatory Risk
Banks are subject to extensive regulation. These regulations are intended
to protect depositors not shareholders. As state-chartered banks, PSB and SBHC's
subsidiary banks are subject to regulation and supervision by the FDIC, which
insures the deposits of each bank, and the Oregon Director. As a bank holding
company, SBHC is subject to regulation and supervision by the 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."
Anti-takeover Provisions
Oregon law includes limitations upon the acquisition of an Oregon
corporation, such as SBHC. As a bank holding company, the acquisition of SBHC or
its subsidiaries would be subject to approval of banking regulators. These
limitations and requirements may serve to delay or prevent an acquisition of
SBHC by another financial institution without the consent and cooperation of the
Board of Directors of SBHC. Moreover, certain provisions of Oregon law limit the
ability of persons or entities to acquire control of SBHC 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, SBHC's articles of incorporation authorize the Board
of Directors to issue additional shares of authorized but unissued shares of
SBHC'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 to provide
flexibility in financing corporate transactions, the issuance of additional
securities of SBHC could have the effect of diluting the ownership interest of a
substantial shareholder or increasing the consideration necessary to acquire
control of SBHC, and could thus be deemed to be an anti-takeover provision.
Further, SBHC'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 SBHC's bylaws may therefore have the effect of making
SBHC 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 "The
Merger -- Description of SBHC Capital Stock" and "Stock Price and Dividend
Information."
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SPECIAL MEETING OF PSB SHAREHOLDERS
Each copy of this Prospectus/Proxy Statement sent to PSB's shareholders is
accompanied by a proxy solicited by the Board of Directors of PSB for use at the
Special Meeting of Shareholders of PSB (the "PSB Meeting") to be held at
______________________________ at _____ p.m. on [day]______________ ,
[date]_________, 1997, and any adjournments thereof. Only holders of record of
PSB common stock at the close of business on ______________ 1997 (the "Record
Date"), are entitled to notice of, and to vote at, the PSB Meeting. At the
meeting, the shareholders will vote on the proposed Merger, and such other
matters as may properly come before the meeting. Shares represented by properly
executed proxies will be voted at the PSB Meeting in accordance with the
instructions on the proxy. If no instructions are given, the shares represented
thereby will be voted in favor of the proposed Merger and in the discretion of
the proxy holders on such other matters that may be considered at the meeting.
A proxy may be revoked prior to its exercise at the PSB Meeting by
presentation of a proxy bearing a later date, by filing an instrument of
revocation (personally or by mail) with the President of the Bank prior to the
meeting, or by oral request if the shareholder is present at the meeting.
Attendance at the meeting will not, of itself, revoke a proxy.
PSB SHAREHOLDERS ARE REQUESTED TO COMPLETE, DATE, AND SIGN THE ACCOMPANYING
PROXY AND RETURN IT PROMPTLY TO PSB IN THE ENCLOSED, POSTAGE-PAID ENVELOPE, EVEN
IF THEY ARE PLANNING TO ATTEND THE MEETING.
The authorized capital stock of PSB consists of 406,875 shares of common
stock. As of _______, 1997, the Record Date, all 406,875 authorized shares of
common stock were issued and outstanding and entitled to vote at the PSB
Meeting.
Method of Counting Votes
A majority of the outstanding shares of PSB common stock must be
represented at the PSB Meeting, in person or by proxy, to constitute a quorum
for the transaction of business. For purposes of determining a quorum, shares
represented in person or by properly executed proxy will be counted. An
abstention from a given matter or a broker non-vote (a proxy submitted by a
broker or other nominee indicating that such nominee has not received
instructions from the beneficial owners or other persons entitled to vote the
shares as to a matter with respect to which the nominee does not have
discretionary voting power) with respect to a such matter will not affect the
presence of that shareholder or the shares represented by such proxy as to
determination of a quorum. Shares represented by properly executed proxy will be
voted in accordance with the instructions on the proxy.
Each share is entitled to one vote. If a quorum is present, the proposed
merger will be approved if at least two-thirds of the outstanding shares are
voted in favor of the Merger. An abstention or a broker non-vote with respect to
a matter submitted to a vote of shareholders will not be counted as a vote in
favor of the matter. An abstention or a broker non-vote from the proposed Merger
will therefore have the effect of a vote against the Merger.
If a proxy is submitted in which no instructions are given, the shares
represented thereby will be voted in the discretion of the named proxy holders.
It is the intention of the named proxy holders to vote shares represented by the
proxy in favor of the proposed Merger.
As of the Record Date, there were 247 shareholders of record. Directors,
executive officers, and principal shareholders of PSB together with their
affiliates, had beneficial ownership of 52,481 shares, of which all are entitled
to vote. The shares held by officers, directors and principal shareholders
constitute approximately 13.0 percent of the total shares outstanding and
entitled to be voted at the PSB Meeting.
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SPECIAL MEETING OF SBHC SHAREHOLDERS
Each copy of this Prospectus/Proxy Statement sent to SBHC shareholders is
accompanied by a proxy solicited by the Board of Directors of SBHC for use at
the Special Meeting of Shareholders of SBHC (the "SBHC Meeting") to be held at
[the principal office of Security Bank at 170 S. Second St., Coos Bay, Oregon]
at p.m. on [day] , [date] , 1997, and any adjournments thereof. Only holders of
record of Company common stock at the close of business on 1997 (the "Record
Date"), are entitled to notice of, and to vote at, the SBHC Meeting. At the SBHC
Meeting, the shareholders of SBHC will vote on the proposed Merger and related
issuance of shares of SBHC common stock pursuant to the terms of the Plan of
Merger, as required by the rules of the Nasdaq Stock Market, and such other
matters as may properly come before the SBHC Meeting. Shares represented by
properly executed proxies will be voted at the SBHC Meeting in accordance with
the instructions on the proxy. If no instructions are given, the shares
represented thereby will be voted in favor of the proposal, and in the
discretion of the proxy holders on such other matters that may be considered at
the SBHC Meeting.
A proxy may be revoked prior to its exercise at the SBHC Meeting by
presentation of a proxy bearing a later date, by filing an instrument of
revocation (personally or by mail) with the Secretary of SBHC prior to the
meeting, or by oral request if the shareholder is present at the meeting.
Attendance at the meeting will not, of itself, revoke a proxy.
SBHC SHAREHOLDERS ARE REQUESTED TO COMPLETE, DATE, AND SIGN THE
ACCOMPANYING PROXY AND RETURN IT PROMPTLY TO SBHC IN THE ENCLOSED, POSTAGE-PAID
ENVELOPE, EVEN IF THEY ARE PLANNING TO ATTEND THE MEETING.
The authorized capital stock of SBHC consists of ten million (10,000,000)
shares of Common Stock, five million (5,000,000) shares of Voting Preferred
Stock, and five million (5,000,000) shares of Non-voting Preferred Stock. As of
________________, 1997, the Record Date, there were 3,169,700 shares of Common
Stock issued and outstanding and entitled to vote at the SBHC Meeting. As of the
Record Date, there were no shares of preferred stock outstanding.
Method of Counting Votes
A majority of the outstanding shares of Common Stock must be represented at
the SBHC Meeting, in person or by proxy, to constitute a quorum for the
transaction of business. For purposes of determining a quorum, shares
represented in person or by properly executed proxy will be counted. An
abstention from, or a broker non- vote (a proxy submitted by a broker or other
nominee indicating that such nominee has not received instructions from the
beneficial owners or other persons entitled to vote the shares as to a matter
with respect to which the nominee does not have discretionary voting power) with
respect to a given matter, will not affect the presence of that shareholder or
the shares represented by such proxy as to determination of a quorum. Shares
represented by properly executed proxy will be voted in accordance with the
instructions on the proxy.
An abstention or a broker non-vote with respect to a matter submitted to a
vote of shareholders will not be counted for or against the matter. Each share
is entitled to one vote. If a quorum is present, the proposal will be approved
if more votes are cast in favor than those cast against. An abstention or a
broker non-vote from the proposal will therefore be counted as neither a vote in
favor thereof nor a vote against.
If a proxy is submitted in which no instructions are given, the shares
represented thereby will be voted in the discretion of the named proxy holders.
It is the intention of the named proxy holders to vote shares represented by the
proxy in favor of the proposed issuance of SBHC shares.
As of the Record Date, there were ______shareholders of record. Directors,
executive officers, and principal shareholders of SBHC together with their
affiliates, had beneficial ownership of ______shares, of which all are entitled
to vote. The shares held by officers, directors and principal shareholders,
constitute _____percent of the total shares outstanding and entitled to be voted
at the SBHC Meeting. The ESOP holds an additional 978,728 shares representing
_____% of the total outstanding.
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THE MERGER
General Terms of the Merger
The following description of the material terms of the Merger is qualified
in its entirety by reference to the Agreement and the Plan of Merger, attached
to this Prospectus/Proxy Statement as Appendix A and incorporated herein by this
reference. All SBHC and PSB shareholders are urged to read the Agreement and the
Plan of Merger carefully, as shareholders are being asked to approve the Merger
in accordance with the terms. For a discussion of the background of and reasons
for the Merger, see "Summary -- Background and Reasons for the Merger."
Under the terms of the Agreement and the Plan of Merger, SBHC would acquire
PSB by means of a reverse triangular merger, in which PSB Interim would be
merged with and into PSB, with PSB being the resultant bank, surviving as a
wholly-owned subsidiary of SBHC and operating under the name "Pacific State
Bank", and shareholders of PSB, other than those who exercise their dissenters'
rights, becoming shareholders of SBHC.
The Merger will close on the Effective Date (as defined in the Agreement)
within 7 days after satisfaction or waiver (except where required by law) of all
of the conditions set forth in the Agreement, unless extended by the parties.
Closing is expected in the autumn of 1997. If closing does not take place prior
to March 31, 1998, either party may terminate the Agreement. See "The Merger --
Conditions to the Merger."
Opinion of PSB Financial Advisor
PSB retained Columbia Financial Advisors ("CFA") as its exclusive financial
advisor pursuant to an engagement letter dated May 22, 1997 in connection with
the Merger. CFA is a regionally recognized investment banking firm that is
regularly engaged in the valuation of businesses and securities in connection
with mergers and acquisitions. The PSB Board selected CFA to act as PSB's
exclusive financial advisor based on CFA's experience in mergers and
acquisitions and in securities valuation generally.
CFA has delivered a written opinion ("CFA Opinion") to the PSB Board of
Directors to the effect that, as of the date of this Prospectus/Proxy Statement,
the consideration to be received by PSB shareholders in the Merger is fair to
the shareholders from a financial point of view. The CFA Opinion is directed
only to the fairness, from a financial point of view, of the consideration to be
received and does not constitute a recommendation to any PSB stockholder as to
how such shareholder should vote at the Special Meeting nor is it a
recommendation to purchase or hold SBHC common stock. The full text of the CFA
Opinion, which sets for the assumptions made, matters considered, and limits on
its review, is attached hereto as Appendix B. The summary of the CFA Opinion in
this Prospectus/Proxy Statement is qualified in its entirety by reference to the
full text of such opinion. PSB SHAREHOLDERS ARE URGED TO READ THE ENTIRE CFA
OPINION.
In rendering its opinion to PSB, CFA reviewed, among other things,
historical financial data of PSB, certain internal financial data and
assumptions of PSB prepared for financial planning and budgeting purposes
furnished by the management of PSB and, to the extent publicly available, the
financial terms of certain change of control transactions involving Northwest
community banks. CFA discussed with PSB's management the financial condition,
current operating results, and business outlook for PSB. CFA also reviewed
certain publicly available information concerning SBHC and certain financial and
securities data of SBHC and companies deemed similar to SBHC. CFA discussed with
SBHC's management the financial condition, current operating results and
business outlook for SBHC and SBHC's plans relating to PSB. In rendering its
opinion, CFA relied, without independent verification, on the accuracy and
completeness of all financial and other information reviewed by it and did not
attempt to verify or to make any independent evaluation or appraisal of the
assets of PSB or SBHC nor was it furnished any such appraisals. PSB did not
impose any limitations on the scope of the CFA investigation in arriving at its
opinion.
CFA analyzed the total Purchase Price on a cash equivalent fair market
value basis using standard evaluation techniques (as discussed below) including
comparable sales multiples, net present value analysis, and net
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asset value based on certain assumption of projected growth, earnings and
dividends and a range of discount rates from 16% to 18%.
Net Asset Value is the value of the net equity of a bank, including every
kind of property and value. This approach normally assumes liquidation on the
date of appraisal with the recognition of the investment securities gains or
losses, real estate appreciation or depreciation, adjustments to the loan loss
reserve, discounts to the loan portfolio and changes to the net value of other
assets. As such, it is not the best evaluation approach when valuing a going
concern because it is based on historical cost and varying accounting methods.
Even if the assets and liabilities are adjusted to reflect prevailing market
prices and yields (which is often of limited accuracy due to the lack of readily
available data), it still results in a liquidation value. In addition, since
this approach fails to account for the values attributable to the going concern
such as the interrelationship among PSB's assets and liabilities, customer
relations, market presence, image and reputation, staff expertise and depth,
little weight is given by CFA to the net assets value approach to valuation.
Market Value is generally defined as the price, established on an
"arms-length" basis, at which knowledgeable, unrelated buyers and sellers would
agree. The "hypothetical" market value for a small bank with a market for its
common stock is normally determined by comparison to the average price to
stockholders equity, price to earnings, and price to total assets, adjusting for
significant differences in financial performance criteria and for any lack of
marketability or liquidity of the buyer. The market value in connection with the
evaluation of control of a bank is determined by the previous sales of small
banks in the state or region. In valuing a business enterprise, when sufficient
comparable trade data are available, the market value approach deserves greater
weighing than the net asset value approach and similar weight as the investment
value approach as discussed below.
CFA maintains a comprehensive data base of prices paid for banking
institutions in the Northwest, particularly Oregon and Washington banking
institutions, from 1988 through 1997. This data base provides comparable pricing
and financial performance data for banking institutions sold or acquired.
Organized by different peer groups, these data present medians of financial
performance and purchase price analysis. In analyzing the transaction value of
PSB, CFA has considered the market approach and has evaluated price to
stockholders equity and price to earnings multiples and the price to total
assets percentage for transactions involving Oregon and Washington banking
organizations with total assets less than $100 million that sold for 100% common
stock from January, 1988 to June, 1997.
Comparable Sales Multiples. CFA calculated a "Merger Consideration-Adjusted
Book Value" for PSB's May 31, 1997 stockholders equity and the estimated
September 30, 1997 stockholders equity, adjusted for the price to stockholders
equity ratios for a sample of Northwest banking institutions with total assets
below $100 million which sold between January 1988 and June 1997 and a sample of
Northwest banking institutions with total assets below $100 million which sold
between January 1994 and June 1997. The calculations are $30.85 and $34.86 per
share, respectively, for the May 31, 1997 stockholders equity for the two
samples. For the estimated September 30, 1997 stockholders equity, the
calculations are $32.28 and $36.47, respectively. For PSB's 1996 net income and
twelve months prior to March 31, 1997, the calculations are $33.87 and $33.14,
respectively.
Transaction Value as a Percentage of Total Assets. CFA calculated the
percentage of total assets which the transaction represents as a price level
indicator. The transaction value as a percentage of total assets facilitates a
truer price level comparison with comparable banking organizations, regardless
of the differing levels of stockholders equity and earnings. In this instance, a
transaction value of $34.08 per share results in a transaction value as a
percentage of total assets of 26.53%. The median price as a percentage of total
assets for a sample of Northwest banking institutions with assets below $100
million which sold between January 1988 through June 1997 and a sample of
Northwest banking institutions with total assets below $100 million which sold
between 1994 and 1997 of 16% and 18%, respectively.
Investment Value is sometimes referred to as the income or earnings value.
One investment value method frequently used estimates the present value of an
institution's future earnings or cash flow which is discussed below.
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Net Present Value Analysis. The investment or earnings value of any banking
organization's stock is an estimate of the present value of future benefits,
usually earnings, dividends, or cash flow, which will accrue to the stock. An
earnings value is calculated using an annual future earnings stream over a
period of time of not less than five years and the residual or terminal value of
the earnings stream after five years, using PSB's estimates of future growth and
an appropriate capitalization or discount rate. CFA's calculations were based on
an analysis of the banking industry, PSB's earnings estimates for 1997-2001,
historical levels of growth and earnings, and the competitive situation in PSB's
market area. Using discount rates of 16% and 18%, acceptable discount rates
considering the risk-return relationship most investors would demand for an
investment of this type as of the valuation date, the "Net Present Value of
Future Earnings" provided a range of $27.09 to $32.50 per share.
When the net asset value, market value and investment value approaches are
subjectively weighed, using the appraiser's experience and judgment, it is CFA's
opinion that the proposed transaction is fair, from a financial point of view.
Pursuant to the terms of the engagement letter, PSB has agreed to pay CFA a
fee of $25,000. In addition, PSB has agreed to reimburse CFA for its reasonable
out-of-pocket expenses, including the fees and disbursements of its counsel, and
to indemnify CFA against certain liabilities.
Recommendation of Boards of Directors
The Boards of Directors of SBHC and PSB have reviewed and approved the
Agreement, and PSB directors have signed commitments to vote their shares in
favor of the Merger. THE BOARDS OF DIRECTORS OF PSB AND SBHC UNANIMOUSLY
RECOMMEND TO THEIR RESPECTIVE SHAREHOLDERS A VOTE IN FAVOR OF THE MERGER.
Exchange of Shares
SBHC has agreed to acquire all of the outstanding shares of PSB common
stock for an amount, payable in shares of SBHC Common Stock, equal to two times
the total shareholders' equity of PSB as of March 31, 1997, determined in
accordance with generally accepted accounting principles, but not including
unrealized gains or losses in its investment portfolio, plus an amount equal to
the increase in shareholders' equity, not including unrealized gains or losses
in its investment portfolio, from April 1, 1997, through the date immediately
preceding the Effective Date. Upon consummation of the Merger, each share of PSB
common stock outstanding as of the Record Date will automatically be converted
into and exchanged for that number of shares of SBHC Common Stock calculated by
dividing the total purchase price by the number of shares of PSB common stock
outstanding as of the Record Date, then further dividing the resulting figure by
$11.375, the closing price per share of SBHC common stock as reported by the
Nasdaq Stock Market on March 31, 1997.
Following consummation of the Merger, certificates representing shares of
PSB stock will, for all corporate purposes other than dividends, represent
shares of SBHC Common Stock. Shareholders of PSB will be notified by SBHC of the
effectiveness of the Merger and SBHC will send to each such shareholder a form
of letter of transmittal and instructions as to surrendering their PSB
certificates in exchange for certificates representing SBHC shares. DO NOT SEND
IN YOUR CERTIFICATES AT THIS TIME. PSB SHAREHOLDERS WILL RECEIVE TRANSMITTAL
INSTRUCTIONS FOLLOWING CONSUMMATION OF THE MERGER. THERE WILL BE NO CHANGE IN
THE SHARES HELD BY SBHC SHAREHOLDERS. Unless and until the certificates
representing shares of PSB common stock are surrendered in exchange for
certificates representing SBHC Common Stock, no dividends or other distributions
payable on shares of SBHC Common Stock will be paid in respect of such shares.
Upon surrender of certificates representing shares of PSB common stock for
exchange, all accrued and unpaid dividends and other distributions, payable on
such shares after the effective date of the Merger, will be paid, without
interest thereon.
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Cash for Fractional Shares
SBHC will not issue certificates for fractional shares of SBHC Common
Stock. Each PSB shareholder otherwise entitled to receive fractional shares
shall be entitled to receive cash in lieu thereof in an amount equal to the
fraction multiplied by $11.375, and will have no other rights with respect to
such fractional shares.
Conduct Pending the Merger
The Agreement provides that, until the Merger is effective, PSB and SBHC
will continue to conduct their respective businesses only in the ordinary
course, and use all reasonable efforts to preserve their present business
organizations, retain the current management, and preserve the goodwill of all
persons with whom they have business dealings. The Agreement also provides that,
without the consent of the other party, neither party to the Agreement will
engage in transactions affecting the capitalization, assets or obligations of
such party, including declaring extraordinary dividends, stock splits or other
recapitalizations, disposing of assets, making material commitments, or
acquiring real property without proper environmental evaluation, or any other
transaction or activity not in the ordinary course of business.
Operations of PSB following the Merger
Following the Merger, PSB will operate in its current office as a
subsidiary bank of SBHC separate from Security Bank, Lincoln Security or
Brookings Bank, with its own board of directors and executive officers, although
Mr. Brummel and an additional director of SBHC or Security Bank are to be
appointed to serve as additional directors on the PSB's board. PSB will continue
to operate under the name "Pacific State Bank", and substantially all of the
current directors, executive officers and employees will be retained. SBHC does,
however, anticipate that certain administrative and data processing services may
be provided by SBHC or Security Bank.
Directors and Officers
The Agreement provides that PSB will appoint two SBHC or Security Bank
directors to serve on the board of PSB until the next annual meeting of PSB
shareholders. In addition, SBHC has agreed to appoint two current PSB directors
acceptable to SBHC to serve on the Board of Directors of SBHC, and to nominate
such directors for election at the next annual meeting of SBHC shareholders.
SBHC has also agreed to appoint one of the directors of PSB to the board of
Security Bank.
Directors and executive officers of PSB will continue to serve in the same
capacities following the Merger and until the 1998 annual meeting of PSB
shareholders or until their successors have been duly elected and qualified. At
the 1998 annual meeting of PSB shareholders, PSB's board may nominate a slate of
directors for election until the 1999 annual shareholders meeting. SBHC, as
PSB's sole shareholder, expects to re-elect the current directors of PSB,
although SBHC is under no obligation to do so.
As a condition to the execution of the Agreement, each member of PSB's
Board of Directors has entered into a non-competition agreement with SBHC which
prohibits these directors from competing with SBHC or any of its subsidiaries
for a period of two years following the date of the Agreement by associating in
any capacity with any financial institution, other than PSB or another SBHC
affiliates bank, that has branches in Coos, Curry, Lincoln or Douglas Counties,
Oregon, except for ownership of less than one percent of the stock of a publicly
held corporation. In addition, each PSB director has agreed not to solicit or
entertain any offer to PSB to enter into any transaction that would compete with
or be inconsistent with the Agreement, and to vote their shares, and to
recommend to shareholders a vote, in favor of the Merger. Further, resales of
shares of SBHC Common Stock by PSB directors and executive officers following
the Merger are subject to certain restrictions. See "The Merger Resales of Stock
by PSB Affiliates."
Employee Benefit Plans
The Agreement confirms SBHC's intention to permit PSB employees who
continue as PSB employees following the Merger to participate in all employee
benefit plans generally available to all SBHC employees. In
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addition, PSB employees are entitled to have health insurance premiums paid by
PSB for eligible dependents of PSB employees so long as they remain eligible and
such payments do not violate any provisions of state or federal laws.
Conditions to the Merger
The Merger is subject to certain conditions set forth in the Agreement. No
assurance can be made that these conditions will be satisfied or waived by the
appropriate party. Accordingly, there can be no assurance that the Merger will
be completed. In the event that conditions to the Merger remain unsatisfied and
the Merger has not been completed by March 31, 1998, the Agreement may be
terminated by either party to the Agreement.
The Merger can only occur if the holders of at least two-thirds of the
outstanding shares of PSB common stock vote in favor of the Merger at the PSB
Meeting, and if the number of SBHC shares voted to approve the Agreement and
related issuance of shares, as provided by the Plan of Merger exceeds the number
voted against the proposal at the SBHC Meeting, provided at least a majority of
the outstanding shares are represented at the SBHC Meeting. In addition, the
Merger requires the approval of the FDIC, the Federal Reserve and the Oregon
Director, as discussed below.
Certain other conditions must be satisfied or waived, and other events must
occur before the parties will be obligated to complete the Merger. Each party's
obligations are conditioned on satisfaction by the other parties of their
conditions. Specifically, these conditions include: (i) the representations and
warranties given by each party to the Agreement are true in all material
respects as of the effective date of the Merger, and each party has complied
with its covenants in the Agreement; (ii) there has been no material adverse
change in the business or financial condition of each party; (iii) each party's
board of directors and shareholders have approved the transaction; (iv) the
parties have provided one another with opinions of experts with respect to
certain tax treatment and legal matters, accounting and fairness, as called for
by the Agreement; (v) the SEC has declared the registration statement effective
with respect to the issuance of SBHC common stock in the Merger; (vi) there are
no actions or proceedings commenced or threatened against any party to restrain,
prohibit or invalidate the Merger; (vii) the holders of no more than 7% of the
shares of PSB have voted against the Merger or otherwise taken steps to perfect
their dissenter's rights as provided by the Agreement; and (viii) all
appropriate regulatory authorities have approved the Merger.
Regulatory Approvals
The Merger is subject to the approval of the FDIC and the Oregon Director.
In addition, the acquisition by SBHC of control of PSB is subject to the
approval of the Federal Reserve and the Oregon Director. SBHC has filed
applications with these regulatory agencies and expects to receive the necessary
approvals in due course, although no assurances can be made in that regard. The
FDIC will not approve the Merger unless and until the PSB shareholders have
approved the Merger. See "Supervision and Regulation."
Waiver of Conditions, Amendment or Termination
Either SBHC or PSB may waive conditions required of the other party, except
those conditions required by law. The parties may also grant extensions of time
to satisfy an obligation or condition. The Agreement may be amended or
supplemented at any time by written agreement of the parties before the special
shareholders meetings.
The Agreement contains several provisions entitling either SBHC or PSB to
terminate the Agreement under certain circumstances. The following briefly
describes those provisions:
Mutual Agreement. The Agreement may be terminated by mutual agreement of
the parties at any time prior to closing, whether before or after approval by
the shareholders.
Breach of Representations or Warranties. The Agreement may be terminated by
either party upon a material breach by the other party of any of its
representations, warranties or covenants, if such breach is not cured within 30
days notice of such breach.
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Lapse of Time. The Agreement may be terminated by either party if
shareholder approval is not obtained by the other party prior to December 31,
1997, and by either of the parties if the conditions to closing have not been
satisfied prior to March 31, 1998.
Fiduciary Obligations of PSB. The Agreement may be terminated by PSB, if,
upon the advice of counsel, the fiduciary duties of its directors so require.
Notice by SBHC. The Agreement may be terminated by SBHC upon written notice
without any specific reason, but under such circumstances SBHC would be required
to pay PSB's reasonable costs and a break-up fee.
If the Agreement is terminated by reason of any of the representations or
warranties of either party being materially incorrect, the other party is
entitled to damages of actual reasonable expenses incurred in connection with
the negotiation and preparation of the Agreement. If SBHC terminates the
Agreement by reason of PSB shareholders failing to approve the merger or PSB
terminating the Agreement upon advice of counsel, and PSB enters into a similar
transaction with another party within one year thereafter, SBHC will be entitled
to be reimbursed for its reasonable expenses incurred by SBHC in connection with
the negotiation and preparation of the Agreement and carrying out the
transaction, plus an additional $350,000. If SBHC terminates the Agreement or
fails to close the Merger for any reason other than a failure of conditions not
within SBHC's control, or a material breach of representations, warranties or
covenants by PSB, then SBHC will be obligated to pay PSB's reasonable expenses
incurred in negotiating the Agreement, plus an additional $175,000.
Interests of Certain Persons in the Merger
Certain directors of SBHC and PSB may be deemed to have an interest in the
Merger, in addition to their interests as shareholders. PSB has agreed to
appoint Mr. Brummel and another director of SBHC or Security Bank to serve on
the board of PSB until the next annual meeting of PSB shareholders. In addition,
SBHC has agreed to appoint two of the current PSB directors to the Board of
Directors of SBHC, and to nominate such directors for election at the next
annual meeting of Security Bank shareholders to serve terms of at least two
years. SBHC has also agreed to appoint one of the directors of PSB to the Board
of Directors of Security Bank. Directors and executive officers of PSB will
continue to serve in those capacities following the Merger.
Comparison of Relative Rights of Shareholders of PSB and SBHC
The Articles of Incorporation of SBHC authorize the issuance of up to
20,000,000 shares of stock, divided into three classes consisting of 10,000,000
shares of Common Stock having a par value of $5.00 per share, of which there
were shares of Common Stock issued and outstanding as of the Record Date;
5,000,000 shares of Voting Preferred Stock having a par value of $5.00 per
share, none of which is issued; and 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. The Board of
Directors of SBHC has the authority to designate one or more series of preferred
stock and to determine the relative rights and preferences of such series,
including the dividends payable thereon, redemption, liquidation and conversion
provisions, and voting rights.
The Articles of Incorporation of PSB authorize 406,875 shares of common
stock, all of which was issued and outstanding as of the Record Date. PSB
Articles of Incorporation do not authorize any preferred stock.
The following discussion compares the relative rights of PSB and SBHC
shareholders.
General
Each outstanding share of SBHC Common Stock has the same relative rights
and preferences as each other share, including the rights to the net assets of
the corporation upon liquidation. All issued and outstanding shares of SBHC are,
and all shares to be issued in the Merger will be, fully paid and
non-assessable. The Board of Directors is authorized to issue or sell additional
capital stock of SBHC, at its discretion and for fair value, and to issue future
cash or stock dividends, without subsequent shareholder approval except as may
be required by the rules
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<PAGE>
of the Nasdaq Stock Market. Holders of SBHC common stock do not have preemptive
rights to subscribe for any additional securities that may be issued, and are
not entitled to conversion or redemption rights.
The Board of Directors of SBHC 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 non-voting
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.
Each outstanding share of PSB common stock has the same relative rights and
preferences as each other share, including the rights to the net assets of the
corporation upon liquidation. All issued and outstanding shares of PSB are fully
paid and non-assessable, except as provided by the Oregon Bank Act, which
provides that in the event the capital of the bank is impaired, or insufficient
to pay the bank's liabilities, the Oregon Director may require the bank to
assess the capital stock in an amount to restore the capital to a sufficient
level. Shareholders are not personally liable for any assessment, except that
failure to pay any assessment could result in forfeiture and sale of shares by
the bank to pay any such assessment. Holders of PSB common stock do not have
preemptive rights to subscribe for any additional securities that may be issued,
and are not entitled to conversion or redemption rights.
Voting Rights
Each share of SBHC common stock is entitled to one vote on matters
submitted to a vote of shareholders, and holders may not cumulate votes in the
election of directors. The Board of Directors of SBHC is authorized to designate
one or more series of preferred stock and to fix the voting rights of such
series, which may be superior to the voting rights of the common stock.
Each share of PSB common stock is entitled to one vote on matters submitted
to a vote of shareholders. Holders of common stock are not entitled to cumulate
votes in the election of directors.
Dividends
The Board of Directors of SBHC is authorized to designate one or more
series of preferred stock and to fix the dividend rights of such series, which
may be superior to the dividend rights of the common stock.
Subject to the rights of holders of any preferred stock which may be
outstanding, the holders of SBHC Common Stock are entitled to receive dividends
if and when declared by the Board of Directors from any funds legally available
therefor. The ability of SBHC to pay dividends is substantially dependent on
dividends it receives from its subsidiary banks. Accordingly, dividend
restrictions imposed on the subsidiary banks under their respective articles of
incorporation and the Oregon Bank Act may limit the dividends SBHC can pay to
its shareholders. See "Supervision and Regulation - Dividends."
Shareholders of PSB are entitled to dividends if and when declared by the
Board of Directors from funds legally available therefor. The ability of PSB to
pay dividends is subject to the limitations of the Oregon Bank Act which imposes
restrictions on dividends in excess of retained earnings, and requires prior
approval of the Oregon Director to pay dividends.
Anti-takeover Provisions
SBHC
SBHC 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
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<PAGE>
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 SBHC'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 SBHC an
"Acquiring Person Statement" setting forth certain information about the
Acquiring Person and its plans with respect to SBHC. The Acquiring Person
Statement may also request that SBHC 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 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.
SBHC is also 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 SBHC'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. SBHC has not adopted such a provision and does not currently intend to
do so. The law may make SBHC 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, SBHC's articles of
incorporation and bylaws contain certain provisions that could make more
difficult the acquisition of SBHC 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 SBHC 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
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<PAGE>
diluting the ownership interest of a shareholder or increasing the consideration
necessary to effect an acquisition of a controlling interest in SBHC.
SBHC'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.
Finally, SBHC is subject to the reporting requirements of, and its common
stock is registered under, the Securities Exchange Act of 1934. Any person who
acquires SBHC common stock, and after giving effect to such acquisition, holds
more than 5% of the outstanding shares, is required to report such acquisition
to the Securities and Exchange Commission under section 13 of the Securities
Exchange Act. Thus, a person contemplating acquiring control will be obligated
to make public such person's intentions, even prior to being required to report
such transactions to the Federal Reserve under the Bank Holding Company Act. See
"Supervision and Regulation."
PSB
PSB is subject to the Oregon Bank Act which requires prior approval of the
Oregon Director before any person may acquire control of a bank. In addition,
under the Bank Holding Company Act of 1956, no person may acquire 25% or more of
the shares of any class of voting stock of a bank without prior approval of the
Federal Reserve. Further, under the Bank Change of Control Act, prior approval
from the FDIC is required before a person may acquire control of a bank. See
"Supervision and Regulation."
Resales of Stock by Affiliates of PSB and SBHC
The SBHC common stock to be issued in the Merger will be freely
transferable by shareholders of PSB, with the exception of those persons deemed
to be affiliates (controlling persons) of PSB, such as all directors, executive
officers and holders of more than 10% of the outstanding stock of PSB
immediately prior to the Merger. Affiliates of PSB may not sell their shares of
SBHC common stock received in exchange for their PSB common stock in the Merger,
except pursuant to an effective registration statement under the Securities Act
of 1933, as amended, or pursuant to the provisions of Rule 144 under the
Securities Act of 1933, unless in the opinion of counsel reasonably satisfactory
to SBHC such shares may be sold pursuant to an applicable exemption from the
registration requirements of the Securities Act.
In addition, to account for the Merger as a pooling of interests,
affiliates of PSB may not sell any shares of SBHC they may hold or control for a
period beginning 30 days prior to the effective date of the Merger and ending at
the time SBHC publishes financial results covering at least 30 days of combined
operations. Certificates issued in the Merger to affiliates of PSB will bear
legends reflecting such restrictions.
Tax Treatment of the Transaction
The Merger is intended to qualify as a tax-free reorganization for federal
income tax purposes under Section 368(a) of the Internal Revenue Code of 1986,
as amended. In such a reorganization, neither PSB nor SBHC will recognize any
gain or loss as a result of the Merger. In addition, no gain or loss is
recognized for federal income tax purposes by shareholders of PSB upon the
exchange of shares of PSB stock for shares of SBHC stock, except that gain or
loss will be recognized on the receipt of cash, if any, received in lieu of
fractional shares. Cash received by a shareholder of PSB in lieu of a fractional
share will be treated as received in exchange for such fractional share and not
as a dividend, and any gain or loss recognized as a result of the receipt of
such cash will be capital gain or loss equal to the difference between the cash
received and the portion of the shareholder's basis in PSB stock allocable to
such fractional share. The tax basis of the shares of SBHC stock received will
be equal to the tax basis, reduced by the amount of basis allocable to any
fractional share for which cash is received, of PSB shares surrendered in the
exchange. The holding period for the shares of SBHC stock received will include
the holding period for the shares of PSB stock exchanged in the Merger, provided
that the shares were held as capital assets on the date of the exchange.
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<PAGE>
Cash received by any holder of PSB common stock who exercises dissenter's
rights will be treated as having been received as a distribution in redemption
of his or her shares. Such a distribution will be treated for federal income tax
purposes in accordance with the provisions and limitations of Section 302 of the
Internal Revenue Code. In general, such a distribution and redemption will be
treated as a sale of a capital asset, with gain or loss recognized on the
difference between the shareholder's basis and the amount of cash received.
Income tax treatment of the proposed Merger in Oregon and other states
where shareholders reside is expected to parallel federal law.
While the transaction is intended to constitute a tax-free reorganization
for PSB, SBHC, or PSB's shareholders, no assurances are made in that regard. No
ruling has been or will be requested from the Internal Revenue Service as to any
of the tax effects to PSB's shareholders of the transactions discussed in this
Prospectus/Proxy Statement. However, PSB and SBHC expect to receive an opinion
of Foster Pepper & Shefelman, PLLC, special counsel to SBHC, to the effect that
under federal income tax law, the Merger will qualify as a tax-free
reorganization, the tax consequences of which will be as discussed above. Such
an opinion will not bind the Internal Revenue Service or preclude it from
adopting a contrary position. The opinion is based on facts and assumptions, and
on representations and assurances made by PSB and SBHC. SHAREHOLDERS ARE ADVISED
AND URGED TO CONSULT WITH THEIR OWN TAX ADVISOR WITH RESPECT TO TAX CONSEQUENCES
OF THE PROPOSED TRANSACTION, INCLUDING THE APPLICABILITY AND EFFECT OF ANY
FOREIGN, STATE, LOCAL AND OTHER TAX LAWS.
Accounting Treatment of the Transaction
The Merger is expected to be accounted for as a pooling of interests for
accounting purposes. Under this method of accounting, the assets and liabilities
of PSB are carried forward on the books of SBHC on a historical basis, and the
financial statements will represent the combined condition and operating results
for periods before and after the Merger. No goodwill will be recognized or
reflected in the consolidated financial statements of SBHC. As a condition of
the Merger, SBHC will receive a letter from KPMG Peat Marwick LLP to the effect
that, based on certain material facts and certain representations and warranties
described in such letter, the Merger will qualify for treatment for accounting
purposes as a pooling of interests. See "Unaudited Pro Forma Condensed Financial
Statements."
Rights of Dissenting Shareholders of PSB
The Agreement provides that shareholders of PSB have the right to dissent
from the Merger and receive the fair value of their shares in cash in lieu of
the consideration otherwise issuable to them pursuant to the Plan of Merger,
which value may be more or less than or equal to that received by non-dissenting
shareholders. Although not entitled to statutory dissenters' rights under the
Oregon Bank Act, PSB shareholders may nonetheless dissent from the Merger and be
entitled to cash payment of the fair value of their shares by following the
procedures set forth in Sections 711.042 through 711.047 of the Oregon Bank Act.
A copy of the applicable sections of the statute is attached as Appendix C to
this Prospectus/Proxy Statement. Any PSB shareholder intending to exercise
dissenters' rights is urged to review these provisions carefully so as to be in
strict compliance with the requirements of state law. EACH OF THE PRESCRIBED
STEPS MUST BE TAKEN AS SPECIFIED OR DISSENTERS' RIGHTS MAY BE LOST. FAILURE TO
CONFORM EXPRESSLY TO ALL CONDITIONS MAY RESULT IN LOSS OF RIGHTS.
The following is only a summary of dissenting shareholders' rights:
Any of PSB's stockholders desiring to dissent and receive payment for
shares must (a) either: (i) deliver to PSB, prior to or at the PSB Meeting
before the vote is taken, written notice of intent to demand payment for shares
if the transaction is consummated; or (ii) vote against the resolution approving
the Merger; and (b) make proper written demand to PSB or SBHC for payment within
30 days following the shareholder vote on the Merger. The demand must be
accompanied by the surrender of share certificates properly endorsed. A
shareholder may not dissent as to fewer than all of his or her PSB shares.
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<PAGE>
A shareholder who returns an executed but unmarked proxy, or abstains
either by not returning a proxy or by marking "Abstain" on the proxy, will be
deemed to have not voted against the Merger and will therefore not be entitled
to exercise Dissenters' Rights unless proper written notice is given prior to
the shareholder vote on the Merger.
Within 30 days after the effective date of the Merger, PSB will give notice
thereof to dissenting shareholders who have properly delivered demand for
payment and make a written offer to pay an amount equal to PSB's estimate of the
fair value of each such dissenting shareholder's shares, plus any applicable
accrued interest from the effective date of the Merger. That amount may be more
than, equal to, or less than the amount of consideration received by other
shareholders in accordance with the Plan of Merger. If a dissenting shareholder
accepts the offer within 30 days of that payment offer, PSB will pay that amount
and the dissenting shareholder will have no further rights with respect to those
shares. If, however, a dissenting shareholder does not accept the offer within
30 days, or if no offer is made, the fair value of the shares held by such
dissenting shareholder will be determined by an appraisal process wherein three
appraisers will be selected, one by owners of two-thirds of the shares involved,
one by the Board of Directors of PSB and the third by the other two appraisers.
The valuation agreed upon by two of the three appraisers will be the amount
which PSB will pay each dissenting shareholder who had not previously accepted a
payment offer. The costs of the appraisal process will be apportioned by the
appraisers as they deem equitable against either the dissenting shareholders or
PSB.
A shareholder may not dissent as to less than all of the shares registered
in the shareholder's name; except a shareholder holding as a fiduciary shares
registered in his or her name for the benefit of more than one beneficiary may
dissent as to less than all of the shares registered in his or her name,
provided that any dissent made as to a particular beneficiary is as to all of
the shares held for that beneficiary by the fiduciary.
Receipt of cash by dissenting shareholders for their shares will be
treated, for federal income tax purposes as a redemption of shares under Section
302 of the Internal Revenue Code, and may be a taxable transaction. Any
shareholder contemplating a demand for payment pursuant to statutory dissenters'
rights is urged to consult with a competent tax advisor.
Expenses
Each of the parties to the Agreement will pay their own expenses in
connection with the Agreement and the transactions contemplated thereby, except
that printing expenses for this Prospectus/Proxy Statement will be shared by
both parties.
SELECTED HISTORICAL AND PRO FORMA CONDENSED
FINANCIAL STATEMENTS
The tables on the following pages present unaudited selected historical and
pro forma financial information for SBHC and PSB for the year ended December 31,
1996, and of the three months ended March 31, 1997. The pro forma amounts assume
the Merger is accounted for on a pooling-of-interests basis and, with respect to
per share amounts, number of outstanding shares and capital ratios, that
1,244,607 shares of SBHC common stock are issued in the Merger. As the exact
number of SBHC shares to be issued will not be determined until the Merger is
completed, such amounts may vary from the figures presented. These unaudited
financial statements should be read in conjunction with the financial statements
and notes thereto included elsewhere in this Prospectus/Proxy Statement.
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<PAGE>
SELECTED HISTORICAL AND
PRO FORMA CONDENSED FINANCIAL STATEMENTS
(Unaudited)
<TABLE>
<CAPTION>
As of and for the year ended, December 31, 1996:
--------------------------------------------------------------
SBHC PSB Combined
----------------- ----------------- -----------------
BALANCE SHEET:
<S> <C> <C> <C>
Net loans $93,940,220 $28,961,541 $122,901,761
Investments, net 79,855,100 20,195,797 100,050,897
----------------- ----------------- -----------------
Total earning assets 173,795,320 49,157,338 222,952,658
Other assets 17,628,517 3,695,588 21,324,105
----------------- ----------------- -----------------
Total assets $191,423,837 $52,852,926 $244,276,763
================= ================= =================
Deposits $148,594,404 $45,438,144 $194,032,548
Borrowings 22,167,685 - 22,167,685
----------------- ----------------- -----------------
Total costing liabilities 170,762,089 45,438,144 216,200,233
Other liabilities 1,178,403 637,062 1,815,465
----------------- ----------------- -----------------
Total liabilities 171,940,492 46,075,206 218,015,698
Minority interest in subsidiary 937,895 - 937,895
Shareholders' equity:
Common stock 15,824,596 406,875 22,047,633
Surplus 1,040,537 5,093,125 317,500
Retained earnings 3,295,461 1,198,440 4,493,901
Unearned ESOP (1,728,225) - (1,728,225)
Unrealized gain on investments, net of tax 113,081 79,280 192,361
----------------- ----------------- -----------------
Total shareholders' equity 18,545,450 6,777,720 25,323,170
Total liabilities, minority interest and equity $191,423,837 $52,852,926 $244,276,763
================= ================= =================
INCOME STATEMENT:
Interest income $13,707,377 $4,207,017 $17,914,394
Interest expense 5,602,636 1,434,208 7,036,844
----------------- ----------------- -----------------
Net interest income before provision for loan loss 8,104,741 2,772,809 10,877,550
Provision for loan loss 208,000 24,000 232,000
----------------- ----------------- -----------------
Net interest income 7,896,741 2,748,809 10,645,550
Non-interest income 3,278,034 236,592 3,514,626
Non-interest expense 8,360,043 1,377,843 9,737,886
----------------- ----------------- -----------------
Income before provision for income taxes 2,814,732 1,607,558 4,422,290
Provision for income taxes 759,500 593,700 1,353,200
----------------- ----------------- -----------------
Net income $2,055,232 $1,013,858 $3,069,090
================= ================= =================
OTHER DATA:
Weighted average shares outstanding 2,408,278 406,875 3,652,885
Earnings per share, basic $0.85 $2.50 $0.84
Total shares outstanding 3,164,920 406,875 4,409,527
less: ESOP unallocated shares (455,824) - (455,824)
----------------- ----------------- -----------------
Adjusted shares outstanding 2,709,096 406,875 3,953,703
Book value per share $6.85 $16.66 $6.40
Efficiency ratio 73% 46% 67%
Total shareholders' equity to total assets 9.69% 12.82% 10.37%
Return on average assets 1.18% 1.93% 1.35%
Return on average equity 13.42% 15.50% 14.04%
</TABLE>
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<PAGE>
SELECTED HISTORICAL AND
PRO FORMA CONDENSED FINANCIAL STATEMENTS
(unaudited)
<TABLE>
<CAPTION>
As of and for the three months ended March 31, 1997:
---------------------------------------------------------------
SBHC PSB Combined
----------------- ----------------- -----------------
BALANCE SHEET:
<S> <C> <C> <C>
Net loans $98,081,369 $29,888,760 $127,970,129
Investments, net 83,356,530 19,336,071 102,692,601
----------------- ----------------- -----------------
Total earning assets 181,437,899 49,224,831 230,662,730
Other assets 15,831,687 2,909,258 18,740,945
----------------- ----------------- -----------------
Total assets $197,269,586 $52,134,089 $249,403,675
================= ================= =================
Deposits $152,576,705 $44,679,344 $197,256,049
Borrowings 24,469,188 - 24,469,188
----------------- ----------------- -----------------
Total costing liabilities 177,045,893 44,679,344 221,725,237
Other liabilities 1,016,710 525,983 1,542,693
----------------- ----------------- -----------------
Total liabilities 178,062,603 45,205,327 223,267,930
Minority interest in subsidiary 930,170 - 930,170
Shareholders' equity:
Common stock 15,848,276 406,875 22,071,313
Surplus 1,105,460 5,093,125 382,423
Retained earnings 3,367,470 1,433,156 4,800,626
Unearned ESOP (1,717,906) - (1,717,906)
Unrealized gain on investments, net of tax (326,487) (4,394) (330,881)
----------------- ----------------- -----------------
Total shareholders' equity 18,276,813 6,928,762 25,205,575
Total liabilities, minority interest and equity $197,269,586 $52,134,089 $249,403,675
================= ================= =================
INCOME STATEMENT:
Interest income $3,594,673 $1,025,681 $4,620,354
Interest expense 1,523,319 356,649 1,879,968
----------------- ----------------- -----------------
Net interest income before provision for loan loss 2,071,354 669,032 2,740,386
Provision for loan loss 68,500 7,000 75,500
----------------- ----------------- -----------------
Net interest income 2,002,854 662,032 2,664,886
Non-interest income 732,463 57,948 790,411
Non-interest expense 2,206,389 358,472 2,564,861
----------------- ----------------- -----------------
Income before provision for income taxes 528,928 361,508 890,436
Provision for income taxes 158,400 126,792 285,192
----------------- ----------------- -----------------
Net income $370,528 $234,716 $605,244
================= ================= =================
OTHER DATA:
Weighted average shares outstanding 2,713,756 406,875 3,958,363
Earnings per share, basic $0.14 $0.58 $0.15
Total shares outstanding 3,169,655 406,875 4,414,262
less: ESOP unallocated shares (455,824) - (455,824)
----------------- ----------------- -----------------
Adjusted shares outstanding 2,713,831 406,875 3,958,438
Book value per share $6.73 $17.03 $6.37
Efficiency ratio 79% 49% 73%
Total shareholders' equity to total assets 9.26% 13.29% 10.11%
Annualized return on average assets 0.79% 1.81% 1.01%
Annualized return on average equity 8.07% 13.89% 9.63%
</TABLE>
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<PAGE>
SELECTED HISTORICAL AND
PRO FORMA CONDENSED FINANCIAL STATEMENTS
(Unaudited)
<TABLE>
<CAPTION>
As of and for the three months ended March 31, 1996:
---------------------------------------------------------------
SBHC PSB Combined
----------------- ----------------- -----------------
BALANCE SHEET:
<S> <C> <C> <C>
Net loans $82,818,204 $28,134,799 $110,953,003
Investments, net 72,572,238 20,820,990 93,393,228
----------------- ----------------- -----------------
Total earning assets 155,390,442 48,955,789 204,346,231
Other assets 10,616,703 2,072,635 21,689,338
----------------- ----------------- -----------------
Total assets $166,007,145 $51,028,424 $217,035,569
================= ================= =================
Deposits $133,229,648 $44,030,041 $177,259,689
Borrowings 17,913,126 0 17,913,126
----------------- ----------------- -----------------
Total costing liabilities 151,142,774 44,030,041 195,172,815
Other liabilities 1,230,781 521,359 1,752,140
----------------- ----------------- -----------------
Total liabilities 152,373,555 44,551,400 196,924,955
Minority interest in subsidiary - - -
Shareholders' equity:
Common stock 13,811,350 406,875 20,034,387
Surplus 82,928 5,093,125 -
Retained earnings 1,826,240 883,315 2,069,446
Unearned ESOP (1,917,114) - (1,917,114)
Unrealized gain on investments, net of tax (169,814) 93,709 (96,105)
----------------- ----------------- -----------------
Total shareholders' equity 13,633,590 6,477,024 20,110,614
Total liabilities, minority interest and equity $166,007,145 $51,028,424 $217,035,569
================= ================= =================
INCOME STATEMENT:
Interest income $3,136,050 $1,045,936 $4,181,986
Interest expense 1,265,774 361,825 1,627,599
----------------- ----------------- -----------------
Net interest income before provision for loan loss 1,870,276 684,111 2,554,387
Provision for loan loss 45,000 - 45,000
----------------- ----------------- -----------------
Net interest income 1,825,276 648,111 2,509,387
Non-interest income 666,352 63,144 729,496
Non-interest expense 1,974,607 362,623 2,337,230
----------------- ----------------- -----------------
Income before taxes 517,021 384,632 901,653
Provision for income taxes 155,000 141,600 296,600
----------------- ----------------- -----------------
Net income $362,021 $243,032 $605,053
================= ================= =================
OTHER DATA:
Weighted average shares outstanding 2,189,139 406,875 3,433,746
Earnings per share, basic $0.17 $0.60 $0.18
Total shares outstanding 2,762,270 406,875 4,006,877
less: ESOP unallocated shares (522,471) 0 (522,471)
----------------- ----------------- -----------------
Adjusted shares outstanding 2,239,799 406,875 3,484,406
Book value per share $6.09 $15.92 $5.77
Efficiency ratio 78% 49% 71%
Equity to total assets (GAAP capital) 8.21% 12.69% 9.27%
Annualized return on average assets 0.89% 1.88% 1.13%
Annualized return on average equity 10.34% 15.21% 11.87%
</TABLE>
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<PAGE>
INFORMATION ABOUT PACIFIC STATE BANK
General
Pacific State Bank is an Oregon commercial bank incorporated in
November, 1962, as Pacific Security Bank. The bank adopted its current name in
1989, and conducts business from a single office in Reedsport, Oregon. The
bank's deposits are insured by the FDIC. As of March 31, 1997, the bank had
total assets of $52.1 million, net loans of $29.9 million, and total deposits of
$44.7 million.
PSB offers commercial and personal banking services to residents and
businesses in western Douglas County and northern Coos County. The bank, with a
staff consisting primarily of long-time residents of the area, has successfully
created the image of a high quality, local institution that responds to the
banking needs of its customers. Consequently, the bank has approximately 64% of
the deposits in its market area, compared to 34% for the only other bank in
Reedsport, and approximately 2% held by credit unions.
The bank's primary service area around Reedsport has, like other
communities on the central and southern Oregon coast, experienced relatively
slow population growth. The primary industries on which the economy has been
dependent have changed over the past ten years from commercial fishing, timber
and wood products to tourism and services supporting the growing population of
retired persons. Retirement income currently constitutes approximately 46% of
the region's personal income.
Results of Recent Operations
The bank's business consists primarily of attracting deposits from the
public and originating commercial, consumer and real estate loans. The bank
derives its income primarily from the difference between the interest it earns
on loans and other investments and the interest it pays to obtain deposits. In
addition, the bank generates non-interest income from fees charged in connection
with the origination of loans and other services it provides to its customers.
For the year ended December 31, 1996, the bank earned $1,013,858 in net
income, an increase of 8.0% from the prior year. For the three months ended
March 31, 1997, the bank earned approximately $235,000 in net income, a decrease
of approximately $8,000 or of 3.4% from the year earlier period. This decrease
was primarily a result of the bank beginning to accrue for loan loss allowance
on a monthly basis beginning on January 1, 1997, whereas prior to that date, the
loan loss allowance was accrued annually in the fourth quarter. Consequently, in
the three months ended March 31, 1996, no allowance for loan losses was
reflected in the financial statements for that period. If a loan loss allowance
had been made in the 1996 period, net income in the 1997 period would have been
down less than 1.0% from 1996. Generally, the growth in net income is a result
of careful management of operating costs in a low-growth economic environment,
and from a conservative lending policy to limit loan losses. The bank
experienced no loan losses in 1996, and its loan losses have averaged
approximately 0.03% of total assets over the past five years.
Deposits
The following table sets forth the average deposit liabilities of and
the rates paid by the Bank for the year ended December 31, 1996:
Average Balance Average Rate Paid
Non interest-bearing demand $ 6,230,407 n/a
Interest-bearing demand 5,783,682 1.29%
Savings 15,450,501 2.95%
Time 17,621,541 5.1 %
Total deposits $45,086,131
===========
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<PAGE>
Of the time deposits listed above, the deposits of $100,000 or more had the
following times remaining to maturity:
Balance at
December 31, 1996
Remaining maturity:
less than 3 months $ 528,901
3-6 months 1,106,999
6-12 months 233,536
over 12 months 353,656
Total deposits $100,000 or more $2,223,092
=========
Loan Portfolio
The bank's lending policies focus on an assessment of each borrower's
ability to repay the loan, and the availability and quality of the collateral
used to secure the loan. The bulk of the bank's loan portfolio consists of loans
secured by real estate for the purchase and/or development of commercial and
residential properties. The following table sets forth the composition of the
bank's loan portfolio by type of loan as of March 31, 1997:
<TABLE>
<CAPTION>
Percent of
(dollars in thousands) Amount Total Loans
<S> <C> <C>
Commercial 8,960,146 31.0%
Consumer 4,017,336 14.0%
Real Estate 16,181,619 55.0%
---------- -----
Total Loans 29,159,101 100.00
======
</TABLE>
With the bank's primary lending focus on commercial, real estate and
consumer loans, risk is generally correlated with the health of the business
community. Risk is mitigated by monitoring the financial condition of the bank's
loan customers and by maintaining adequate collateral. Accrual of interest on
loans is discontinued when reasonable doubt exists as to the collectibility of a
loan or the unpaid interest, or when payment of principal or interest is
contractually 90 days past due, unless the loan is well secured or in the
process of collection. Upon such discontinuance of accruals, the loan is placed
on non-accrual status, and any accrued but unpaid interest is charged against
income in that period. At March 31, 1997, non-accrual loans totaled $15,663 and
loans past due were $173,864.
Investment Securities
The bank, as required, classifies its investment securities as trading
securities, held-to-maturity, or available-for-sale, based on management's
intent as to the ultimate disposition of each security. All securities held in
the bank's investment portfolio are considered available-for-sale securities.
Unrealized gains and losses on available-for-sale securities are excluded from
earnings, and are reported as a separate component of stockholders' equity. The
following table sets forth certain information concerning the bank's investment
portfolio:
The following table shows the amortized costs, estimated market values,
unrealized gains and unrealized losses of the bank's portfolio of investments as
of March 31, 1997:
<TABLE>
<CAPTION>
Estimated
March 31, 1997: Amortized Market Unrealized Unrealized
(dollars in thousands) Cost Value Gains Losses
-------------- ------------ ------------ ----------
<S> <C> <C> <C> <C>
U.S. Government & federal agencies $ 500,000 $ 498,125 $ -0- $ (1,875)
Mortgage-backed securities -0- -0- -0- -0-
United States Treasury 16,959,088 16,974,062 14,981 -0-
Corporate obligations -0- -0- -0- -0-
Obligations of state and political subdivisions 1,202,477 6,184,977 -0- (17,500)
U.S. federal securities mutual bond funds -0- -0- -0- -0-
----------- ------------- ---------- -------
Total $18,661,558 $18,657,164 $14,981 $(19,375)
=========== ============= ========== =========
</TABLE>
-30-
<PAGE>
<TABLE>
<CAPTION>
Estimated
December 31, 1996: Amortized Market Unrealized Unrealized
(dollars in thousands) Cost Value Gains Losses
<S> <C> <C> <C> <C>
U.S. Government & federal agencies $ 500,000 $ 503,906 $ 3,906 $ -0-
Mortgage-backed securities -0- -0- -0- -0-
United States Treasury 16,947,952 17,066,563 118,611 -0-
Corporate obligations -0- -0- -0- -0-
Obligations of state and political subdivisions 843,782 849,875 6,093 -0-
---------- ---------- ------- --------
Total $18,291,734 18,420,344 128,610 -0-
========== ========== ======= ========
</TABLE>
Return on average equity for the year ended December 31, 1996, was
15.45%, and return on average assets for the same period was 1.94%. Management
believes that the success of the bank, despite a lack of overall growth in the
population and economy of its market area, is largely a consequence of a
conservative banking practices and the experience of management.
Until 1995, the bank had the same president since 1963. The current
president, R.T. Green, joined the bank in 1993 and assumed the position of Chief
Executive Officer in 1995. Prior to that time, Mr. Green served as Executive
Vice President and Loan Administrator for SBHC, positions he held for six of the
18 years he was employed at SBHC.
Securities Ownership by Management and Certain Beneficial Owners
The following table sets forth information as of June 30, 1997, with
respect to (i) each director and executive officer of the bank, and (ii) the
shares owned by all directors and executive officers as a group:
<TABLE>
<CAPTION>
Number of Shares Percent of Total
Name Beneficially Owned(1) Outstanding Shares
- ---- ------------------ ------------------
<S> <C> <C>
R.T. Green 23,195 2,3 5.70%
Christy L. Schafer 670 3 *
Terry A. King 726 3 *
Robert Fullhart 2,585 3 *
Albert E. Lewis 2,385 3 *
Louis Lorenz 8,260 3 2.03%
David Morgan 3,575 3 *
Gretchen McNeff 160 3 *
Thomas S. Tymchuk 8,840 3 2.17%
Gary L. Waggoner 1,865 3 *
------
All Directors and Executive Officers 52,261
as a Group (10 persons) ====== 12.84%
1 Beneficial ownership includes sole voting and investment power as to the
shares, unless otherwise indicated.
2 Includes 22,840 shares held by the bank's Profit Sharing Plan, of which
Mr. Green is a trustee.
3 Includes shares held by or jointly with spouse.
</TABLE>
Legal Proceedings
The bank is from time to time involved in routing litigation incident
to the operation of its business. Currently, no legal proceedings are pending or
threatened involving the bank.
-31-
<PAGE>
INFORMATION ABOUT SECURITY BANK HOLDING COMPANY
Business
General
SBHC, incorporated in 1981, is a multi-bank holding company registered
under the Bank Holding Company Act of 1956. The administrative office of SBHC is
located in Coos Bay, Oregon. SBHC 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. SBHC
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, in 1996, SBHC 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, SBHC's
return on average equity has exceeded 13% for the past five years and return on
average assets was 1.18% in 1996 and 1.26% in 1995. At March 31, 1997,
consolidated total assets were $197.3 million, net loans were $98.1 million and
deposits were $152.6 million.
SBHC has enjoyed this growth and performance from its primary markets
of Coos and Curry Counties. 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. SBHC 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, SBHC 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 has opened mortgage banking offices in
Eugene and Bend, Oregon and is currently preparing to open an office in
Portland. In addition, SBHC continued to expand its market by replicating the
successful strategy used by Security Bank through its investment in Lincoln
Security. The proposed Merger will further enhance SBHC's market presence on the
Oregon coast, while retaining the image as a local provider of financial
services.
SBHC competes 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 SBHC. In order to compete
effectively, SBHC's subsidiary banks attempt 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. Through its subsidiary community banks, SBHC is
able to offer loan and deposit products specifically designed for the markets
served by each subsidiary. 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. It is
anticipated that SBHC would extend such products and services in the Reedsport
area following the acquisition of PSB.
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
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<PAGE>
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 rebound of the population generally and 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 1997 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 $121.0 million in individual, partnership and corporate deposits
as of December 31, 1996, representing 16.4% of such deposits held by commercial
bank, savings and loan association and credit union offices located in the
county, up from 10.5% in 1990. In Curry County, Security Bank held approximately
$16.4 million in individual, partnership and corporate deposits as of December
31, 1996, 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 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. 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.
SBHC facilitated the organization of Lincoln Security by purchasing
210,390 shares of Lincoln Security's Class B common stock, representing
approximately 68% 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, SBHC has the right under certain
circumstances to acquire all of the then outstanding shares of Lincoln Security
Class A common stock. If SBHC were to acquire the Class A common stock in an
exchange for newly issued securities of SBHC, such a transaction would likely
cause little or no dilution to existing shareholders of SBHC. SBHC 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.
-33-
<PAGE>
As a result of the ownership of a majority of Lincoln Security's
outstanding common stock, SBHC is able to control any corporate decisions
requiring approval of Lincoln Security shareholders. At this time, Mr. Brummel,
President and Chief Executive Officer of SBHC, and Kenneth Messerle, a director
of SBHC, are serving on the Board of Directors of Lincoln Security, with balance
of the Board of Directors being Lincoln County residents. SBHC 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, SBHC 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 will
have the same community commitment and ties that distinguish Security Bank from
its larger statewide competitors. Although currently SBHC has only two
representatives on Lincoln Security's Board of Directors, SBHC expects to
continue to influence major decisions made by the Board. Further, it is
anticipated that the Lincoln Security's management will continue to look to SBHC
and Security Bank for guidance in managing the administrative affairs of the
bank. Nonetheless, Lincoln Security officers oversee day-to-day operations of
the bank without significant involvement of SBHC. As of March 31, 1997, Lincoln
Security had total assets of $18.5 million, total loans of $6.6 million and
total deposits of $15.5 million.
Business Strategy
SBHC seeks to achieve growth in its earning assets, while maintaining a
strong return on equity. The strategy for accomplishing those goals is based
upon:
o Personalized Customer Service
o Development of Innovative Products
o Expanding into new Geographic Markets
Personalized Customer Service. SBHC's banking subsidiaries 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, SBHC maintains an
Employee Stock Ownership Plan in which all employees are eligible to
participate. The Plan enables employees to become shareholders of SBHC and share
a common interest with other shareholders. Thus, employees' efforts to improve
SBHC's performance provide an economic benefit to them through potential
increases in the value of their share ownership. SBHC also has established a
stock option plan for senior management personnel. See "Management - Other
Benefit Plans."
Innovative Products. SBHC 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 example, specially
designed deposit and insurance products for the population over age fifty-five,
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
-34-
<PAGE>
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. SBHC 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 opened mortgage loan offices in
Eugene and Bend, Oregon, and expects to open an office in Portland by the end of
1997.
Prior to the organization of Lincoln Security, SBHC had considered
expanding its market geographically through acquisitions or the opening of
branch offices of Security Bank in coastal communities north of its existing
market area. SBHC believed, and continues to believe, however, that retaining a
community bank identity is crucial to Security Bank's and SBHC's success, and
that branching beyond the existing market would pose some risk to Security
Bank's image as a local bank. SBHC believes that organizing new community banks
in cooperation with local business people provides opportunities for expansion
while retaining the benefits of being identified as a local community bank. The
same principle applies to the proposed Merger.
SBHC's investment in Lincoln Security is a unique approach to partner
with investors in a new market area, and reflects SBHC'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. SBHC is currently investigating other communities that might present
attractive opportunities to organize new community banks on a basis similar to
that of Lincoln Security.
SBHC's growth strategy can be further seen in a proposed spin-off of
the Brookings-Harbor branch of Security Bank as a separate wholly-owned
subsidiary bank of SBHC. This spin-off is intended to permit that branch to
expand its local market share by being the local community bank, rather than
simply a branch of another out-of-town financial institution. The spin-off has
not yet been approved by federal and state regulators, and is not expected to be
completed before autumn of 1997. At that time, it will operate as a separate
bank with its own directors and executive officers, with some representation by
SBHC directors, similar to the anticipated agreement with PSB.
Economic Conditions and Demographics
SBHC and its subsidiary banks primarily receive deposits and make loans
in Coos, Curry and Lincoln Counties of Oregon. As community banks, they have
certain competitive advantages in their local focus, but 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 population of approximately 62,100 in 1995, while the
population of Curry County was approximately 22,200. 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
1995. Curry County, while also suffering high
-35-
<PAGE>
unemployment, has recovered, and is growing at faster rate. The population of
Curry County grew 12.9% between 1990 and 1995. 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 influx of
retirees, particularly into Curry County. With these population shifts, a high
percentage of personal income comes from sources other than net earnings, 56% in
Curry County and 45% in Coos County in 1993, the latest year for which such data
is 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. 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.
Lincoln County
Lincoln County, the market served by Lincoln Security, 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 41,000 in 1994, approximately a 16% 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 SBHC and its subsidiaries are
highly competitive with respect to both deposits and loans. SBHC competes
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
79.5% of statewide commercial and savings bank deposits as of March 31, 1997.
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 SBHC does not offer.
SBHC's 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 SBHC can offer. 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, SBHC competes
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<PAGE>
for deposits by offering a variety of deposit accounts at rates generally
competitive with similar financial institutions in the area.
SBHC's competition for loans comes principally from commercial banks,
savings and loan associations, mortgage companies, finance companies, insurance
companies, and other institutional lenders. Many of its competitors have
substantially higher lending limits than those of SBHC's subsidiaries,
individually or in the aggregate. SBHC competes 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, SBHC and its subsidiaries 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
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. SBHC'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. SBHC is currently taking steps to create a
separate, wholly-owned subsidiary bank from this branch.
Mortgage Lending Offices. Security Bank has mortgage lending offices
located at 200 East 11th Avenue, Suite 14A, Eugene, Oregon and at 2106 N.E. 4th
St., Bend, Oregon. The offices are leased under a lease agreements which expire
October 14, and October 31, 1998, respectively.
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<PAGE>
Lincoln Security Bank. Lincoln Security's principal office is located
at 1250 North Coast Highway in Newport, Oregon, in a facility owned by the bank
and 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.
In addition to the above properties, SBHC owns two vacant parcels of
land for future development as branch offices. One parcel, in North Bend, will
be a new branch office to replace the current North Bend branch. The other
parcel, in Coos Bay, will eventually be a branch office to replace the Bunker
Hill mall branch.
Employees
As of March 31, 1997, SBHC and its subsidiaries had a total of 125
full-time equivalent employees. None of the employees of SBHC or its
subsidiaries are subject to a collective bargaining agreement. SBHC and its
subsidiaries consider their relationships with their employees to be good.
Legal Proceedings
SBHC's subsidiary 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 SBHC or the banks, which, if
determined adversely, would have a material effect on the business or financial
position of SBHC or the banks.
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<PAGE>
MANAGEMENT
Directors and Executive Officers
The following sets forth information regarding the directors and executive
officers of SBHC, and those persons currently serving as directors or executive
officers of PSB who would become directors or executive officers of SBHC
following the Merger.
Charles D. Brummel, age 58, serves as Chairman of the Board of Directors,
President and Chief Executive Officer of SBHC, and is a director and the Chief
Executive Officer of its principal subsidiary, Security Bank, where he has been
employed since 1971, and is a directors of Lincoln Security. 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.
Mr. Brummel is also a director of BancInsure and Chairman of OBA Insurance
Agency.
Michael J. Delvin, age 49, joined SBHC and Security Bank in 1992 as VP/Loan
Administrator. He was promoted to Executive Vice President in 1994 and Chief
Financial Officer. Delvin was previously employed by First Interstate Bank since
1972. He serves as Chairman of OBA Services, Inc., a for-profit subsidiary of
the Oregon Bankers Association.
R.T. Green, age 59, serves as Director, President and Chief Executive
Officer of PSB, a position he has held since 1995. Prior to that time he was in
retirement from the position of Vice President and Loan Administrator at
Security Bank, positions he held from 1986 to 1992. Mr. Green has over 35 years
of banking experience.
Ronald C. LaFranchi, age 44, serves as Director of SBHC. Mr. LaFranchi is
the owner of Ron's Oil, a chain of independently owned, name brand retail
gasoline stations he started in 1976. He presently operates 17 stations located
throughout Oregon as well as a propane gas division which serves in excess of
700 predominately retail customers. He serves on SBHC's Audit and Nominating
Committees.
William A. Lansing, age 50, serves as a Director of SBHC. Mr. Lansing is
President of Menasha Corporation, in North Bend, Oregon, where he has been
employed since 1970. Lansing serves on SBHC's Growth and Nominating Committees
and is Chairman of the Compensation and Benefits Committee.
Kenneth C. Messerle, age 57, a Director, is a State Representative in the
Oregon Legislature. He serves on Security Bank's Loan and Growth Committees and
is Chairman of the Audit Committee. Mr. Messerle also serves on the board of
directors of Lincoln Security Bank.
Glenn A. Thomas, age 55, a Director, 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, Growth
Committees.
In addition to the above, one director of PSB will be appointed to the SBHC
Board as of the Effective Date but, of this Prospectus/Proxy statement, no
determination has been made as to who this director will be.
Directors serve for a three-year terms. As part of a re-alignment of the
management of SBHC and its subsidiary banks, and to reduce the size of the SBHC
Board from ten to seven directors, Thomas Graham, Ralph Gazeley, Kathleen
Kerins, Donald Goddard, Harry Slack and Samuel Dement recently resigned from the
SBHC Board, although they continue to serve on Security Bank's Board of
Directors. With the exception of Mr. Brummel, who continues to serve on the
Boards of Directors of Security Bank, Lincoln Security and SBHC, directors of
SBHC who had served on Security Bank's Board of Directors have resigned from
their bank board positions to concentrate
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<PAGE>
on their duties to the SBHC Board of Directors. Ronald LaFranchi has been
appointed to fill one of the vacancies on the SBHC Board created by the
resignations, and R. T. Green, director, President and Chief Executive Officer
of PSB, and one other PSB director, will be appointed to fill the remaining two
positions currently vacant.
Director Compensation
Pursuant to the 1997 Directors Compensation Plan, directors of SBHC who are
not employees each receive $400 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 SBHC exceeds 10%, with the fair market value of the stock to
be issued to each director calculated according to a formula that takes into
account the number of meetings attended and the overall profitability of SBHC as
measured by total earnings above a threshold amount established by the return on
average equity.
Executive Compensation
The following table sets forth compensation earned for the fiscal year
ended December 31, 1996 by each executive officer of SBHC receiving over
$100,000 of total compensation during such year:
<TABLE>
<CAPTION>
Other (1) Total
Name and Principal Position Salary Bonus Compensation Compensation
<S> <C> <C> <C> <C>
Charles D. Brummel $125,573 $62,700 $ 4,787 $193,060
President/Chief Executive Officer
Michael J. Delvin $83,183 $36,263 __ $119,446
Executive Vice President
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(1) Consisting of company-provided auto.
</TABLE>
Incentive Cash Bonus Plan. The Board of Directors of SBHC 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. The size of the total incentive is determined by a formula based upon
the earnings of the Company with a threshold level of return on equity of 10%.
The two named officers received 50% and 30%, respectively, of this total
during 1996.
Phantom Stock Deferred Compensation Plan. As of January 1, 1996, SBHC
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. 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,
SBHC has agreed to pay him additional compensation should his employment be
terminated under certain conditions. The severance agreement
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<PAGE>
is effective only if Mr. Brummel's employment is involuntarily terminated in
connection with the merger or sale of Security Bank and/or SBHC, or if he elects
to terminate his employment within one year of a merger or sale. In the event of
such a termination, SBHC 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
deferred portion of any annual bonus, and the pro rata portion of any unpaid
bonus. If the severance agreement had been triggered as of March 31, 1997, Mr.
Brummel would have been entitled to a payment of $140,423.
Other Benefit Plans
General. SBHC 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. SBHC 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 SBHC or a subsidiary for at least six months and elect to contribute
2% to 10% of the employee's total compensation. SBHC has in the past matched a
portion of each participant's contributions, but does not do so currently.
Interests in SBHC'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. SBHC 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 SBHC.
The purpose of the plan is to advance the interests of SBHC and its
shareholders by enabling SBHC to attract and retain the services of people with
training, experience and ability and to provide additional incentive to key
employees and directors of SBHC by giving them an opportunity to participate in
the ownership of SBHC.
The Plan reserves 276,000 shares of SBHC'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 March 31, 1997, 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.
The following table sets forth information regarding outstanding options:
<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, SBHC 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
SBHC's performance and instill an "ownership" commitment to SBHC.
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<PAGE>
Directors Compensation Plan. In March, 1997, SBHC adopted a compensation
plan for non-employee directors under which each director is entitled to
received $400 for each regular and special meeting of the Board of Directors and
$100 for each committee meeting. In addition, each directors is entitled to
receive incentive compensation, payable in shares of SBHC common stock, based on
the profitability of SBHC as measured by net income in excess of an established
threshold of return on average equity, up to a maximum of $10,000 per directors.
Employee Stock Ownership Plan. SBHC 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
SBHC. 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 SBHC 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 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 March 31, 1997, the total ESOP indebtedness, all of which is owed to
SBHC, equalled $2,028,289, and the ESOP trust held a total of 978,728 shares of
SBHC's common stock, or 30.88% of the total number of shares outstanding. Of
those shares, 522,904 (16.5% of total outstanding) have been allocated to
participant accounts. The remaining 455,824 shares (14.4% 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.
SBHC accounts for its ESOP loan in accordance with SOP 93-6 issued by the
American Institute of Certified Public Accountants. The ESOP indebtedness to
SBHC is not recorded on the balance sheet of SBHC as assets. In order to account
for the unallocated shares acquired at the time of these loans (shares held in
the collateral account), SBHC'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 SBHC on
ESOP shares may be used by the ESOP to pay debt services on loans due to SBHC.
Dividends paid on unallocated shares do not directly affect SBHC'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, SBHC 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, SBHC'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 SBHC'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 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 SBHC's equity since the contributions are invested in
Company stock.
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<PAGE>
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. To alleviate the
adverse effect of the ESOP indebtedness caused by the recent increase in market
value of SBHC common stock, SBHC has requested a private letter ruling from the
Internal Revenue Service to amend the repayment schedule, thereby reducing the
compensation expense associated with the release of unallocated shares. No
assurance can be made that SBHC will be successful in obtaining a favorable
ruling from the Internal Revenue Service, and failure to do so may have an
adverse effect on the market value of SBHC shares.
Related Transactions With Directors and Officers
Some of the directors and officers of SBHC and its subsidiaries, 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 March 31, 1997, the
aggregate outstanding amount of all loans to officers and directors was
approximately $1,815,000, which represented approximately 9.9% of SBHC's
consolidated shareholders' equity at that date. All such loans are currently in
good standing and are being paid in accordance with their terms.
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<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth as of the Record Date the shares of common
stock beneficially owned by all of the directors and officers of SBHC. As of
that date there were 3,169,700 shares of SBHC's Common Stock issued and
outstanding. All shares are held directly unless otherwise indicated.
<TABLE>
<CAPTION>
Name(1) Number of Shares Percent of Class
<S> <C> <C>
Charles D. Brummel (Director/Officer)(2) 73,337(2) 2.3%
Michael J. Delvin (Officer)(3) 18,933(3) *
William A. Lansing (Director)(4) 17,784(4) *
Ronald C. LaFranchi (Director) (5) 633,646(5) 20.0%
Kenneth C. Messerle (Director)(6) 4,143(6) *
Glenn A. Thomas (Director)(8) 4,037(7) *
All Directors and Executive Officers as a Group (6 751,880(2-7) 23.4%
persons)
- --------------------
* Less than 1.0%
(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 42,712 shares held in the ESOP (364 of which shares are held by Mr.
Brummel's spouse who is also an employee of Security Bank). Also includes 27,600
share covered by stock options exercisable with 60 days.
(3) Michael J. Delvin holds 7,893 shares in the ESOP, 4,735 of which have
been vested as of this date.
(4) William A. Lansing's shares are held jointly with his spouse.
(5) Includes 12,000 shares held in a custodial capacity for the benefit of
minor children.
(6) Kenneth C. Messerle's holdings include 4,065 shares held jointly with
his spouse and 78 shares held jointly with his grandchildren.
(7) Glenn A. Thomas' shares are held jointly with his spouse.
</TABLE>
As of the Record Date the only person other than those named above known to
own more than 5% of SBHC's Common Stock is the ESOP, which owned 978,728 shares
or 30.88% of the total shares outstanding. That number includes 455,824 shares
held of record by the ESOP which are not allocated to employees and are pledged
to secure repayment of indebtedness to SBHC. Trustees of the Trust are appointed
by the Board of Directors of SBHC 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 of
Security Bank.
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<PAGE>
SBHC MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following summary financial data and the discussion and analysis should be
read in conjunction with the SBHC's unaudited consolidated financial statements
and the notes thereto for the three months ended March 31, 1997, and SBHC's
audited consolidated financial statements and the notes thereto for the years
ended December 31, 1996 and 1995. The consolidated entity includes SBHC,
Security Bank, Lincoln Security Bank, and Security Bank's wholly-owned
subsidiaries, Alland, Inc. and Security Financial Insurance Agency. The results
of operations for SBHC 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 SBHC during the next twelve
months, and economic and demographic changes in SBHC's market areas.
For the Quarter ended March 31, 1997 and 1996
Results of Operations
The operating results of SBHC depend primarily on its net interest income.
SBHC'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. SBHC'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.
General. Net income increased to $371,000 for the three months ended March 31,
1997 from $362,000 for the same period of 1996, a 2.5% increase. The increase in
both interest expense and other expense were offset by increases in interest
income and other income. The increase in net income is mostly attributable to an
increase in net earning assets over the same period in 1996.
Net Interest Income. Net interest income before the provision for loan losses
increased $210,000 or 11.1% for the three months ended March 31, 1997 over the
same period in 1996. The increase in interest income was primarily due to $28.5
million or 19.1% increase in average interest-earning assets for the three
months ended March 31, 1997 over the same period in 1996. The increase in
average interest-earning assets was mostly attributable to an increase in
investment securities of $18.4 million, which accounted for $303,000 of the
total increase in interest income, and an increase in loans of $13.5 million,
which accounted for $343,000 of the total increase in interest income. Average
interest-bearing liabilities increased $26.4 million or 18.3% for the three
months ended March 31, 1997, compared to the same period in 1996. The increase
accounted for $285,000 of the total increase in interest expense.
Provision for Loan Losses. The loan loss provision during the three month period
ended March 31, 1997, was $68,500 compared to $45,000 for the same period in
1996. Net charge-offs during the three month periods were $37,000 and $12,000
for 1997 and 1996, respectively. The increase in loan loss provision includes
$13,500 for Lincoln Security, which commenced operations in May, 1996.
Management believes the loan loss provision maintains the reserve for loan
losses at an appropriate level. The reserve for loan losses was $1,150,000 at
March 31, 1997, as compared to $1,096,000 at March 31, 1996. SBHC's ratio of
reserve for loan losses to total loans was 1.16% at March 31, 1997, compared to
1.30% at March 31, 1996.
Non-performing assets (defined as loans on non-accrual status, 90 days or more
past due, and other real estate owned) were $550,000 and $444,000 at March 31,
1997 and 1996, respectively. Management believes the loans are adequately
secured and that no significant losses will be incurred. The foregoing is a
forward-looking statement
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<PAGE>
and accordingly, no assurances can be made that the stated outcome will actually
occur. A downturn in the economy or an increase in interest rates could
adversely impact the value of the collateral securing the loans.
Other Income. Other income increased 9.9% to $732,000 for the three months ended
March 31, 1997 as compared to $667,000 for the same period in 1996. The increase
in other income is due primarily to an increase in service charges on deposit
accounts, resulting from an increase in total deposit balances. Loan servicing
fees have decreased approximately $12,000 from the first quarter of 1996,
resulting from a sale of the servicing portfolio in November, 1996. Given the
SBHC's acquisition of servicing through normal production, it is estimated that
loan servicing income will increase to fourth quarter 1996 levels within one
year. The foregoing is a forward-looking statement and accordingly, no
assurances can be made that the stated outcome will actually occur. A downturn
in the economy, or an increase in interest rates could adversely effect the
level of borrowing activity and decrease the amount of loan production.
Other Expense. Other expense increased 12% to $2,244,000 for the three months
ended March 31, 1997, compared to $2,004,000 for the same period in 1996. The
primary other expenses are salaries and the related employee benefits, and
expenses relating to occupancy and equipment. Salaries and employee benefits
were up due to increased staff levels and approximately $207,000 in additional
operating expenses associated with Lincoln Security, which, as discussed above,
commenced operations in May 1996.
Compensation expense associated with the Employee Stock Ownership Plan
(ESOP), a leveraged employee-retirement benefit plan which owns approximately
30.8% of the common stock of SBHC, has been adjusted in anticipation of a
restructuring of the related ESOP debt in fiscal 1997. The net result of this
adjustment is approximately $53,000 in lower compensation expense for the three
months ended March 31, 1997 as compared to the same period in 1996. ESOP
compensation expense is based upon the number of shares of stock released during
the year at the average share price during the year. Given the recent increase
in share price of the SBHC's stock, and given the planned retirement benefit
levels provided to the employees of SBHC, SBHC is in the process of
restructuring the related ESOP debt, which determines the total number of shares
released during the year. It is anticipated the ESOP debt will be extended past
its present maturity, thereby reducing ESOP related compensation expense
recorded by SBHC. The process of restructuring the ESOP debt will involve
obtaining a Private Letter Ruling (PLR) from the Internal Revenue Service.
Recently issued PLR's suggest the Company will be able to restructure the ESOP
debt. However, there can be no assurance the restructuring will be successful at
this time. Based on the original debt structure, and given the recent increase
in the price of SBHC's common stock, compensation expense for the first quarter
of 1997 would have been approximately $90,000 higher, for a total of $160,000,
compared to $123,000 for the first quarter of 1996.
Financial Condition
Total assets have continued to grow in 1997 as compared to the prior
periods. Total assets have grown 3% to $197.3 million at March 31, 1997,
compared to $191.4 million at December 31, 1996. The growth in assets in 1997
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 increased to 65% at March 31, 1997, compared to 64% at
December 31, 1996. Lincoln Security, opened in May 1996 in Newport, Oregon, had
total assets of $18.5 million and total deposits of $15.5 million as of March
31, 1997.
The growth in interest-earning assets has been predominantly in loans and
investment securities. Net loans and leases increased $4.1 million from December
31, 1996, to March 31, 1997. Investment securities increased $1.2 million as of
March 31, 1997, due to the continued growth in deposit funds and Federal Home
Loan Bank borrowings 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 Company.
Deposit growth continued for the three months ended March 31, 1997. Total
deposits increased $4.0 million to $152.6 million at March 31, 1997, compared to
$148.6 million at December 31, 1996. The growth in 1997 has been predominantly
in interest-bearing deposits. The ratio of interest-bearing deposits to total
deposits decreased slightly from 85.9% at December 31, 1996, to 85.6% at March
31, 1997.
-46-
<PAGE>
Security Bank is a member of the Federal Home Loan Bank of Seattle. This
membership allows Security Bank access to low cost, long-term funding otherwise
unavailable. Security Bank has utilized this funding, and in 1996 borrowed $5.5
million to support loan and investment growth. In the three months ended March
31, 1997, Security Bank has borrowed an additional $2.4 million, leaving the
balance at $19.4 million as of March 31, 1997.
Liquidity
Liquidity enables SBHC to meet the withdrawals of its depositors and the
borrowing needs of its loan customers. SBHC maintains its liquidity position
through maintenance of cash resources and a stable core deposit base. A further
source of liquidity is SBHC's ability to borrow funds. SBHC maintains three
unsecured lines of credit totaling $10.5 million for the purchase of funds on an
overnight basis. As discussed above, Security Bank is also a member of the
Federal Home loan Bank which provides a secured line of credit in the amount of
$35.7 million (20% of total assets), and other funding opportunities for
liquidity and asset/liability matching. Over the past four years these lines
have been used periodically. As of March 31, 1997 no funds were borrowed under
SBHC's unsecured lines of credit and $19.4 million were borrowed from the
Federal Home Loan Bank. Interest rates charged on the lines are determined by
market factors. In addition, SBHC has approximately $45 million in repurchase
agreement availability. SBHC's liquidity has been stable and adequate over the
past four years. Short-term deposits have continued to grow and excess
investable cash is loaned on a short term basis (federal funds sold). SBHC'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 SBHC'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%, a
minimum Tier 1 Capital Ratio of 4.00% and a minimum Leverage Capital Ratio of
3%. At March 31, 1997, SBHC had a Total Risk-based Capital Ratio of 16.52%, a
Tier 1 Capital Ratio of 15.58% and a Leverage Capital Ratio of 9.95%. This was
compared to 17.02%, 16.07% and 10.87% for total Risk-based Capital Ratio, Tier 1
Capital Ratio and Leverage Capital Ratio, respectively, at December 31, 1996. At
December 31, 1996, SBHC had a Risk-based Capital Ratio of 17.02% and Tier 1
Capital Ratio of 16.07%. This was compared to 13.12% and 12.13% for total
Risk-Based Capital and Tier 1 Capital, respectively, at December 31, 1995. If
SBHC were fully leveraged (i.e. if SBHC were at the minimum Risk-Based Capital
and Tier 1 Capital ratios), further growth would be restricted to the level
attainable through generation and retention of net income unless SBHC were to
seek additional capital from outside sources.
For the years ended December 31, 1996 and 1995
Results of Operations
General. Net income increased to $2.1 million for the year ended December
31, 1996 from $1.9 million for the same period in 1995, a 10.25% 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 $.6 million or 7.55% for the year ended December 31, 1996 over the
same period in 1995. The increase resulted from a $1.8 million increase in
interest income offset by a $1.2 million increase in interest expense. The
increase in interest income is due primarily to an increase in average earning
assets of $24.9 million or 18.23% for the year ended December 31, 1996, over the
same period in 1995. Although loans and investments continued to increase during
the year of 1996, 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 1996 over 1995. Average interest-bearing
liabilities increased $20.1 million or 17.29% for the year ended December 31,
1996, compared to the same period in 1995. The weighted average yields earned
were 8.48% and 8.75% for the years ended December 31, 1996 and 1995,
respectively. Average yields earned decreased 27 basis points or 3.09% for the
year
-47-
<PAGE>
ended December 31, 1996 compared to the same period in 1995. Average rates paid
were 4.09% and 3.79% for the years ended December 31, 1996 and 1995,
respectively. This represents an increase of 30 basis points or 7.92% for the
year ended December 31, 1996, compared to 1995.
Provision for Loan Losses. The loan loss provision increased during the year
ended December 31, 1996 to $208,000 as compared to $160,000 for the same period
in 1995. Net charge-offs during the years were $152,000 and $114,000 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 $1,119,000
at December 31, 1996, as compared to $1,063,000 at December 31, 1995. SBHC's
ratio of reserve for loan losses to total loans was 1.21% at December 31, 1996,
compared to 1.32% at December 31, 1995.
Non-performing assets (defined as loans 90 days or more past due, and other
real estate owned) were $490,000 and $467,000 at December 31, 1996 and 1995,
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 49.89% for the year ended
December 31, 1996 as compared to the same period in 1995. SBHC had a
nonrecurring sale of $683,000 of mortgage servicing rights in 1996, recognizing
a gain of $380,000. Service charges on deposit accounts were $931,000 in 1996,
compared to $853,000 in 1995, a 9.14% increase. Mortgage loan originations were
$62.6 million in the year ended December 31, 1996, up from $32.1 million for the
same period in 1995. Loans sold were $63.1 million and $30.9 million for the
years ended December 31, 1996 and 1995, respectively, generating $1,033,000 and
$611,000 of sold loan fee income during each respective period, an increase of
69.1% from 1995 to 1996. A strong refinance market supported mortgage
origination activity.
Non-Interest Expense. Non-interest expense increased 18.31% for the year ended
December 31, 1996, as compared to the year ended December 31, 1995, resulting
primarily from the addition of Lincoln Security. 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 increased 19.98% for
the year ended December 31, 1996 as compared to the same period in 1995. This
was primarily the result of an over-accrual of taxes in 1994, leading to a lower
tax provision in 1995.
Loan Losses and Recoveries. The provision for loan losses charged to operating
expense is based on SBHC'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 SBHC's reserve for loan
losses, and charge-off and recovery activity:
-48-
<PAGE>
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------
1996 1995
<S> <C> <C>
Loans outstanding at
end of period $92,226,100 $80,743,626
=========== ===========
Average loans
outstanding during the period $84,232,894 $77,922,578
=========== ===========
Reserve balance,
beginning of period $1,062,993 $1,016,770
Recoveries:
Commercial 28,015 --
Real estate 2,250 --
Installment 30,473 64,715
Credit card 2,571 6,666
----------- -----------
63,309 71,381
Loans Charged off:
Commercial (24,305) --
Real estate -- --
Installment (150,025) (156,017)
Credit card (41,108) (29,141)
-------- --------
(215,438) (185,158)
--------- ---------
Net loans charged off (152,129) (113,777)
Provision charged to operations 208,000 160,000
------- -------
Reserve balance, end of period $1,118,864 $1,062,993
========== ==========
Ratio of net loans charged off
to average loans outstanding (0.18)% (0.15)%
======= =======
</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 SBHC's customer base and the growth experienced in Coos, Curry and
Lincoln Counties, real estate is frequently a material component of collateral
for SBHC'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.
SBHC 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 SBHC. The commercial real estate risk is further
mitigated by making the majority of commercial real estate loans on
owner-occupied properties.
SBHC 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, SBHC 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.
-49-
<PAGE>
The following table presents information with respect to non-performing
assets:
<TABLE>
<CAPTION>
December 31,
--------------------
1996 1995
<S> <C> <C>
Loans on non-accrual status $490,000 $432,000
Loans past due greater than 90 days
but not on non-accrual status -- --
Other real estate owned, net -- 35,000
-- ------
Total non-performing assets $490,000 $467,000
======== ========
Percentage of non-performing
assets to total assets 0.26% 0.29%
</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
SBHC 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 SBHC's assessment at a point in time of perceived credit loss exposure
and the impact of current and anticipated economic conditions.
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------
Percent of Percent of
1996 Total loans 1995 Total loans
---- ----------- ---- -----------
<S> <C> <C> <C> <C>
Unclassified loans $664,543 94.40% $668,847 94.80%
Letters of credit 2,525 0.46% 2,542 0.53%
Credit cards 42,376 2.30% 38,511 2.39%
Watchlist 103,400 1.10% 85,900 0.81%
Substandard 292,300 1.71% 225,400 1.42%
Doubtful 13,720 0.03% 41,793 0.05%
Specific-reserve -- -- -- --
---------- --------- --------- ---------
$1,118,864 100.00% $1,062,993 100.00%
========== ========= ========== =========
</TABLE>
Analysis of Net Interest Income.
The following table presents information regarding yields on
interest-earning assets, expense on interest-bearing liabilities, and net yields
on interest-earning assets for the periods indicated (amounts in thousands,
except percentages):
<TABLE>
<CAPTION>
Analysis for the years ended
December 31, 1996 and 1995 1996 1995 Increase (Decrease) Change
- -------------------------- ---- ---- ------------------- ------
<S> <C> <C> <C> <C>
Average interest-earning assets $161,607 $136,688 $24,191 8.23%
Average interest-bearing liabilities $136,997 $116,803 $20,194 17.29%
Average yields earned 8.48% 8.75% (0.27)% (3.09)%
Average rates paid 4.09% 3.79% 0.30% 7.92%
----- ----- -----
Net interest spread 4.39% 4.96% (0.57)% (11.49)%
===== ===== =======
Net interest income to average
interest-earning assets 5.01% 5.51% (0.50)% (9.07)%
==== ==== ======
</TABLE>
-50-
<PAGE>
Analysis of Changes in Interest Differential
The following table sets forth the dollar amount of the increase (decrease)
in SBHC'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>
Year Ended December 31, 1996 over 1995
-----------------------------------------------------
Total Amount of Change
Increase Attributed to
(Decrease) Volume Rate Days
<S> <C> <C> <C> <C>
Interest income:
Federal funds sold $12,795 $30,363 ($17,865) $297
Time deposits-domestic financial institutions (39,187) (45,696) 6,343 166
Investment securities - taxable 1,136,257 1,092,115 37,745 6,396
Investment securities - exempt from
federal income taxes(1) (18,289) 7,788 (28,732) 2,655
Loans, net and mortgage loans held for sale 516,231 636,398 (142,373) 22,206
Net investment in direct financing leases 92,177 60,573 30,928 677
Dividend income on Federal Home Loan Bank stock 50,721 27,156 23,294 271
---------- ---------- --------- -------
Total interest income $1,750,705 $1,808,697 ($90,660) $32,668
---------- ---------- --------- -------
Interest expense:
Interest on deposits:
Interest-bearing demand 34,839 29,401 5,250 188
NOW accounts (32,145) (4,522) (28,356) 732
Money market accounts 149,593 104,676 43,620 1,297
Savings accounts (28,824) (30,442) 494 1,124
Time deposits 752,332 582,274 163,533 6,525
Securities sold under agreement to repurchase 38,024 37,524 85 415
ESOP debt (21,358) (19,430) (2,099) 171
Short term borrowings (1,553) 854 (2,471) 63
Federal Home Loan Bank borrowings 290,553 346,559 (57,591) 1,565
------- ------- -------- -----
Total interest expense $1,181,461 $1,046,894 $122,465 $12,080
---------- ---------- -------- -------
Net interest income $569,244 $761,803 ($213,125) $20,588
======== ======== ========== =======
(1) Interest income from investment securities exempt from federal income tax is
not reported on a tax equivalent basis.
</TABLE>
Financial Condition
Total assets continued to grow in 1996 as compared to the prior year.
Assets have grown 20.71% at December 31, 1996, compared to December 31, 1995.
The growth in 1996 is the result of increased deposits which were invested in
investment securities and loans. 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 63.97% at December 31, 1996, compared to 66.09% at
December 31, 1995.
The growth in interest-earning assets has been predominantly in loans and
investment securities. Net loans increased $10.9 million at December 31, 1996,
over the same period in 1995. 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, 1996.
Investment securities increased $19.2 million as of December 31, 1996, as
compared to the same period in 1995, due to the continued growth in deposit
funds available for investment. Federal funds sold, reflecting short term
(over-night) investments, decreased to $0 at December 31,
-51-
<PAGE>
1996. The level of federal funds sold fluctuates daily relative to loan demand,
deposit fluctuations and investment activity, and provides a source of liquidity
for SBHC.
Deposit growth continued for the years ended December 31, 1996 and 1995.
Total deposits increased $21.3 million at December 31, 1996, compared to
December 31, 1995. The growth in 1996 and 1995 has been predominantly in
interest-bearing deposits. The ratio of interest-bearing deposits to total
deposits increased slightly from 84.7% at December 31, 1995, to 85.9% at
December 31, 1996.
Security Bank is a member of the Federal Home Loan Bank of Seattle. This
membership allows Security Bank access to low cost, long-term funding otherwise
unavailable. Security Bank has utilized this funding, and in 1996 borrowed $5.5
million to support loan and investment growth, leaving the balance at $17.0
million as of December 31, 1996.
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 December 31, 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, SBHC'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. In the
event interest rates rise, SBHC's strategy is to increase its asset sensitivity
predominantly through variable asset pricing.
-52-
<PAGE>
Estimated Maturity or Repricing
December 31, 1996
<TABLE>
<CAPTION>
Three months
Less than to less than One to Over
three months one year five years five years Total
Interest earning assets:
<S> <C> <C> <C> <C> <C>
Securities and investments (1) $22,693,421 $11,069,644 $26,602,676 $19,310,630 $79,676,371
Federal funds sold -- -- -- -- --
Loans 28,226,321 35,994,604 22,084,917 5,750,762 92,056,604
Leases 143,218 429,054 1,954,915 475,293 3,002,480
----------- ---------- ---------- ---------- -----------
Total interest earning assets 51,062,960 47,493,302 50,642,508 25,536,685 174,735,455
========== ========== ========== ========== ===========
Unrealized gains on securities
available for sale 178,729
Reserve for loan losses (1,118,864)
Cash and due from banks 8,436,612
Other assets 9,191,905
-----------
Total assets 191,423,837
Interest bearing liabilities:
Interest bearing demand accounts $ 3,854,395 -- -- -- $3,854,395
Savings/time deposits (2) 45,513,761 31,919,024 22,494,085 23,858,668 123,785,538
Borrowed funds 16,167,685 500,000 5,500,000 -- 22,167,685
---------- ---------- ---------- ---------- ----------
Total interest bearing liabilities $65,535,841 $32,419,024 $27,994,085 $23,858,668 149,807,618
=========== =========== =========== =========== ===========
Non-interest bearing demand accounts 20,954,471
Other liabilities 1,178,403
Minority interest in subsidiary 937,895
Shareholders' equity 18,545,450
----------
Total liabilities, minority
interest & shareholders' equity $191,423,837
Interest sensitivity gap (14,472,881) 15,074,278 22,648,423 1,678,017 24,927,837
Cumulative interest sensitivity gap (14,472,881) 601,398 23,249,820 24,927,837
Cumulative interest sensitivity gap
as a percentage of total assets (7.56)% 0.31% 12.15% 13.02%
- --------------------
(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.
</TABLE>
Inflation
The primary impact of inflation on SBHC'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.
-53-
<PAGE>
Investment Portfolio
The following table shows the amortized costs, estimated market values,
unrealized gains and unrealized losses of SBHC's portfolio of investments as of
December 31, 1996, and 1995:
<TABLE>
<CAPTION>
Estimated
Amortized Market Unrealized Unrealized
Cost Value Gains Losses
1996 Available for sale
<S> <C> <C> <C> <C>
U.S. Government & federal agencies $24,248,728 $24,148,296 $29,458 $129,890
Mortgage-backed securities 34,339,376 34,224,187 116,347 231,536
United States Treasury 1,994,988 2,038,120 43,132 --
Corporate 2,745,530 2,745,122 7,099 7,507
Obligations of state and political
subdivisions 13,908,989 14,260,615 377,635 26,009
---------- ---------- ------- ------
Total available for sale $77,237,611 $77,416,340 $573,671 $394,942
=========== =========== ======== ========
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
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
=========== =========== ========== ========
</TABLE>
-54-
<PAGE>
The following is a summary of the contractual maturities and weighted
average yields of investment securities classified as available for sale at
December 31, 1996:
<TABLE>
<CAPTION>
AVAILABLE FOR SALE
-------------------------------------------------------
Estimated Weighted
Amortized Market Average
Cost Value Yield (1)
U.S. Government federal agencies
<S> <C> <C> <C>
One year or less $1,249,776 $1,250,830 5.75%
After one year through five years 21,448,952 21,352,781 6.51%
After five years through ten years 1,550,000 1,544,685 6.89%
--------- ---------
Total 24,248,728 24,148,296 6.49%
========== ==========
Mortgage-backed securities
After one year through five years 2,816,088 2,840,088 6.62%
After five years through ten years 5,370,625 5,349,254 6.49%
After ten years 26,152,663 26,034,845 6.61%
---------- ----------
Total 34,339,376 34,224,187 6.59%
========== ==========
United States Treasury
One year or less -- -- --
After one year through five years 1,994,988 2,038,120 6.93%
--------- ---------
Total 1,994,988 2,038,120 6.93%
========= =========
Corporate obligations
One year or less 886,624 885,776 6.62%
After one year through five years 1,858,906 1,859,346 6.23%
--------- ---------
Total 2,745,530 2,745,122 6.36%
========= =========
Obligations of state and political
subdivisions
One year or less 648,170 653,810 5.34%
After one year through five years 1,856,272 1,877,844 5.43%
After five years through ten years 6,102,444 6,331,385 5.88%
After ten years 5,302,103 5,397,576 5.41%
--------- ---------
Total 13,908,989 14,260,615 5.62%
========== ==========
Total securities available for sale $77,237,611 $77,416,340 6.39%
========== ==========
- --------------------
(1) Yields on tax-exempt securities have not been stated on a
tax-equivalent basis.
</TABLE>
As of December 31, 1996, SBHC had no securities classified as "held to
maturity".
-55-
<PAGE>
Loan Portfolio
Interest earned on the loan portfolio is the primary source of income for
SBHC. Net loans represented 49% of total assets as of December 31, 1996.
Although SBHC strives to serve the credit needs of its service area, its primary
focus is on real estate and commercial loans. SBHC makes substantially all of
its loans to customers located within SBHC's service area. SBHC has no loans
defined as highly leveraged transactions by the Federal Reserve Bank. SBHC has
no significant agricultural loans. Commercial real estate loans primarily
include owner-occupied commercial properties occupied by the proprietor of the
business conducted on the premises, and income-producing or farm properties. 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. SBHC'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, a 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, SBHC 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. SBHC 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. Security
Bank also offers credit cards to its customers. These unsecured loans carry
significantly higher interest rates than secured loans, which allows Security
Bank to maintain a higher loss reserve in conjunction with maintaining strict
credit guidelines when considering loan applications. The following table
presents the composition of SBHC's loan portfolio, at the dates indicated:
<TABLE>
<CAPTION>
December 31,
-----------------------------------------
1996 1995
<S> <C> <C>
Commercial - real estate $17,258,779 $16,627,336
Commercial - lines of credit 25,519,673 23,164,048
Residential - real estate 21,954,916 19,231,938
Installment 24,310,783 18,662,005
Credit cards & other 3,181,949 3,058,299
--------- ---------
Total loans 92,226,100 80,743,626
Deferred loan fees, net (169,496) (153,203)
Reserve for loan losses (1,118,864) (1,062,993)
----------- -----------
Net loans $90,937,740 $79,527,430
=========== ===========
</TABLE>
At December 31, 1996, the maturities of all loans by category were as
follows:
<TABLE>
<CAPTION>
Within One to After
One Year Five Years Five Years Total
<S> <C> <C> <C> <C>
Commercial - real estate $8,268,126 $4,965,691 $4,024,962 $17,258,779
Commercial - lines of credit 18,750,841 5,969,949 798,883 25,519,673
Residential - real estate 10,083,115 1,836,594 10,035,207 21,954,916
Installment 1,636,356 12,880,071 9,794,356 24,310,783
Credit cards & other 3,111,944 70,005 -- 3,181,949
--------- ------ -- ---------
$41,850,382 $25,722,310 $24,653,408 $92,226,100
========== ========== =========== ===========
</TABLE>
Of loans with maturities of one year or more, $40,902,805 were fixed-rate
loans, and $9,472,913 were variable rate loans.
-56-
<PAGE>
Deposit Liabilities
The following table sets forth the average deposit liabilities of and rates
paid by SBHC for the periods indicated:
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------------------------------
1996 1995
----------------------- --------------------
Deposit Liabilities Amount Rate Amount Rate
<S> <C> <C> <C> <C>
Demand $19,966,618 n/a $18,180,478 n/a
Interest-bearing demand 2,426,214 4.27% 1,711,356 4.01%
NOW accounts 22,297,007 1.04% 22,634,967 1.18%
Money market accounts 17,866,588 3.50% 14,712,696 3.23%
Savings accounts 15,181,616 2.52% 16,345,241 2.52%
Time deposits 59,101,601 5.31% 47,691,652 5.01%
---------- -----------
Total deposits $136,839,644 3.28% $121,276,390 2.98%
=========== ============
</TABLE>
As of December 31, 1996, SBHC's time deposit and IRA liability maturities
were as follows:
<TABLE>
<CAPTION>
Time Deposits and IRA Liabilities All Other
of $100,000 Time
or more (1) Deposits(2)
----------------------------- ----------------------------
Remaining Time to
Maturity:
<C> <C> <C> <C> <C>
3 months or less $14,118,743 62.96% $10,671,773 24.96%
6 months 3,344,332 14.91% 7,421,613 17.36%
12 months 3,993,069 17.81% 14,768,598 34.54%
Over 1 year 969,161 4.32% 9,900,743 23.14%
----------- ------ --------- ------
Total $22,425,305 100.00% $42,762,727 100.00%
=========== ====== =========== =======
- -----------------
(1) Time deposits of $100,000 or more represent 15.09% of total deposits as
of December 31, 1996.
(2) All other time deposits represent 28.78% of total deposits as of
December 31, 1996.
</TABLE>
-57-
<PAGE>
Average Balances and Average Rates Earned and Paid
The following table presents, for the periods indicated, information
regarding average balances of assets and liabilities of SBHC, 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 daily balances.
<TABLE>
<CAPTION>
Year ended December 31, 1996 Year ended December 31, 1995
----------------------------------- ------------------------------
Average Average
Average Yield Average Yield
Balance Interest or Rates Balance Interest or Rates
<S> <C> <C> <C> <C> <C> <C>
Assets
Federal funds sold $2,242,277 $121,652 5.43% $1,720,511 $108,857 6.33%
Time deposits - domestic financial
institutions 378,233 21,598 5.71% 1,234,541 60,785 4.92%
Investment securities - taxable 54,164,369 3,477,721 6.42% 36,397,912 2,340,964 6.43%
Investment securities - exempt
from federal income taxes 16,384,141 953,583 5.82% 16,207,389 971,872 6.00%
Loans, net and mortgage loans
held for sale, at cost which
approximates market(1)(2) 83,114,030 8,643,643 10.40% 76,834,887 8,127,412 10.58%
Net investment in direct
financing leases 3,410,641 339,803 9.96% 2,763,330 247,626 8.96%
Federal Home Loan Bank stock,
at cost 1,912,859 149,877 7.84% 1,529,722 99,156 6.48%
--------- ------- ----- --------- ------ -----
Total interest-earning assets/
interest income 161,606,550 13,707,877 8.48% 136,688,292 11,956,672 8.75%
Cash and due from banks 5,172,156 4,648,940
Premises and equipment, net 3,259,340 3,311,064
Other assets 4,172,695 3,411,986
--------- ---------
Total assets $174,210,741 $148,060,282
============ ============
Liabilities, Minority Interest
and Shareholders' Equity
Interest-bearing demand $2,426,214 $103,503 4.27% $1,711,356 $68,664 4.01%
NOW accounts 22,297,007 235,938 1.06% 22,634,967 268,083 1.18%
Money market accounts 17,866,588 624,251 3.49% 14,712,696 474,658 3.23%
Savings accounts 15,181,616 382,547 2.52% 16,345,841 411,371 2.52%
Time deposits 59,101,601 3,140,382 5.31% 47,691,652 2,388,050 5.01%
Securities sold under
agreements to repurchase 4,271,650 189,796 4.44% 3,417,569 151,772 4.44%
ESOP debt 503,795 41,373 8.21% 72,836 62,731 8.61%
Short-term borrowings 434,979 21,644 4.98% 422,741 23,197 5.49%
Federal Home Loan Bank
borrowings 14,913,613 863,202 5.79% 9,137,987 572,669 6.27%
---------- ------- ----- --------- ------- -----
Total interest- bearing
liabilities/interest expense 136,997,063 5,602,636 4.09% 116,147,645 4,421,195 3.79%
Demand deposits 19,966,618 18,168,140
Other liabilities 1,371,586 977,111
--------- -------
Total liabilities 158,335,267 135,292,896
Minority Interest 557,799 --
Shareholders' equity 15,317,675 12,111,855
---------- ----------
Total liabilities, minority
interest and shareholders' equity $174,210,741 $147,404,751
============ ============
Net interest income $8,105,241 $7,535,477
========== ==========
Net interest spread 4.39% 4.96%
----- -----
Net interest income to earning assets 5.01% 5.51%
===== =====
- --------------------
(1) Average non-accrual loans included in the computation of average loans
were $447,000 for 1996 and $243,000 for 1995.
(2) Loan related fees recognized during the period and included in the
yield calculation totaled approximately $483,000 in 1996 and $393,000 in 1995.
</TABLE>
-58-
<PAGE>
SUPERVISION AND REGULATION
General
SBHC and PSB 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 SBHC and the Banks.
The operations of SBHC and PSB may be affected by legislative changes and by the
policies of various regulatory authorities. No accurate predictions can be made
as to 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
SBHC is a bank holding company within the meaning of the Bank Holding
Company Act of 1956, as amended ("BHCA"), and as such, it is subject to
regulation, supervision and examination by the Federal Reserve. SBHC 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.
The 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, the 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 SBHC's ability to obtain funds from its
subsidiary 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 tying arrangements in
connection with any extension of credit, lease or sale of property or furnishing
of services. For example, Security Bank may not generally require a customer to
obtain other services from it or SBHC, 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.
-59-
<PAGE>
Federal and State Bank Regulation
PSB and the subsidiary banks of SBHC, as state-chartered banks with
deposits insured by the FDIC that are not members of the Federal Reserve System,
are subject to the supervision and regulation of the Oregon Director and of the
FDIC. These agencies may prohibit the banks from engaging in what they believe
constitute unsafe or unsound banking practices.
Since July 1, 1989, Oregon has permitted 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 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 merge with or acquire branches of Oregon or
federal savings associations. Initial acquisitions must involve institutions
which have 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.
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.
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 has prescribed, by regulation, non-capital safety
and soundness standards for institutions under its authority. These standards
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. SBHC believes that
its subsidiary banks meet all the standards, and therefore does not believe that
these regulatory standards materially affect SBHC's business operations.
Deposit Insurance
As FDIC member institutions, the deposits of PSB and SBHC's subsidiary
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 included 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
-60-
<PAGE>
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.
SBHC's subsidiary 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 SBHC's cash revenues is dividends received from
Security Bank. Lincoln Security 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, PSB and SBHC's subsidiary banks are subject
to restrictions on the payment of cash dividends to their shareholders. 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. PSB and Security Bank have been paying regular dividends to
shareholders, although as assurances can be given that dividends will continue
to be paid. 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. SBHC and its banks 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.
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.
-61-
<PAGE>
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%.
The FDICIA also created a 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. SBHC does not anticipate that these regulations have any
material effect on its banks.
Effects of Government Monetary Policy
The earnings and growth of PSB and of SBHC and its subsidiary banks,
including 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 PSB, SBHC or
its subsidiary 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 SBHC 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,
-62-
<PAGE>
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.
CERTAIN LEGAL MATTERS
The validity of SBHC Common Stock to be issued in the Merger will be passed
upon for SBHC by Foster Pepper & Shefelman PLLC, Portland, Oregon. Foster Pepper
& Shefelman PLLC will also give an opinion concerning certain tax matters
relating to the Merger.
EXPERTS
The consolidated financial statements of SBHC as of December 31, 1996 and
1995, and for each of the years then ended, and the financial statements of PSB
as of December 31, 1996, 1995 and 1994, and for each of the years then ended,
included in this Prospectus/Proxy Statement and in the Registration Statement
have been included in reliance upon the reports of KPMG Peat Marwick LLP,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing.
OTHER MATTERS
Neither the Board of Directors of SBHC nor of PSB is aware of any other
business to come before the PSB Meeting or SBHC Meeting other than those matters
described above in this Prospectus/Proxy Statement. However, if other matters
should properly come before either meeting, it is intended that proxies in the
accompanying form will be voted in the discretion of the named proxy holders.
-63-
<PAGE>
INDEX TO FINANCIAL STATEMENTS
SECURITY BANK HOLDING COMPANY
<TABLE>
<CAPTION>
Page
<S> <C>
Independent Auditors' Report F-2
Consolidated Balance Sheets Ended
March 31, 1997 and 1996 (unaudited) F-3
For the Three Months Ended March 31, 1997 and 1996 (unaudited):
Consolidated Statements of Income F-4
Consolidated Statements of Cash Flows F-5
Consolidated Balance Sheets, at December 31, 1996 and 1995 F-6
For the Years Ended December 31, 1996 and 1995:
Consolidated Statements of Income F-8
Consolidated Statements of Shareholders Equity F-9
Consolidated Statements of Cash Flows F-10
Notes to Consolidated Financial Statements F-12
PACIFIC STATE BANK
Independent Auditors' Report F-26
Balance Sheet at March 31, 1997 and December 31, 1996 (unaudited condensed) F-27
For the Three Months Ended March 31, 1997 and 1996 (unaudited condensed):
Statements of Income F-28
Statements of Cash Flows F-29
Balance Sheets at December 31, 1996 and 1995 F-30
For the years ended December 31, 1996, 1995 and 1994:
Statements of Income F-31
Statements of Stockholders' Equity F-32
Statements of Cash Flows F-33
Notes to Financial Statements F-34
</Tatble>
F - 1
<PAGE>
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 (the "Company") as of December 31, 1996
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, 1996 and 1995, and the
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Portland, Oregon
January 24, 1997
F - 2
<PAGE>
SECURITY BANK HOLDING COMPANY & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited - in thousands)
</TABLE>
<TABLE>
<CAPTION>
ASSETS Mar. 31, 1997 Dec. 31, 1996
- ------ ------------- -------------
<S> <C> <C>
Cash and cash equivalents:
Cash and due from banks $6,131 $8,437
Federal funds sold 2,675 --
------ ----------
Total cash and cash equivalents 8,806 8,437
Time deposits - domestic financial institutions 180 270
Investment securities available for sale 78,630 77,416
Loans, net 93,496 88,754
Mortgage loans held for sale, at cost which approximates market 1,433 2,184
Net investment in direct financing leases 3,152 3,002
Premises and equipment, net 5,469 5,122
Federal Home Loan Bank stock, at cost 1,872 2,169
Other assets 4,232 4,070
-------- --------
Total assets $197,270 $191,424
======== ========
LIABILITIES, MINORITY INTEREST AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Demand $22,019 $20,954
Interest bearing demand 3,729 3,854
NOW accounts 25,043 23,986
Money market accounts 22,304 19,903
Savings accounts 14,345 14,709
Time deposit 65,137 65,188
------ ------
Total deposits 152,577 148,594
Securities sold under agreements to repurchase 4,477 4,562
Short term borrowings 579 578
Federal Home Loan Bank borrowings 19,413 17,028
Other liabilities 1,017 1,178
------- -------
Total liabilities 178,063 171,940
------- -------
Minority interest in subsidiary 930 938
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
3,169,655 shares in 1997 (3,164,920 shares in 1996) 15,848 15,825
Surplus 1,105 1,041
Retained earnings 3,367 3,295
Unearned ESOP shares at cost (1,718) (1,728)
Unrealized gain on investment securities available for sale (325) 113
------ ------
Total shareholders' equity 18,277 18,546
------ ------
Total liabilities, minority interest and shareholders' equity $197,270 $191,424
======== ========
</TABLE>
See accompanying notes to consolidated financial statements
F - 3
<PAGE>
SECURITY BANK HOLDING COMPANY & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(unaudited - in thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended March 31,
1997 1996
<S> <C> <C>
Interest income:
Interest on loans $2,284 $2,061
Interest and dividends on securities:
Taxable 1,013 665
Exempt from Federal income tax 206 252
Interest on time deposits-domestic financial institutions 4 8
Dividend income on Federal Home Loan Bank stock 36 28
Interest on Federal funds sold 17 60
Income on direct financing leases 73 91
-- --
Total interest income 3,633 3,165
----- -----
Interest expense:
Deposits
Interest bearing demand 29 21
NOW 63 60
Money market 186 137
Savings 87 97
Time 847 730
Securities sold under agreements to repurchase 56 30
ESOP debt -- 14
Short term borrowings 6 6
Federal Home Loan Bank borrowings 250 171
--- ---
Total interest expense 1,524 1,266
----- -----
Net interest income 2,109 1,899
Provision for loan losses 68 45
-- --
Net interest income after provision for loan losses 2,041 1,854
----- -----
Other income:
Service charges on deposit accounts 250 217
Gain on sale of investments available for sale, net 3 14
Loan servicing fees 68 80
Sold real estate loan fees 255 257
Other 156 99
--- ---
Total other income 732 667
--- ---
Other expense:
Salaries and employee benefits 1,285 1,116
Occupancy of bank premises 122 106
Furniture and equipment 220 184
Professional fees 115 120
FDIC assessment 4 1
Supplies 83 46
Other 415 431
---- ----
Total other expense 2,244 2,004
----- -----
Income before provision for income taxes 529 517
Provision for income taxes 158 155
--- ---
Net income $371 $362
==== ====
Net income per share $.14 $.17
==== ====
</TABLE>
See accompanying notes to consolidated financial statements
F - 4
<PAGE>
SECURITY BANK HOLDING COMPANY & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited - in thousands)
<TABLE>
<CAPTION>
Three months ended March 31,
1997 1996
<S> <C> <C>
Cash flows provided by operating activities:
Net income $371 $362
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 152 159
Provision for loan losses 68 45
Origination of mortgage loans held for sale (11,113) (15,514)
Proceeds from mortgage loans sold 11,864 15,874
Net loss on sale of fixed assets -- 10
Net loss on call of investment securities available for sale (3) --
Net gain on sale of investment securities available for sale -- (14)
Federal Home Loan Bank stock dividend (36) (28)
ESOP related compensation expense 99 146
Increase in other assets (162) (15)
Increase in other liabilities 97 262
-- ---
Net cash provided by operating activities 1,337 1,287
Cash flows from investing activities:
Net decrease in time deposits-domestic financial institutions 90 180
Purchase of investment securities available for sale (5,830) (19,883)
Proceeds from sale of investment securities available for sale -- 5,606
Proceeds from maturities and call of investment
securities available for sale 3,924 1,527
Net loan originations (4,723) (229)
Purchase of participations (87) (23)
Additions to premises and equipment (500) (138)
Purchase of Federal Home Loan Bank stock (941) (221)
Redemption of Federal Home Loan Bank stock 1,274 --
Proceeds from sale of premises and equipment -- 18
Originations of direct financing leases (511) (185)
Gross payments on direct financing leases 361 284
Minority interest in subsidiary (8) --
--- --
Net cash used in investing activities (6,951) (13,064)
Cash flows from financing activities:
Net increase in deposits 3,983 5,939
(Decrease) increase in securities sold with agreements to repurchase (85) 104
Increase of Federal Home Loan Bank borrowings 2,385 2,221
Payment of dividends (299) (225)
Other (1) 70
--- --
Net cash provided by financing activities 5,983 8,109
----- -----
Net increase in cash and cash equivalents 369 (3,668)
Cash and cash equivalents at beginning of period 8,437 8,097
----- -----
Cash and cash equivalents at end of period $8,806 $4,429
====== ======
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $1,538 $1,174
Income taxes 15 68
Supplemental disclosures of investing activities:
Unrealized (loss) gain on investment
securities available for sale, net of tax $(438) $805
Loans transferred to other real estate owned $-- $--
</TABLE>
See accompanying notes to consolidated financial statements
F - 5
<PAGE>
SECURITY BANK HOLDING COMPANY & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of December 31, 1996 and 1995
<TABLE>
<CAPTION>
Assets 1996 1995
- ------ ---- ----
<S> <C> <C>
Cash and cash equivalents:
Cash and due from banks (notes 2 and 15) $8,436,612 $5,012,995
Federal funds sold -- 3,083,714
--------------- ---------
Total cash and cash equivalents 8,436,612 8,096,709
Time deposits domestic financial institutions 270,060 549,741
Investment securities available for sale (note 3) 77,416,340 58,227,575
Loans, net (notes 4, 5 and 15) 88,754,119 76,911,398
Mortgage loans held for sale,
at cost which approximates market (note 4) 2,183,621 2,616,032
Net investment in direct financing leases (note 6) 3,002,480 3,541,804
Premises and equipment, net (note 7) 5,122,273 3,241,153
Federal Home Loan Bank stock, at cost (note 15) 2,168,700 1,494,600
Other assets 4,069,632 3,909,321
--------- ---------
Total assets 191,423,837 158,588,333
=========== ===========
</TABLE>
F - 6
<PAGE>
SECURITY BANK HOLDING COMPANY & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
As of December 31, 1996 and 1995
<TABLE>
<CAPTION>
Liabilities, Minority Interest & Shareholders Equity
1996 1995
---- ----
<S> <C> <C>
Liabilities:
Deposits:
Demand $20,954,471 $19,492,203
Interest bearing demand 3,854,395 2,415,886
NOW accounts 23,985,974 21,485,781
Money market accounts 19,902,920 15,368,474
Savings accounts 14,708,612 15,363,678
Time deposit (note 9) 65,188,032 53,164,393
---------- ----------
Total deposits 148,594,404 127,290,415
Securities sold under agreements
to repurchase (notes 3 and 8) 4,562,364 2,874,619
ESOP debt (note 10) -- 644,000
Short term borrowings 577,821 500,937
Federal Home Loan Bank borrowings (note 15) 17,027,500 11,500,000
Other liabilities 1,178,403 1,406,508
--------- ---------
Total liabilities 171,940,492 144,216,479
----------- -----------
Minority interest in subsidiary 937,895 --
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 3,164,920 shares in 1996
(2,762,195 shares in 1995) (note 1) 15,824,596 13,810,975
Surplus 1,040,537 965
Retained earnings (note 11) 3,295,461 1,688,954
Unearned ESOP shares at cost (note 1) (1,728,225) (1,980,914)
Unrealized gain on investment securities available
for sale (note 1) 113,081 851,874
------- -------
Total shareholders equity 18,545,450 14,371,854
------------ ------------
Commitments and contingent liabilities (note 12)
Total liabilities, minority interest and
shareholders equity $191,423,837 $158,588,333
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
F - 7
<PAGE>
SECURITY BANK HOLDING COMPANY & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Interest income:
Interest on loans $8,643,643 $8,127,412
Interest and dividends on securities:
Taxable 3,477,221 2,340,964
Exempt from Federal income tax 953,583 971,872
Interest on time deposits-domestic financial institutions 21,598 60,785
Dividend income on Federal Home Loan Bank stock 149,877 99,156
Interest on Federal funds sold 121,652 108,857
Income on direct financing leases 339,803 247,626
------- -------
Total interest income 13,707,377 11,956,672
---------- ----------
Interest expense:
Deposits
Interest bearing demand 103,503 68,664
NOW 235,938 268,083
Money market 624,251 474,658
Savings 382,547 411,371
Time (note 9) 3,140,382 2,388,050
Securities sold under agreements to repurchase (note 8) 189,796 151,772
ESOP debt 41,373 62,731
Short term borrowings 21,644 23,197
Federal Home Loan Bank borrowings 863,202 572,669
------- -------
Total interest expense 5,602,636 4,421,195
--------- ---------
Net interest income 8,104,741 7,535,477
Provision for loan losses (note 5) 208,000 160,000
--------- ---------
Net interest income after provision for loan losses 7,896,741 7,375,477
Other income:
Service charges on deposit accounts 930,798 853,204
Gain on sale of investments available for sale, net 1,305 12,517
Loan servicing fees 325,572 305,671
Sold real estate loan fees 1,032,989 610,757
Gain on sale of servicing rights 380,335 --
Other 607,035 405,293
------- --------
Total other income 3,278,034 2,187,442
--------- ---------
Other expense:
Salaries and employee benefits 4,875,282 3,933,862
Occupancy of bank premises 448,769 404,785
Furniture and equipment 682,778 604,558
Professional fees 466,450 408,231
FDIC assessment 3,000 136,728
Supplies 260,129 288,093
Other 1,623,635 1,289,553
---------- ---------
Total other expense 8,360,043 7,065,810
---------- ---------
Income before provision for income taxes 2,814,732 2,497,109
Provision for income taxes (note 13) 759,500 633,000
---------- ----------
Net income $2,055,232 $1,864,109
========== ==========
Net income per share $.85 $.83
==== ====
</TABLE>
See accompanying notes to consolidated financial statements
F - 8
<PAGE>
SECURITY BANK HOLDING COMPANY & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
Years ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
Unearned Unrealized Total
Common Stock Retained ESOP Shares Gain (Loss) Shareholders
Shares Amount Surplus Earnings At Cost On Securities Equity
--------- ----------- --------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, Dec. 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, Dec. 31, 1995 2,762,195 $13,810,975 $965 $1,688,954 $(1,980,914) $851,874 $14,371,854
Net income -- -- -- 2,055,232 -- -- 2,055,232
Dividends -- -- -- (448,725) -- -- (448,725)
Sale of common stock 402,725 2,013,621 739,562 -- -- -- 2,753,183
Release of ESOP shares -- -- 300,010 -- 252,689 -- 552,699
Unrealized loss on securities
available for sale -- -- -- -- -- (738,793) (738,793)
--------- ----------- --------- ---------- ----------- ---------- ----------
Balance, Dec. 31, 1996 3,164,920 $15,824,596 $1,040,537 $3,295,461 $(1,728,225) $113,081 $18,545,450
========= =========== ========== ========== =========== ======== ============
</TABLE>
See accompanying notes to consolidated financial statements.
F - 9
<PAGE>
SECURITY BANK HOLDING COMPANY & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Cash flows provided by operating activities:
Net income $2,055,232 $1,864,109
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 560,393 643,626
Provision for loan losses 208,000 160,000
Origination of mortgage loans held for sale (62,634,059) (32,076,359)
Proceeds from mortgage loans sold 63,066,470 30,924,361
Net (gain) loss on sale of fixed assets 9,823 (573)
Net gain on call of investment securities held to maturity -- (2,783)
Net gain on sale of investment securities available for sale (1,305) (12,517)
Federal Home Loan Bank stock dividend (149,600) (98,900)
ESOP related compensation expense 552,699 367,818
(Increase) decrease in other assets (160,311) 78,601
Increase (decrease) in other liabilities 139,136 (298,365)
------- ---------
Net cash provided by operating activities 3,646,478 1,549,018
Cash flows from investing activities:
Net decrease in time deposits-domestic financial institutions $279,681 $1,099,940
Purchase of investment securities held to maturity -- (4,595,144)
Purchase from investment securities available for sale (48,699,964) (10,079,490)
Proceeds from sale of investment securities available for sale 14,802,432 5,612,195
Proceeds from maturities of investment securities held to maturity -- 1,916,467
Proceeds from maturities of investment securities available for sale 13,538,000 5,144,345
Net loan originations (11,550,097) (4,561,868)
Purchase of participations (500,624) (51,561)
Additions to premises and equipment (2,407,179) (427,156)
Purchase of Federal Home Loan Bank stock (2,065,200) (1,997,700)
Redemption of Federal Home Loan Bank stock 1,540,700 2,165,700
Proceeds from sales of premises and equipment 21,881 6,134
Originations of direct financing leases (678,160) (1,734,943)
Gross payments on direct financing leases 1,217,484 244,291
Minority interest in subsidiary 937,895 --
------- -----------
Net cash used in investing activities (33,563,151) (7,258,790)
========== ==========
</TABLE>
(Continued)
F - 10
<PAGE>
SECURITY BANK HOLDING COMPANY & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Years ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Cash flows from financing activities:
Net increase in deposits $21,303,989 $6,172,260
Increase in securities sold with agreements to repurchase 1,687,745 61,819
Repayment of ESOP debt (644,000) (89,000)
Increase of Federal Home Loan Bank borrowings 5,527,500 2,714,300
Proceeds from issuance of common stock 2,753,183 1,656
Payment of dividends (448,725) (319,885)
Other 76,884 (9,426)
------ -------
Net cash provided by financing activities 30,256,576 8,531,724
Net increase in cash and cash equivalents 339,903 2,821,952
Cash and cash equivalents at beginning of year 8,096,709 5,274,757
Cash and cash equivalents at end of year $8,436,612 $8,096,709
========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $5,416,199 $4,329,506
Income taxes $635,000 $662,000
Supplemental disclosures of investing activities:
Unrealized gain (loss) on investment
securities available for sale, net of tax $(738,793) $1,829,523
Loans transferred to other real estate owned $ -- $ --
</TABLE>
See accompanying notes to consolidated financial statements
F - 11
<PAGE>
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 (Security Bank), its majority-owned subsidiary,
Lincoln Security Bank (Lincoln Security), and Security Bank's wholly-owned
subsidiaries, Alland, Inc. and Security Financial Insurance Agency. Security
Bank and Lincoln Security are referred to collectively herein as the Banks.
Significant intercompany accounts and transactions have been eliminated in
consolidation.
(b) Description of Business
Security 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. Security Banks primary market
area consists of cities and communities along the Southern Oregon Coast.
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 Security 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 Security commenced operations in
May of 1996, and engages in general commercial banking business. Lincoln
Security offers commercial banking services to small and medium size businesses,
professionals and retail customers in the their market area.
The Banks are subject to the regulations of certain federal agencies and undergo
periodic examinations by these regulatory authorities.
(c) Basis of Financial Statement Preparation
The financial statements have been prepared in conformity with generally
accepted accounting principles. 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 Banks are located in Coos, Curry and Lincoln Counties of Oregon. A large
portion of the Banks assets are loans, which are collateralized by real estate
in this geographic area and, accordingly, the ultimate collectibility of this
portion of the Banks loan portfolio is susceptible to changes in the local
market conditions. However, the loan portfolio is diversified and management
believes there is no concentration of loans exceeding 10% for any particular
industry. It is managements opinion that the reserve for 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 Banks reserve for losses on loans and real estate owned. Such
agencies may require the Banks to recognize additions to the reserve based on
their judgements about information available to them at the time of their
examinations.
(d) Investment Securities
Investment 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 sales of securities, recognized on a specific identification basis, and
valuation adjustments of trading account securities are included
F - 12
<PAGE>
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.155-B, A Guide to Implementation of Statement 115 on Accounting for Certain
Investments in Debt and Equity Securities. Special Report No. 155-B allowed for
a one-time reclassification among investment categories. In light of the Special
Report, Security 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 managements judgement, the future collectibility of
interest or principal is in serious doubt. Loans are generally placed on non
accrual 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 managements 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 managements 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. Regulatory examiners may
require the Banks to recognize additions to the allowances based upon their
judgements about information available to them at the time of their examination.
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 managements judgement, the borrowers
ability to make periodic interest and principal payments is back to normal, in
which case the loan is returned to accrual status.
The Banks adopted Statement of Financial Accounting 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
requires entities to measure certain impaired loans based on the present value
of future cash flows discounted at the loans effective interest rate, or at the
loans 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 Banks 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. Prior periods have not
been restated. All loans have been evaluated for collectibility under the
provisions of these statements.
(g) Direct Financing Leases
The aggregate lease payments to be received over the term of these leases plus
the estimated residual values are capitalized as Security Banks 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 (building- thirty-one and one half to forty
years; furniture and equipment-five to seven years) and are computed using
accelerated methods 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
F - 13
<PAGE>
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) Stock Option Plan
Prior to January 1, 1996, SBHC accounted for its stock option plan in accordance
with the provisions of Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations. As such,
compensation expense would be recorded on the date of grant only if the current
market price of the underlying stock exceeded the exercise price. On January 1,
1996, SBHC adopted Statement of Financial Accounting Standards No. 123, (SFAS
No. 123) Accounting for Stock-Based Compensation, which permits entities to
recognize as expense over the vesting period the fair value of all stock-based
awards on the date of grant. Alternatively, SFAS No. 123 also allows entities to
continue to apply the provisions of APB Opinion No. 25 and provide pro forma net
income and pro forma earnings per share disclosures for employee stock option
grants made in 1995 and future years as if the fair-value-based method defined
in SFAS No. 123 had been applied. SBHC has elected to continue to apply the
provisions of APB Opinion No. 25. The pro forma disclosure provisions of SFAS
No. 123 are not material to SBHC's Statement of Income.
(l) Capitalized Mortgage Loan Servicing Rights
The Banks adopted Statement of Financial Accounting Standards No. 122, (SFAS No.
122) Accounting for Mortgage Servicing Rights, an amendment of SFAS 65, on
January 1, 1996. SFAS No. 122 requires that corporations that acquire mortgage
servicing rights through either the purchase or origination of mortgage loans
and sells or securities those loans with servicing rights retained should
allocate the total cost of the mortgage loans to the mortgage servicing rights
and loans (without the mortgage servicing rights) based on their relative fair
values. The statement also requires that corporations assess their capitalized
mortgage servicing rights for impairment based on the fair value of those
rights. Adoption of this SFAS had no material impact on the Banks financial
position or results of operations.
(m) Net Income Per Share
Net income per share is based on the weighted average number of common shares
outstanding during each year. For the year ended December 31, 1996 and 1995, the
weighted average number of common shares outstanding did not include 455,824 and
522,471 shares, respectively, held by SBHC's ESOP, as these shares have not been
allocated to participant accounts nor have they been committed to be released.
The weighted average number of common shares outstanding were 2,408,278 and
2,239,670 at December 31, 1996 and 1995, respectively.
(n) 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.
(o) Reclassifications
Certain amounts previously recorded on the December 31, 1995 consolidated
financial statements have been reclassified to conform to classifications on the
December 31, 1996, consolidated financial statements.
(p) 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.
F - 14
<PAGE>
2. CASH AND DUE FROM BANKS
The Banks are 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 on December 31, 1996 and 1995 was approximately
$1,046,000 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 amortized costs, estimated market values, unrealized gains and unrealized
losses of investment securities at December 31, 1996 and 1995 are summarized as
follows:
<TABLE>
<CAPTION>
Estimated
Amortized Market Unrealized Unrealized
Cost Value Gains Losses
<S>
1996: <C> <C> <C> <C>
Available for sale:
U.S. Government and Federal Agencies $24,248,728 $ 24,148,29 $ 29,458 $129,890
Mortgage-backed securities 34,339,376 34,224,187 116,347 231,536
United States Treasury 1,994,988 2,038,120 43,132 --
Corporate obligations 2,745,530 2,745,122 7,099 7,507
Obligations of state and political subdivisions 13,908,989 14,260,615 377,635 26,009
------------ ---------- -------- --------
Total available for sale $77,237,611 $77,416,340 $573,671 $394,942
============ =========== ======== ========
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
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
U.S. Federal Securities mutual bond funds 984,550 937,350 -- 47,200
Obligations of state and political subdivisions 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
============ =========== ========== =========
</TABLE>
Gross realized gains and gross realized losses on sales of securities available
for sale for the years ended December 31, 1996 and 1995 were:
<TABLE>
<CAPTION>
1996 1995
---------------------- ---------------------
Realized Realized Realized Realized
Gains Losses Gains Losses
<S> <C> <C> <C> <C>
U.S. Government and Federal Agencies $25,573 $-- $21,829 $--
United States Treasury 1,557 9,573 5,086 --
Corporate obligations 13,298 24,281 24,966 12,888
U.S. Federal Securities mutual bond funds -- 219,549 -- 80,008
Obligations of state and political subdivisions 214,280 -- 53,532 --
-------- ------- ------- -------
Total $254,708 $253,403 $105,413 $92,896
======== ======== ======== =======
</TABLE>
F - 15
<PAGE>
Approximate investment portfolio maturities at December 31, 1996 are as
follows:
<TABLE>
<CAPTION>
Securities Available for Sale
----------------------------
Estimated
Amortized Market
Cost Value
<S> <C> <C>
One year or less $ 2,784,569 $ 2,790,416
After one year through five years 29,975,207 29,968,179
After five years through ten years 13,023,069 13,225,323
After ten years 31,454,766 31,432,422
---------- ----------
Total $77,237,611 $77,416,340
=========== ===========
</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, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
U.S. Government and Federal Agencies $9,277,788 $5,215,999
United States Treasury 2,038,120 6,110,595
Obligations of state and political subdivisions 2,364,305 2,397,856
Total $13,680,213 $13,724,450
=========== ===========
</TABLE>
4. LOANS
Major categories of loans at December 31, 1996 and 1995 included in the
portfolio are as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Commercial real estate $17,258,779 $16,627,336
Commercial lines of credit 25,519,673 23,164,048
Residential real estate 21,954,916 19,231,938
Installment 24,310,783 18,662,005
Credit cards and other 3,181,949 3,058,299
--------- ---------
Total loans 92,226,100 80,743,626
Deferred loan fees, net (169,496) (153,203)
Reserve for loan losses (1,118,864) (1,062,993)
------------ ----------
Net loans $90,937,740 $79,527,430
=========== ===========
</TABLE>
Approximate loan portfolio maturities on fixed rate loans and repricing on
variable rate loans at December 31, 1996 are as follows:
<TABLE>
<CAPTION>
Within One to After
One Year Five Years Five Years Total
<S> <C> <C> <C> <C>
Commercial-real estate $ 8,268,126 $ 4,965,691 $ 4,024,962 $17,258,779
Commercial-lines of credit 18,750,841 5,969,949 798,883 25,519,673
Residential-real estate 10,083,115 1,836,594 10,035,207 21,954,916
Installment 1,636,356 12,880,071 9,794,356 24,310,783
Credit cards and other 3,111,944 70,005 -- 3,181,949
----------- ------------------------------- -----------
$41,850,382 $25,722,310 $24,653,408 $92,226,100
=========== =========== =========== ===========
</TABLE>
F - 16
<PAGE>
Mortgage loans held for sale are included above as residential real estate
mortgage loans maturing within one year.
Loans on nonaccrual status were approximately $490,000 and $432,000 at December
31, 1996 and 1995, respectively. Interest income which would have been realized
on non-accrual loans if they had remained current was insignificant.
Renegotiated loans were approximately $556,556 and $463,000 at December 31, 1996
and 1995, respectively. At December 31, 1996, $447,000 of these loans, under
their renegotiated terms, are not considered impaired under SFAS No. 114.
The Banks have no commitments to extend additional credit on loans which are
renegotiated, non-accrual or impaired at December 31, 1996.
At December 31, 1996 and 1995, Security Bank serviced approximately $179,074,000
and $141,649,000 respectively, of loans owned by others.
The Banks lending activities are concentrated along the central to southern
Oregon coast.
5. RESERVE FOR LOAN LOSSES
Transactions in the reserves for loan losses for the years ended December 31,
1996 and 1995 were as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Balance, beginning of year $1,062,993 $1,016,770
Provision for loan losses 208,000 160,000
Loans charged off (215,438) (185,158)
Recoveries of loans previously charged off 63,309 71,381
----------- ---------
Balance, end of year $1,118,864 $1,062,993
========== ==========
</TABLE>
The recorded investment in loans for which an impairment has been recognized at
December 31, 1996 and 1995 was $39,030 and $36,400, respectively. The average
recorded investment in impaired loans during 1996 and 1995 was $174,630 and
$159,482, respectively. Interest income recognized on impaired loans receivable
during 1996 and 1995 was insignificant.
6. DIRECT FINANCING LEASES
Following are the components of the net investment in direct financing leases at
December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Total minimum lease payments receivable $3,181,333 $2,998,730
Add:
Estimated unguaranteed residual values
of leased equipment 426,182 274,609
Equipment acquired for lease,
under interim rent 24,800 865,357
Less:
Unearned income 629,835 596,892
------- -------
Net investment in direct financing leases $3,002,480 $3,541,804
========== ==========
</TABLE>
F - 17
<PAGE>
Future minimum lease payments to be received on direct financing leases are as
follows:
Year ending December 31:
1997 $1,025,179
1998 885,654
1999 699,721
2000 397,687
2001 123,647
Thereafter 49,445
------
Total $ 3,181,333
===========
7. PREMISES AND EQUIPMENT
The composition of premises and equipment at December 31, 1996 and 1995 is as
follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Land $ 471,618 $ 100,000
Buildings 4,852,960 3,807,449
Furniture and equipment 3,694,897 2,826,730
--------- ---------
9,019,475 6,734,179
Less accumulated depreciation and amortization 3,897,202 3,493,026
$5,122,273 $3,241,153
========= =========
</TABLE>
8. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
<TABLE>
<CAPTION>
Weighted Carrying Market
Average Value of Value of
Repurchase Interest Underlying Underlying
Amount Rate Assets Assets
<S> <C> <C> <C> <C>
December 31, 1996: Overnight $4,562,364 4.33% $3,388,229 $3,388,229
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 Banks 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 $3,708,000 for the year ended December 31, 1996 and the
maximum amount outstanding at any month end for the year ended December 31, 1996
was approximately $4,562,000.
9. TIME DEPOSITS
Time certificates of deposit in excess of $100,000 aggregated approximately
$21,883,222 and $18,305,000 at December 31, 1996 and 1995, respectively.
Interest expense on these certificates amounted to approximately $1,360,720 and
$855,000 for the years ended December 31, 1996 and 1995, respectively.
10. EMPLOYEE BENEFIT PLANS
Employee Savings Plan - Security Bank has a qualified profit sharing (401k) 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 in both 1996 and 1995.
F - 18
<PAGE>
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 the 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 reduction of debt and accrued interest.
SBHC has ESOP related debt of $0 and $644,000 to Bank of America at December 31,
1996 and 1995, respectively. In addition, during 1993, SBHC loaned the ESOP
$1,583,205 to purchase 365,000 shares of its common stock. SBHC paid the note to
Bank of America in 1996. However, the ESOP still owes SBHC for this debt. These
loans are not reflected on SBHC's consolidated balance sheets at December 31,
1996 and 1995. The ESOP shares as of December 31, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Allocated 456,256 397,675
Shares released for allocation 66,647 58,581
Unreleased shares 455,824 522,471
------- -------
Total ESOP shares 978,727 978,727
======= =======
Fair value of unreleased shares $3,988,460 $4,134,487
========== ==========
</TABLE>
Stock Option Plan - SBHC 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
market value of such shares on the date of the 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 10 years from the date of grant.
The following table summarizes stock option activity for the years ended
December 31, 1996 and 1995:
<TABLE>
<CAPTION>
Average
Shares Exercise Price
<S> <C> <C>
Granted in 1995 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
=======
Granted in 1996 -- --
------ ------
Outstanding options at December 31, 1996 96,600 $5.67
======= ======
Exercisable at December 31, 1996 19,320 $5.67
======= ======
Shares available for future
grant at December 31, 1996 179,400
=======
</TABLE>
F - 19
<PAGE>
11. REGULATORY MATTERS
SBHC is subject to various regulatory capital requirements administered by the
federal banking agencies. Failure to meet minimum requirements can initiate
certain mandatory and possibly additional discretionary actions by regulators
that, if undertaken, could have a direct material effect on SBHC's financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, SBHC must meet specific capital guidelines that
involve quantitative measures of SBHC's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices.
SBHC's capital amounts and classifications are also subject to qualitative
judgements by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure capital adequacy
require SBHC to maintain minimum amounts and ratios (set forth in the following
table) of total and Tier 1 capital (as defined in the regulations) to
risk-weighted assets (as defined) and Tier 1 Capital to average assets (as
defined). Management believes, as of December 31, 1996, that SBHC meets all
capital adequacy requirements to which it is subject.
As of December 31, 1996, the most recent notification from the Federal Reserve
Board categorized SBHC as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized, SBHC must
maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios
as set forth in the following table. There are no conditions or events since
that notification that management believes have changed the institutions
category.
SBHC's actual capital amounts and ratios are presented in the following table:
<TABLE>
<CAPTION>
To be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
-------- ------- ---------- ----- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996:
Total Capital
(to Risk Weighted Assets) $20,069,025 17.02% >$9,432,334 >8% >$11,790,417 >10%
- - - -
Tier 1 Capital
(to Risk Weighted Assets) $18,950,161 16.07% >$4,716,167 >4% >$7,074,250 >6%
- - - -
Tier 1 Capital
(to Average Assets) $18,950,161 10.87% >$5,229,434 >3% >$8,715,724 >5%
- - - -
As of December 31, 1995:
Total Capital
(to Risk Weighted Assets) $14,122,971 13.12% >$8,609,992 >8% >$10,762,490 >10%
- - - -
Tier 1 Capital
(to Risk Weighted Assets) $13,059,978 12.13% >$4,304,996 >4% >$6,457,494 >6%
- - - -
Tier 1 Capital
(to Average Assets) $13,059,978 8.85% >$4,428,781 >3% >$7,381,301 >5%
- - - -
</TABLE>
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. As of December 31, 1996, the most recent
notification from the FDIC categorized the Banks as well capitalized under the
regulatory framework for prompt corrective action.
F - 20
<PAGE>
The Banks, as state-chartered banks, are prohibited from declaring or paying any
dividends in an amount greater than undivided profits. At December 31, 1996 and
1995, undivided profits of approximately $3,512,175 and $3,708,787,
respectively, were available for the payment of dividends to SBHC with prior
regulatory approval.
12. COMMITMENTS AND CONTINGENCIES
The banks are leasing four of their branches under operating leases which
include various renewal and purchase options. The approximate future minimum
rental payments under these leases are as follows:
Year ending December 31:
1997 $134,000
1998 116,300
1999 82,800
2000 82,800
2001 82,800
Thereafter 315,700
-------
Total $814,400
Rental expense for all operating leases was approximately $117,000 and $94,000
for the years ended December 31, 1996 and 1995, respectively.
At December 31, 1996, the Banks have $19,644,287 of unused lines of credit.
In the normal course of business, there are various commitments outstanding,
including commitments to extend credit and commercial letters of credit to
ensure performance of certain commercial customer obligations.
At December 31, 1996 and 1995, these commitments and obligations were as
follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Loans at fixed rates $6,413,000 $5,633,000
Loans at variable rates 2,297,000 1,065,000
--------- ---------
$8,710,000 $6,698,000
</TABLE>
SBHC 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 SBHC's financial position.
13. PROVISION FOR INCOME TAXES
The provision for income taxes for the years ended December 31, 1996 and 1995
consists of the following:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Current $803,000 $633,000
Deferred (43,500) --
-------- --------
$759,500 $633,000
======== ========
</TABLE>
F - 21
<PAGE>
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, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Computed expected Federal tax at statutory
rate of 34% $ 945,183 $ 849,017
State taxes, net of Federal effect 118,990 57,878
Tax exempt interest (311,298) (315,202)
Change in valuation allowance (34,828) 7,273
ESOP fair value adjustment and dividends 70,136 29,545
Other, net (28,683) 4,489
-------- ---------
$ 759,500 $633,000
======== =========
</TABLE>
The tax effects of temporary differences which give rise to significant portions
of deferred tax assets and deferred tax liabilities at December 31, 1996 and
1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Deferred tax assets:
Loans receivable,
due to allowance for possible loan losses $289,558 $273,059
Other liabilities,
due to deferred compensation reserve 202,178 199,323
Deferred loan fees 50,846 58,984
Net operating loss carryforward 28,564 --
Other 230,025 112,423
------- -------
Total gross deferred tax assets 801,171 643,789
Less valuation allowance (184,000) (237,000)
--------- ---------
Net deferred tax assets $617,171 $406,789
--------- ---------
Deferred tax liabilities:
Investment securities,
due to reserve for unrealized gains $65,810 $414,716
Investment securities,
due to accretion of discount 92,918 75,899
Premises and equipment,
due to difference in depreciation 488,709 278,351
Other 68,419 57,590
------ ------
Total gross deferred tax liabilities 715,856 826,556
Net deferred tax liability $(98,685) $(419,767)
========= ==========
</TABLE>
The valuation allowance for deferred tax assets as of January 1, 1995 was
$356,000. The net change in the total valuation allowance for the years ended
December 31, 1996 and 1995 were a decrease of $53,000 and $119,000,
respectively. Of the net change in the valuation allowance for 1996, $18,172 was
credited to equity in 1996.
SBHC has determined that the valuation allowance of $184,000 is reasonable as it
is more likely than not that the net deferred tax asset of $617,171 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
F - 22
<PAGE>
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 Banks in the ordinary course of business, and the
Banks expect 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 Banks, do not involve more than the normal risk of collectibility or
present any other unfavorable features.
An analysis of activity with respect to loans to directors, executive officers
and principal shareholders of SBHC for the year ended December 31, 1996 and 1995
is as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Balance, beginning of year $2,541,949 $1,427,207
Additions 1,024,438 2,499,964
Repayments (1,676,943) (1,385,222)
----------- -----------
Balance, end of year $1,889,444 $2,541,949
========== ==========
</TABLE>
15. FEDERAL HOME LOAN BANK BORROWINGS
At December 31, 1996, Security Bank had outstanding advances from the Federal
Home Loan Bank (FHLB) of $17,027,500 with a weighted average rate of 5.70% and a
weighted average maturity of 240 days. These advances were collaterized by
certain investment securities, certain residential first mortgage loans,
deposits with the FHLB, and FHLB stock totaling approximately $17,027,500 at
December 31, 1996. The FHLB requires Security Bank to maintain a level of
investment of FHLB stock.
F - 23
<PAGE>
16. FAIR VALUE OF FINANCIAL INSTRUMENTS
Pursuant to SFAS No. 107, Disclosures about Fair Value of Financial Instruments,
the following information is presented.
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, 1996
Carrying Amount Fair Value
<S> <C> <C>
Financial assets:
Cash equivalents and time deposits $ 8,706,672 $ 8,706,672
Investment securities 77,416,340 77,416,340
Loans, net 88,754,119 88,234,279
Mortgage loans held for sale 2,183,621 2,183,621
Federal Home Loan Bank stock 2,168,700 2,168,700
Financial liabilities:
Deposits 148,594,404 144,585,587
Securities sold under agreements to repurchase 4,562,364 4,562,364
Short term borrowings 577,821 577,821
Federal Home Loan Bank borrowings 17,027,500 17,045,970
Off balance sheet financial instruments:
Loan commitments 8,320,000 8,320,000
Letters of credit 390,000 390,000
</TABLE>
Financial assets and financial liabilities other than securities are not traded
in active markets. The above estimates of fair value require subjective
judgements 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 their carrying amounts.
Financial Liabilities - The estimated fair value of deposits is estimated
by discounting the future cash flows using current rates at which similar
deposits would be made. The estimated fair value approximates the carrying
amounts of short term borrowings and securities sold under agreements to
repurchase. 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.
SBHC did not hold any derivative financial instruments in its investment
portfolio at or during the year ended December 31, 1996, with the exception of
collaterized mortgage obligations.
<PAGE>
PACIFIC STATE BANK
Financial Statements
F - 25
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Pacific State Bank:
We have audited the accompanying balance sheets of Pacific State Bank (the Bank)
as of December 31, 1996 and 1995, and the related statements of income,
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1996. These financial statements are the
responsibility of the Bank's management. Our responsibility is to express an
opinion on these 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 financial statements referred to above present fairly, in
all material respects, the financial position of Pacific State Bank as of
December 31, 1996 and 1995, and the results of its operations and its cash flows
for each of the years in the three-year period ended December 31, 1996 in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Portland, Oregon
June 27, 1997
F - 26
<PAGE>
PACIFIC STATE BANK
Condensed Balance Sheets
at March 31, 1997 and December 31, 1996
(unaudited)
<TABLE>
<CAPTION>
March 31, 1997 December 31, 1996
-------------- -----------------
<S> <C> <C>
Cash and due from banks $ 1,713,721 $ 2,637,005
Loans, net 29,888,760 28,961,541
Investments, net 19,336,071 20,195,797
Other assets 1,195,537 1,058,583
----------- -----------
Total assets $52,134,089 $52,852,926
=========== ===========
Deposits $44,679,344 $45,438,144
Other liabilities 525,983 637,062
----------- -----------
Total liabilities $45,205,327 $46,075,206
Shareholders' equity 6,928,762 6,777,720
----------- -----------
Total liabilites and shareholders' equity $52,134,089 $52,852,926
=========== ===========
</TABLE>
F - 27
<PAGE>
PACIFIC STATE BANK
Condensed Statements of Income
as of March 31, 1997 and 1996
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
1997 1996
---- ----
<S> <C> <C>
Interest income $1,025,681 $1,045,936
Interest expense 356,649 361,825
Net interest income before
provision for loan losses 669,032 684,111
Provision for loan losses 7,000 0
-------------- -------------
Net interest income $662,032 $684,111
Other income 57,948 63,144
Other expense 358,472 362,623
-------------- ------------
Income before provision for
income taxes 361,508 384,632
Provision for income taxes 126,792 141,600
______________ _____________
Net income $234,716 $243,032
============== =============
Net income per share $0.58 $0.60
Weighted average shares outstanding 406,875 406,875
</TABLE>
F - 28
<PAGE>
PACIFIC STATE BANK
Condensed Statements of Cash Flows
as of March 31, 1997 and 1996
(unaudited)
<TABLE>
<CAPTION>
as of March 31,
1997 1996
<S> <C> <C>
Cash flows from operating activities:
Net Income $234,716 243,032
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 7,000 0
(Increase) decrease in other assets (136,954) (104,041)
Increase (decrease) in other liabilities (111,079) (134,392)
Other (54,423) (73,178)
-------- --------
Net cash provided by (used in)
operating activities ($60,740) ($68,579)
</TABLE>
F - 29
<PAGE>
PACIFIC STATE BANK
Balance Sheets
December 31, 1996 and 1995
<TABLE>
<CAPTION>
Assets 1996 1995
------ ---- ----
<S> <C> <C>
Cash and due from banks $ 2,637,005 $ 1,497,214
Federal funds sold 1,600,000 1,700,000
Investment securities (note 2) 18,420,397 20,818,565
Loans, less allowance for loan losses (note 3) 28,961,541 27,379,382
Land, building and equipment, net of accumulated
depreciation (note 4) 537,014 438,275
FHLB stock, at cost 175,400 162,900
Interest receivable and other assets 521,569 598,612
------- -------
Total assets $52,852,926 $52,594,948
=========== ===========
Liabilities and Stockholders' Equity
Deposits:
Demand 6,110,531 5,773,722
NOW accounts 5,584,650 6,594,101
Savings accounts 15,597,962 16,048,677
Certificates of deposit (note 5) 18,145,001 17,214,674
---------- ----------
Total deposits 45,438,144 45,631,174
Other liabilities 637,062 655,751
----------- ----------
Total liabilities $46,075,206 $46,286,925
---------- ----------
Stockholders' equity:
Common stock, par value of $1.00, 406,875 shares
authorized, issued and outstanding (note 9) 406,875 406,875
Surplus 5,093,125 5,093,125
Retained earnings 1,198,440 640,282
Net unrealized gain on investment securities,
net of deferred taxes of $49,327 in 1996 and
$104,372 in 1995 (note 2) 79,280 167,741
------ -------
Total stockholders' equity 6,777,720 6,308,023
--------- ---------
Total liabilities and stockholders' equity $52,852,926 $52,594,948
========== ==========
</TABLE>
See accompanying notes to financial statements.
F - 30
<PAGE>
PACIFIC STATE BANK
Statements of Income
Years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $2,868,368 $2,792,755 $2,461,152
Interest on investment securities:
Taxable 1,263,745 1,173,362 918,931
Exempt from federal income tax 8,446 7,559 21,561
Federal funds sold 66,458 83,709 98,406
------ ------ ------
Total interest income 4,207,017 4,057,385 3,500,050
--------- --------- ---------
Interest expense:
Interest on interest bearing checking
accounts 74,448 134,401 139,731
Interest on savings accounts 455,767 460,223 367,344
Interest on certificates of deposit 903,993 777,665 559,190
------- ------- -------
Total interest expense 1,434,208 1,372,289 1,066,265
--------- --------- ---------
Net interest income 2,772,809 2,685,096 2,433,785
Provision for loan losses (note 3) 24,000 66,275 -
--------- --------- ---------
Net interest income after provision
for loan losses 2,748,809 2,618,821 2,433,785
--------- --------- ---------
Other income:
Service fees and other income 224,984 235,458 212,907
Gain (loss) on sale of investment securities (note 2) 11,608 - (54,081)
------- ------- -------
Total other income 236,592 235,458 158,826
------- ------- -------
Operating expenses:
Salaries, employee benefits and employment
taxes 893,062 865,394 866,829
Occupancy expense 55,871 59,373 61,366
Depreciation expense 67,757 74,972 71,199
Other operating expenses 361,153 382,348 400,919
------- ------- -------
Total operating expenses 1,377,843 1,382,087 1,400,313
--------- --------- ---------
Income before income taxes 1,607,558 1,472,192 1,192,298
Provision for income taxes (note 6) 593,700 533,500 445,969
--------- --------- ---------
Net income $1,013,858 $938,692 $746,329
========== ========= =========
Net income per share $ $2.50 $2.31 $1.84
========== ========= =========
</TABLE>
See accompanying notes to financial statements.
F - 31
<PAGE>
PACIFIC STATE BANK
Statements of Stockholders' Equity
Years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Net unrealized
gain (loss) on
Common stock Retained investment
Shares Amount Surplus earnings securities Total
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1994 406,875 $406,875 $4,093,125 $610,328 - 5,110,328
Net income - - - 746,329 - 746,329
Transfer to surplus - - 400,000 (400,000) - -
Cash dividend declared, $.70
per share - - - (284,811) - (284,811)
Net unrealized loss on investment
securities (net of deferred taxes) - - - - (182,294) (182,294)
------- -------- ---------- --------- --------- ---------
Balance December 31, 1994 406,875 406,875 4,493,125 671,846 (182,294) 5,389,552
Net income - - - 938,692 - 938,692
Transfer to surplus - - 600,000 (600,000) - -
Cash dividends declared, $.91
per share - - - (370,256) - (370,256)
Net unrealized gain on investment
securities (net of deferred taxes) - - - - 350,035 350,035
------- -------- ---------- --------- -------- ---------
Balance December 31, 1995 406,875 406,875 5,093,125 640,282 167,741 6,308,023
Net income - - - 1,013,858 - 1,013,858
Cash dividends declared, $1.12
per share - - - (455,700) - (455,700)
Net unrealized loss on investment
securities (net of deferred taxes) - - - - (88,461) (88,461)
-------- -------- --------- -------- -------- ---------
Balance December 31, 1996 406,875 $406,875 $5,093,12 $1,198,440 $79,280 $6,777,720
======= ======= ========= ========== ======= =========
</TABLE>
See accompanying notes to financial statements.
F - 32
<PAGE>
PACIFIC STATE BANK
Statements of Cash Flows
Years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $1,013,858 $938,692 $746,329
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 67,757 74,792 71,199
Provision for loan losses 24,000 66,275 -
Amortization of bond premium 4,487 - 4,221
Accretion of bond discount (58,693) (115,327) (53,557)
(Increase) decrease in interest receivable and
other assets 77,043 (198,439) 10,857
Increase (decrease) in accrued interest and
other liabilities 36,356 3,664 43,408
(Gain) loss on sales of investment securities, net (11,608) - 54,081
FHLB stock dividend (12,500) (12,000) (3,100)
------- ------- --------
Net cash provided by operating activities 1,140,700 757,657 873,438
--------- ------- --------
Cash flows from investing activities:
Proceeds from maturities of investment securities
held to maturity 100,000 - -
Proceeds from sales and maturities of investment
securities available for sale 14,010,417 5,500,000 15,616,509
Purchase of investment securities available for sale (11,789,941) (9,883,646) (11,066,981)
Net increase in loans (1,607,673) (266,870) (3,068,725)
Capital expenditures (164,982) (148,568) (22,302)
----------- ----------- ----------
Net cash provided by (used in) investing
activities 547,821 (4,799,084) 1,458,501
-------- --------- ---------
Cash flows from financing activities:
Net increase (decrease) in demand deposits, NOW
accounts and savings account (1,123,357) 1,290,383 (633,849)
Net increase in certificates of deposits 930,327 961,582 345,940
Dividends paid (455,700) (305,156) (284,811)
---------- ---------- --------
Net cash provided by (used in) financing
activities (648,730) 1,946,809 (572,720)
----------- --------- --------
Net increase (decrease) in cash and cash
equivalents 1,039,791 (2,094,618) 1,759,219
Cash and cash equivalents, beginning of year 3,197,214 5,291,832 3,532,613
----------- ---------- ---------
Cash and cash equivalents, end of year $4,237,005 $3,197,214 $5,291,832
=========== ========== ==========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest paid to depositors $1,434,208 1,376,258 1,066,265
=========== ========== =========
Income taxes $585,610 $593,145 $445,969
========== ========== =========
</TABLE>
See accompanying notes to financial statements.
F - 33
<PAGE>
PACIFIC STATE BANK
Notes to Financial Statements
December 31, 1996 and 1995
(1) Summary of Significant Accounting Policies
(a) Nature of Operations
Pacific State Bank (the Bank) provides a variety of financial services to
individual and corporate customers in the Reedsport, Winchester Bay and
Gardiner areas in the State of Oregon. The Bank's primary deposit
products are interest bearing checking accounts, savings accounts and
certificates of deposit. Its primary lending products are single family
residential and commercial real estate loans, short-term commercial loans
and consumer loans.
(b) Basis of Financial Statement Preparation
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Material estimates that are particularly susceptible to significant
change relate to the determination of the allowance for losses on loans.
The majority of Pacific State Bank's loan portfolio consists of single
family residential and commercial real estate loans and short-term
commercial loans in the Reedsport, Winchester Bay and Gardiner areas. The
regional economy depends heavily on the wood products industry, which is
currently in economic decline. Accordingly, the ultimate collectibility
of a substantial portion of the Bank's loan portfolio is susceptible to
changes in local market conditions.
While management uses available information to recognize losses on loans,
future additions to the allowance for loan losses may be necessary based
on changes in local economic conditions.
(c) Investment Securities
Investment securities are classified as 1) held to maturity, 2) available
for sale, or 3) trading. Investment 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 approximate market value. Gains and losses on sales of
securities, recognized on a specific identification basis, and valuation
adjustments of trading account securities are included in non-interest
income. Net unrealized gains or losses on securities available for sale
are included, net of tax, as a component of stockholders' equity.
Historically, Pacific State Bank has held investment securities to
maturity. All investment securities classified as held to maturity in
1995 matured during 1996. All new securities purchased in 1996 and 1995
were classified as available for sale.
(d) Allowance for Loan Losses
The allowance 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 allowance 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
F - 34
<PAGE>
a review of problem loans, business conditions, loss experience and an
overall evaluation of the quality of the portfolio. The allowance is
increased by provisions charged to operations and reduced by loans
charged off, net of recoveries. Regulatory examiners may require the Bank
to recognize additions to the allowances based upon their judgments about
information available to them at the time of their examination.
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.
In accordance with Statement of Financial Accounting Standards No. 114
"Accounting by Creditors for Impairment of a Loan" as amended by SFAS No.
118 (collectively referred to as SFAS No. 114) impaired loans are
measured based on the present value of future cash flows discounted at
the loans effective interest rate, or at the loans 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. Prior
periods have not been restated. All loans have been evaluated for
collectibility under the provisions of these statements.
(e) Premises and Equipment
Buildings and equipment are stated at cost, less accumulated depreciation
computed principally on the straight-line method over the estimated
useful lives of the assets. Useful lives were five to seven years for
equipment and twenty to forty years for buildings.
(f) 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.
(g) 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.
F - 35
<PAGE>
(2) Investment Securities
Carrying amounts and approximate market values of investment securities as
of December 31, 1996 and 1995 are summarized as follows:
<TABLE>
<CAPTION>
Approximate
Amortized Unrealized Unrealized market
cost gains losses value
<S> <C> <C> <C> <C>
December 31, 1996:
Available for sale securities:
U.S. Government and
agency securities and
municipal bonds $18,291,790 $140,654 $(12,047) $18,420,397
========== ======= ====== ==========
December 31, 1995:
Held to maturity securities:
State and municipal 99,950 3,800 - 103,750
------ ----- ---------- ----------
Available for sale securities:
U.S. Government and
agency securities 20,446,502 272,113 - 20,718,615
---------- ------- ---------- ----------
$20,546,452 $275,913 - $20,822,365
========== ======= ======== ===========
</TABLE>
The following is a summary of maturities of investment securities available
for sale as of December 31, 1996:
<TABLE>
<Caption<
Investment securities
available for sale
-------------------------------
Approximate
Amortized market
cost value
<S> <C> <C>
Amounts maturing in:
One year or less $8,414,222 $8,473,383
After one to five years 8,962,976 9,025,995
After five to ten years - -
After ten years 914,592 921,019
------- -------
$18,291,790 $18,420,397
</TABLE>
Proceeds from the sale of available for sale securities were $2,039,912,
$-0- and $2,944,609 during 1996, 1995 and 1994, respectively. Realized
gains on the sales of securities were $11,921, $-0- and $-0- during 1996,
1995 and 1994, respectively. Realized losses were $313, $-0- and $54,081
during 1996, 1995 and 1994, respectively.
Investment securities with cost amounts of $4,840,856 and $3,096,631 at
December 31, 1996 and 1995, respectively, were pledged to secure public
deposits as permitted by law. Respective market values at December 31, 1996
and 1995 were approximately $4,888,000 and $3,200,000.
(Continued)
F - 36
<PAGE>
PACIFIC STATE BANK
Notes to Financial Statements
(3) Loans
Major classifications of loans as of December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Commercial $9,862,804 $9,379,196
Consumer 4,088,346 4,085,990
Real estate 17,184,336 16,126,147
Non-accruing loans 26,139 67,975
---------- ----------
31,161,625 29,659,308
Undisbursed loans (1,983,428) (2,085,704)
---------- ----------
29,178,197 27,573,604
Allowance for loan losses (216,656) (194,222)
--------- --------
Loans, net $28,961,541 $27,379,382
========== ==========
</TABLE>
(Continued)
F - 37
<PAGE>
PACIFIC STATE BANK
Notes to Financial Statements
The approximate maturities and repricing intervals of loans at December 31,
1996 and 1995 were as follows:
<TABLE>
<CAPTION>
1996
Fixed Adjustable
rate rate Total
loans loans loans
<S> <C> <C> <C>
Maturing or repricing in:
Three months $1,612,299 $7,572,568 $9,184,867
From three months to one year 2,658,173 4,168,466 6,826,639
From one year to five years 5,616,949 2,103,249 7,720,198
After five years 5,446,493 5,446,493
--------- ----------- ---------
$15,333,914 $13,844,283 $29,178,197
========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
1995
Fixed Adjustable
rate rate Total
loans loans loans
<S> <C> <C> <C>
Maturing or repricing in:
Three months $1,159,075 $6,320,390 $7,479,465
From three months to one year 3,481,715 1,720,414 5,202,129
From one year to five years 6,093,062 57,967 6,151,029
After five years 8,740,981 - 8,740,981
--------- ------------ ---------
$19,474,833 $8,098,771 $27,573,604
========== ========= ==========
</TABLE>
As of December 31, 1996 and 1995, past due loans in the amount of $26,139
and $67,975, respectively, were classified as non-accrual for purposes of
accruing interest income. If interest on these loans had been recognized at
the original rates, interest income would have increased by $1,801 and
$2,200 for 1996 and 1995, respectively.
As of December 31, 1996 and 1995, no loans were classified as impaired.
Changes in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Balance, beginning of year $194,222 $134,750 $134,343
Provision charged to operations 24,000 66,275 -
Loans charged off (3,080) (7,731) (13,033)
Recoveries 1,514 928 13,440
----- --- ------
Balance, end of year $216,656 $194,222 $134,750
======= ======= =======
</TABLE>
F - 38
<PAGE>
(4) Land, Buildings and Equipment
Major classifications of these assets are summarized as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Land $97,252 $97,252
Bank building 338,679 287,724
Rental building 98,447 98,447
Equipment 688,372 590,799
------- -------
1,222,750 1,074,222
Accumulated depreciation (685,736) (635,947)
-------- --------
Land, building and equipment, net $537,014 $438,275
======= =======
</TABLE>
(5) Certificates of Deposit
Amounts of certificates of deposit equal to or in excess of $100,000
totaled $1,982,885 and $1,893,173 at December 31, 1996 and 1995,
respectively. Interest rates and maturities of these certificates of
deposit range from 4.00% to 7.00% and 0 months to 39 months, respectively,
for 1996 and from 5.00% to 7.00% and 2 months to 51 months, respectively,
for 1995.
(6) Income Taxes
The provision for income tax expense for 1996, 1995 and 1994 consists of
the following:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Federal:
Current $498,635 $504,698 $392,984
Deferred (8,635) (20,700) (25,015)
------ ------- -------
490,000 483,998 367,969
------- ------- -------
State:
Current 105,434 55,802 83,703
Deferred (1,734) (6,300) (5,703)
------ ------ ------
103,700 49,502 78,000
------- ------ ------
Total $593,700 $533,500 $445,969
======= ======= =======
</TABLE>
F - 39
<PAGE>
The provision for income tax expense differs from income tax expense
computed by applying the federal statutory rate to income before taxes as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Computed expected federal tax at
statutory rate $546,570 $500,545 $405,382
State tax, net of federal benefit 69,168 33,016 51,948
Tax-exempt interest (9,273) (6,892) (9,715)
Other, net (12,765) 6,831 (1,646)
------- ----- ------
$593,700 $533,500 $445,969
======= ======= =======
</TABLE>
The tax effect of temporary differences which give rise to significant
portions of deferred tax assets and deferred tax liabilities at December
31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Deferred tax assets:
Deferred compensation $53,783 $50,289
Allowance for loan losses 41,901 25,343
--------- ----------
95,684 75,632
Deferred tax liabilities:
Investment securities, due to reserve for
unrealized gains (49,327) (104,372)
Premises and equipment, due to difference
in depreciation (46,315) (36,632)
------ ----------
95,642 141,004
$ 42 $(65,372)
======== =======
</TABLE>
The Bank has determined that the valuation allowance of $-0- as of December
31, 1996 and 1995 is reasonable as it is more likely than not that the
gross deferred tax assets of $95,684 and $75,632, respectively, will be
principally realized through future reversals of existing taxable temporary
differences and future taxable income. Management believes that future
taxable income will be sufficient to realize the existing benefits of
deductible temporary differences that cannot be realized through the
reversal of future taxable temporary differences.
(7) Profit-sharing Plan
The Bank has adopted a profit-sharing plan that covers substantially all of
its employees. Contributions are made at a percentage of eligible
employees' compensation. The Bank is under no obligation to make a
contribution. Total profit-sharing contribution expense was $84,945,
$81,787 and $73,608 for 1996, 1995 and 1994, respectively.
(8) Commitments
The Bank's financial statements do not reflect various commitments and
contingent liabilities which arise in the normal course of business and
which involve elements of credit risk, interest rate risk and liquidity
risk. These commitments and contingent liabilities include commitments to
extend credit and standby letters of credit. A summary of the Banks'
commitments and contingent liabilities at December 31, 1996 is as follows:
Commitments to extend credit $2,061,428
Standby letters of credit 6,000
F - 40
<PAGE>
Commitments to extend credit and standby letters of credit include exposure
to some credit loss in the event of nonperformance of the customer. The
Bank's credit policies and procedures for financial guarantees are the same
as those for extensions of credit that are recorded in the financial
statements.
The commitments to extend credit are comprised exclusively of undisbursed
loans and are commonly drawn upon. Historically, standby letters of credit
have not been drawn upon.
(9) Stock Split
The stockholders of Pacific State Bank, at their February 9, 1995 annual
meeting, authorized an amendment to the articles of incorporation of the
Bank. The amendment changed the par value of shares outstanding from $5.00
per share to $1.00 per share. As a result of this amendment, each
stockholder received five $1.00 par shares for each $5.00 par value share
held. Total shares authorized and outstanding before the stock split were
81,375. After the stock split, total shares authorized and outstanding are
406,875. The number of shares issued, dividends per share, and earnings per
share have been restated to reflect this five-for-one stock split.
(10) Regulatory Matters
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum requirements can
initiate certain mandatory, and possibly additional discretionary, actions
by regulators that, if undertaken, could have a direct material effect on
the Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet
specific capital guidelines that involve quantitative measures of the
Bank's assets, liabilities and certain off-balance-sheet items as
calculated under regulatory accounting practices. The Bank's capital
amounts and classifications are also subject to qualitative judgments by
the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
following table) of total and Tier 1 capital (as defined in the
regulations) to risk weighted assets (as defined) and Tier 1 capital to
average assets (as defined). Management believes, as of December 31, 1996,
that the Bank meets all capital adequacy requirements to which it is
subject.
The Bank's actual capital amounts and ratios are presented in the following
table:
<TABLE>
<CAPTION>
To be well capitalized
For capital under prompt corrective
Actual adequacy purposes action provisions
------------------- ----------------------- ------------------------
Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996:
Total capital (to risk
weighted assets) $ 6,915,096 29% $ 1,891,840 8% $ 2,364,800 10.0%
Tier 1 capital (to risk
weighted assets) 6,698,440 28 945,920 4 1,418,880 6.0
Tier 1 capital (to average
assets) 6,698,440 13 1,579,413 3 2,632,354 5.0
As of December 31, 1995:
Total capital (to risk
weighted assets) 6,334,504 25 2,026,732 8 2,533,415 10.0
Tier 1 capital (to risk
weighted assets) 6,140,282 24 1,013,366 4 1,520,049 6.0
Tier 1 capital (to average
assets) 6,140,282 12 1,526,312 3 2,543,854 5.0
</TABLE>
F - 41
<PAGE>
The Bank, as a state-chartered bank with deposits insured by the Federal
Deposit Insurance Corporation (FDIC) that is not a member of the Federal
Reserve System, is subject to the supervision and regulation of the
Director of the Oregon Department of Consumer and Business Services,
administrated through the FDIC and the Division of Finance and Corporate
Securities (Oregon Director). As of April 1995, the most recent
notification from the FDIC categorized the Bank as well capitalized under
the regulatory framework for prompt corrective action. There are no
conditions or events since that notification that management believes have
changed the institution's category.
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,
1996 and 1995, undivided profits of approximately $1,198,440 and $640,282,
respectively, were available for the payment of dividends without prior
regulatory approval.
In addition, as a member of the Federal Home Loan Bank (FHLB), the Bank is
required to hold a minimum amount of FHLB stock. The Bank was required to
hold 157,800 and 147,500 shares at December 31, 1996 and 1995,
respectively, which represented substantially all of the carrying value of
FHLB stock held.
(11) Transactions with Related Parties
Some of the directors, executive officers and principal stockholders of the
Bank, 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.
A summary of activity with respect to loans to directors, executive
officers and principal stockholders of the Bank for the years ended
December 31, 1996, 1995 and 1994 is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Balance, beginning of year $1,348,734 $1,352,303 $1,466,647
Additions 699,040 826,000 511,950
Repayments (588,163) (829,569) (626,294)
-------- -------- --------
Balance, end of year $1,459,611 $1,348,734 $1,352,303
========= ========= ==========
</TABLE>
F - 42
<PAGE>
APPENDIX A
AGREEMENT AND PLAN OF REORGANIZATION
This Agreement and Plan of Reorganization is entered into effective this
9th day of July, 1997 (the "Agreement"), by and between SECURITY BANK HOLDING
COMPANY ("SBHC"), and PACIFIC STATE BANK, ("Pacific State").
RECITALS:
A. SBHC is an Oregon corporation with its head office at 170 South Second
Avenue, Suite 200, Coos Bay, Oregon.
B. Pacific State is an Oregon State Chartered bank with its head office at
1975 Winchester Avenue, Reedsport, Oregon.
C. The parties hereto desire to enter into a Plan of Merger under which
SBHC will acquire all of the stock of Pacific State and Pacific State
shareholders will receive shares of common stock of SBHC pursuant to the terms
of this Agreement.
AGREEMENT
In consideration of the mutual covenants herein contained, the parties
hereby enter into this Agreement and agree as follows:
For purposes of this Agreement, the following terms shall have the
definitions given:
"Code" means the Internal Revenue Code of 1986, as amended.
"Effective Date" is the date on which the Plan of Merger is effected by
issuance of a Certificate of Merger by the Oregon Director.
"Employee Benefit Plan" means an employee benefit plan as defined by
section 3 of ERISA.
"ERISA" means the Employee Retirement Income Security Act of 1984, as
amended.
"Exchange Agent" means Security Bank or such other bank designated by SBHC
to perform the duties of Exchange Agent in this Agreement.
"FDIC" means the Federal Deposit Insurance Corporation.
"FHA" means the Federal Housing Administration.
"FHLMC" means the Federal Home Loan Mortgage Corporation.
"FNMA" means the Federal National Mortgage Association.
"FRB" means Federal Reserve Board.
-1-
Appendix A - 1
<PAGE>
"GNMA" means the Government National Mortgage Association.
"Oregon Director" means the Director of the Oregon Department of Consumer
and Business Services.
"PSB Interim" means the bank to be charted by SBHC under the name of PSB
Interim Bank pursuant to the Agreement whose sole purpose is to merge with and
into Pacific State to effect the Merger.
"Merger" means the merger of PSB Interim into Pacific State on the
Effective Date in accordance with the Plan of Merger.
"Oregon Bank Act" means Chapter 706 through 716 of the Oregon Revised
Statutes.
"Plan of Merger" means the Plan of Merger to be executed by PSB Interim and
Pacific State and delivered to the Oregon Director for filing on the Effective
Date in the form attached hereto and incorporated herein by reference.
"Pacific State Stock" means shares of common stock, $1.00 par value, of
Pacific State, and which will be cancelled or converted into the right to SBHC
stock at the Effective Date.
"PBGC" means the Pension Benefit Guaranty Corporation.
"SBA" means the Small Business Administration of the Department of
Commerce.
"SEC" means the Securities and Exchange Commission.
"Resultant Bank" means the banking institution formed by the merger of PSB
Interim and Pacific State as provided by the Plan of Merger which shall be
Pacific State Bank.
"VA" means the Veterans Administration.
" SBHC Stock" means shares of common stock, $5.00 par value, of SBHC which
are to be issued to Pacific State shareholders pursuant to the Plan of Merger.
1. MERGER
1.1 Organization of Interim Bank. SBHC covenants to take any and all steps
necessary and proper to effect the due incorporation of PSB Interim so as to
permit PSB Interim to be merged into Pacific State, as contemplated by this
Agreement.
1.2 Transactions Pursuant to the Plan of Merger. Upon performance of all of
the covenants of the parties hereto and fulfillment or waiver of all of the
conditions contained herein, on the Effective Date:
(a) PSB Interim shall be merged with and into Pacific State on the terms
and conditions set forth in the Plan of Merger. Pursuant to the Merger, each
share of common stock of Pacific State shall be converted into the right to
receive such number of shares of SBHC (and cash for any fractional shares) as
provided in the Plan of Merger. The then outstanding shares
-2-
Appendix A - 2
<PAGE>
of common stock of PSB Interim shall be converted into shares of common
stock of Resultant Bank as provided in the Plan of Merger.
(b) As provided in the Plan of Merger, Pacific State shall be the Resultant
Bank upon effectiveness of the Merger and shall be a wholly-owned subsidiary of
SBHC.
(c) SBHC shall make available SBHC Stock (and any required cash) for
issuance to the stockholders of Pacific State in accordance with the Plan of
Merger.
2. REPRESENTATIONS AND WARRANTIES OF PACIFIC STATE.
Pacific State represents and warrants to SBHC as follows:
2.1 Organization, Existence, and Authority of Pacific State. Pacific State
is a bank duly organized, validly existing, and in good standing under the laws
of the State of Oregon and has all requisite corporate power and authority to
own, lease, and operate its properties and assets and carry on its business in
the manner now being conducted. Its activities do not require it to be qualified
to do business in any other state.
2.2 Authorized and Outstanding Stock, Options, and Other Rights. The
authorized capital stock of Pacific State consists of 406,875 shares of common
stock, with a par value of $1.00 per share, of which all shares are outstanding
and are validly issued, fully paid and nonassessable (except as provided by the
Oregon Bank Act). No subscriptions, options, warrants, convertible securities or
other rights or commitments which would enable the holder to acquire any shares
of capital stock or other investment securities of Pacific State, or which
enable or require Pacific State to acquire shares of its capital stock or other
investment securities from any holder, are authorized, issued or outstanding.
2.3 Articles of Incorporation, Bylaws, Minutes. The copies of the Articles
of Incorporation, as amended and the Bylaws of Pacific State delivered to SBHC
as Schedule 2.3, are true, correct and complete copies of existing Articles of
Incorporation and Bylaws of Pacific State as amended to date. Pacific State is
not in violation of any provision of its Articles of Incorporation or Bylaws.
The minute books of Pacific State which have been or will be made available to
SBHC for its review contain accurate and complete minutes of all meetings and
all consents evidencing actions taken without a meeting by the Board of
Directors (and any committees thereof) and by its shareholders.
2.4 No Holding Company, Joint Venture, or Other Subsidiaries. No
corporation or other entity is registered or, to the knowledge of Pacific State,
is required to be registered as a bank holding company under the Bank Holding
Company Act of 1956, as amended, because of ownership or control of Pacific
State. Pacific State does not directly or indirectly own or control, either by
power to control the investment or power to vote, any shares of capital stock of
any other corporation or entity, other than shares held in a fiduciary or
custodial capacity in the ordinary course of business and shares representing
less than five percent of the outstanding shares of such corporation acquired in
partial or full satisfaction of debts previously contracted. Pacific State is
not a part of any joint venture, or general or limited partnership, or a member
of any unincorporated association.
2.5 Shareholder Reports. Pacific State has delivered to SBHC as Schedule
2.5 copies of all of Pacific State's reports and other communications to
stockholders since January 1, 1995, including all proxy statements and notices
of shareholder meetings. Until the Effective Date, Pacific State will furnish to
SBHC copies of all future communications within two days such materials are
first sent to its shareholders.
-3-
Appendix A - 3
<PAGE>
2.6 Pacific State Call Reports. Pacific State has delivered to SBHC as
Schedule 2.6 copies of Pacific State's "Call Reports of Conditions and Income"
filed with the FDIC for December 31, 1994, 1995 and 1996 (which, together with
all future format reports so filed, the "Pacific State Call Reports"), together
with copies of all other reports, applications, statements and other filings
required of a state bank by the FDIC or Oregon Director since December 31, 1994.
Until the Effective Date, Pacific State will file with the FDIC or Oregon
Director (and will furnish to SBHC within two days thereafter) all additional
reports and other documents which Pacific State is required by law or
regulation, or otherwise files, with the FDIC or Oregon Director. The Pacific
State Call Reports have been and will be prepared in accordance with regulatory
accounting principles, consistently applied throughout the periods presented and
present fairly the financial conditions and results of operation of Pacific
State and its subsidiary in accordance with such regulatory principles on the
dates and for the periods covered thereby. As of the date filed, each such
filing has and will be accurate and complete and has complied or will comply
with all requirements applicable to such filing.
2.7 Pacific State Financial Reports. Pacific State has delivered to SBHC as
Schedule 2.7 copies of Pacific State's Annual Report to Shareholders for the
three years ended December 31, 1996 to Shareholders (which, together with all
future reports, the "Pacific State Financial Reports") which future reports will
be furnish to SBHC within two days after they are first sent to shareholders.
Except as noted on Schedule 2.7, the Pacific State Financial Reports have been
and will be prepared in accordance with generally accepted accounting
principles, consistently applied and present fairly the financial position and
results of operation of Pacific State on the dates and for the periods covered
thereby. As of the date issued, each Pacific State Financial Report has and will
be accurate and complete.
2.8 Books and Records. The books and records of Pacific State accurately
reflect in all material respects the transactions to which it is a party or by
which it or its properties are bound or subject. Such books and records have
been and are accurate and complete and comply in all material respects with
applicable legal, regulatory and accounting requirements.
2.9 Legal Proceedings. Except for regulatory examinations conducted in the
normal course of regulation of Pacific State, and except as disclosed in
Schedule 2.9 delivered to SBHC, there are no actions, suits, proceedings, claims
or governmental investigations pending or, to the knowledge of Pacific State,
threatened against or affecting Pacific State before any court, administrative
officer or agency, other governmental body or arbitration which might,
individually or in the aggregate, result in any material adverse change in the
business, assets, earnings, operation or condition (financial or otherwise) of
Pacific State or which might hinder or delay the consummation of the
transactions contemplated by this Agreement or the Plan of Merger.
2.10 Compliance with Lending Laws and Regulations. Except as disclosed in
Schedule 2.10 delivered to SBHC:
(a) The conduct by Pacific State of its business and the operation by
Pacific State of the properties or other assets owned or leased by it does not
violate or infringe any domestic or foreign laws, statutes, ordinances, rules or
regulations, the enforcement of which, individually or in the aggregate, would
materially and adversely affect Pacific State. Specifically, but without
limitations, Pacific State is in compliance in all material respects with every
local, state or federal law or ordinance, and any regulation or order issued
thereunder, now in effect and applicable to Pacific State governing or
pertaining to fair housing, anti-redlining, equal credit opportunity,
truth-in-lending, real estate settlement procedures, fair credit reporting and
every other prohibition against unlawful discrimination in residential lending,
or governing consumer credit, including, but not limited to, the Community
Reinvestment Act, the Consumer Credit Protection Act, Truth-in-Lending Law, and
Regulation Z promulgated by the FRB,
-4-
Appendix A - 4
<PAGE>
and the Real Estate Settlement Procedures Act of 1974. All loans, leases,
contracts and accounts receivable (billed and unbilled), security agreements,
guarantees and recourse agreements, of Pacific State, as held in its portfolios,
or as sold into the secondary market represent and are valid and binding
obligations of their respective parties and debtors, enforceable in accordance
with their respective terms; each of them is based on a valid, binding and
enforceable contract or commitment, each of which has been executed and
delivered in full compliance, in form and substance, with any and all federal,
state or local laws applicable to Pacific State, or to the other party or
parties to the contract(s) or commitment(s), including without limitation the
Truth-in-Lending Act, Regulations Z and U of the FRB, laws and regulations
providing for nondiscriminatory practices in the granting of loans or credit,
applicable usury laws, and laws imposing lending limits; and all such contracts
or commitments have been administered in full compliance with all applicable
federal, state or local laws or regulations. All Uniform Commercial Code
filings, or filings of trust deeds, or of liens or other security interest
documentation that are required by any applicable federal, state or local
government laws and regulations to perfect the security interests referred to in
any and all of such documents or other security agreements have been made, and
all security interests under such deeds, documents or security agreements have
been perfected, and all contracts have been entered into or assumed in full
compliance with all applicable material legal or regulatory requirements.
(b) All loan files of Pacific State are complete and accurate in all
material respects and have been maintained in accordance with good banking
practice.
(c) All notices of default, foreclosure proceedings or repossession
proceedings against any real or personal property collateral have been issued,
initiated and conducted by Pacific State in full formal and substantive
compliance with all applicable federal, state or local laws and regulations, and
no loss or impairment of any security interest, or exposure to meritorious
lawsuits or other proceedings against Pacific State has been or will be suffered
or incurred by Pacific State.
(d) Pacific State is not in violation of any applicable servicer or any
other requirements of the FHA, VA, FNMA, GNMA, FHLMC, SBA or any private
mortgage insurer which insured or guaranteed any loans owned by Pacific State or
as to which Pacific State has sold to other investors, the effect of which
violation would materially and adversely affect the business, assets, earnings,
operation or condition (financial or otherwise) of Pacific State, and with
respect to such loans Pacific State has not done or failed to do, or caused to
be done or omitted to be done, any act the effect of which act or omission
impairs or invalidates (i) any FHA insurance or commitments of the FHA to
insure, (ii) any VA guarantee or commitment of the VA to guarantee, (iii) any
SBA guarantees or commitments of the SBA to guarantee, (iv) any private mortgage
insurance or commitment of any private mortgage insurer to insure, (v) any title
insurance policy, (vi) any hazard insurance policy, or (vii) any flood insurance
policy required by the National Flood Insurance Act of 1968, as amended, which
would materially and adversely affect the business, assets, earnings, operation
or condition (financial or otherwise) of Pacific State.
(e) Pacific State has not knowingly engaged principally, or as one of its
important activities, in the business of extending credit for the purpose of
purchasing or carrying any margin stock.
2.11 Commitments. Pacific State has delivered to SBHC as Schedule 2.11 a
listing of all outstanding commitments, including outstanding letters of credit,
repurchase agreements and unfunded agreements to lend of Pacific State.
2.12 Hazardous Wastes. To the knowledge of the directors and officers of
Pacific State, neither Pacific State, nor any other person having an interest in
any property which Pacific State owns or leases, or has owned or leased, or in
which either holds any security interest, mortgage, or other liens
-5-
Appendix A - 5
<PAGE>
or interest including but not limited to as beneficiary of a trust deed
("Property") has engaged in the generation, use, manufacture, treatment,
transportation, storage (in tanks or otherwise), or disposal of Hazardous
Material on or from such Property. Individually or in the aggregate, there has
been no: (i) presence, use, generation, handling, treatment, storage, release,
threatened release, migration or disposal of Hazardous Material; (ii) condition
that could result in any use, ownership or transfer restriction; or (iii)
condition of nuisance on or from such Property, any of which individually or
collectively would have a material adverse effect on the business, assets,
earnings, operation or condition (financial or otherwise) of Pacific State.
Pacific State has received no notice of, or has no reason to know of, a
condition that could give rise to any private or governmental suit, claim,
action, proceeding or investigation against Pacific State, any such other person
or such Property as a result of any of the foregoing events. "Hazardous
Material" means any chemical, substance, material, object, condition, or waste
harmful to human health or safety or to the environment due to its
radioactivity, ignitability, corrosivity, reactivity, explosivity, toxicity,
carcinogenicity, infectiousness or other harmful or potentially harmful
properties or effects, including, without limitation, petroleum or petroleum
products, and all of those chemicals, substances, materials, objects,
conditions, wastes or combinations of them which are now or become listed,
defined or regulated in any manner by any federal, state or local law based,
directly or indirectly, upon such properties or effects.
2.13 Contingent and Other Liabilities. Pacific State has delivered to SBHC
as Schedule 2.13 a list of contingent and other liabilities not set forth in
other schedules, together with copies of documents evidencing those liabilities.
Except as set forth in the Pacific State Financial Reports or in Schedules
delivered by Pacific State to SBHC, and except for FDIC insured deposits and
federal funds purchased and securities sold under agreements to repurchase
arising out of transactions subsequent to the date of such Financial Reports,
Pacific State has no obligations or liabilities of any nature (whether accrued,
absolute, contingent or otherwise) which are material or which, when combined
with all other such obligations or liabilities would be material to the
business, assets, earnings, operation or condition (financial or otherwise) of
Pacific State.
2.14 No Adverse Changes. Except as set forth in Schedule 2.14, since March
31, 1997, (a) there has been no material adverse change in the business, assets,
earnings, operation or condition (financial or otherwise) of Pacific State; (b)
no cash, stock or other dividends, or other distributions with respect to
capital stock, have been declared or paid by Pacific State, nor has Pacific
State purchased or redeemed any of its shares; and (c) there has not been any
damage, destruction or loss (whether or not covered by insurance) materially and
adversely affecting any asset material to Pacific State. As of the Effective
Date, Pacific State will have no obligations or liabilities of any nature,
whether absolute, accrued, contingent or otherwise, in excess of $15,000
individually, or $50,000 in the aggregate, other than:
(a) Obligations and liabilities disclosed in Financial Reports as of March
31, 1997, or Schedules provided herewith;
(b) Obligations and liabilities incurred in, or as a result of, the normal
and ordinary course of business, consistent with past practices, which do not,
in the aggregate, have a material adverse effect on the business, assets,
earnings, operation or condition (financial or otherwise) of Pacific State; and
(c) Obligations and liabilities incurred otherwise than in or as a result
of the normal and ordinary course of business consistent with past practices,
provided SBHC shall have consented thereto pursuant to Section 4.1 hereof.
-6-
Appendix A - 6
<PAGE>
There is no basis for any claim against Pacific State or any other
obligation or liability of any nature, in excess of $15,000 individually or
$50,000 in the aggregate, not set forth in Pacific State's Schedules.
2.15 Regulatory Approvals Required. The nature of the business and
operations of Pacific State does not require any approval, authorization,
consent, license, clearance or order of, any declaration or notification to, or
any filing or registration with, any governmental or regulatory authority in
order to permit Pacific State to perform its obligations under this Agreement,
or to prevent the termination of any material right, privilege, license or
agreement of Pacific State, or any material loss or disadvantage to its
business, upon consummation of the Pacific State Plan of Merger, except for:
(a) Approval of the Merger by the Oregon Director;
(b) Approval from the FRB of the acquisition of Pacific State by SBHC;
(c) Approval of the Plan of Merger by the FDIC and the Oregon Director;
(d) Issuance of an interim banking charter by the Oregon Director to PSB
Interim;
(e) Filing of the Plan of Merger with the Oregon Director; and
(f) Registration with the SEC and state blue sky administrators of the SBHC
Stock to be issued to the Pacific State shareholders.
2.16 Corporate and Shareholder Approval of Agreement, Binding Obligations.
Pacific State has all requisite corporate power to execute, deliver and perform
its obligations under this Agreement. The execution, delivery and performance of
this Agreement, and the transactions contemplated thereby, have been duly
authorized by the Board of Directors of Pacific State. No other corporate action
on the part of Pacific State other than shareholder approval is required to
authorize this Agreement or the Plan of Merger or the consummation of the
transactions contemplated thereby. This Agreement has been duly executed and
delivered by Pacific State and constitutes the legal, valid and binding
obligation of Pacific State enforceable in accordance with its terms. The Plan
of Merger, when duly executed and delivered by Pacific State will constitute the
legal, valid and binding obligation of Pacific State enforceable in accordance
with its terms.
2.17 No Defaults from Transaction. Subject to compliance with the
governmental approvals described in Section 2.15, neither the execution,
delivery and performance of this Agreement and the Plan of Merger by Pacific
State, nor the consummation of the transactions contemplated thereby will
conflict with, result in any breach or violation of, or result in any default or
any acceleration of performance under, any of the terms, conditions or
provisions of its Articles of Incorporation or Bylaws, or of any statute,
regulation or existing order, writ, injunction or decree of any court or
governmental agency, or of any contract, agreement or instrument to which it is
a party or by which it is bound, or will result in the declaration or imposition
of any lien, charge or encumbrance upon any of the assets of Pacific State which
are material to their business. Assuming the accuracy of SBHC's representations
and warranties, compliance with its covenants, and the performance of its
obligations under this Agreement and the Plan of Merger, the consummation of the
transaction contemplated by this Agreement will not result in any material
adverse change in the business, assets, earnings, operations or conditions
(financial or otherwise) of Pacific State.
-7-
Appendix A - 7
<PAGE>
2.18 Tax Returns. Pacific State has filed all federal, state and other
income, franchise or other tax returns, required to be filed by it; each such
return is complete and accurate in all material respects; and all taxes and
related interest and liabilities to be paid in connection therewith have been
paid or adequate reserve has been established for the timely payment thereof.
Pacific State has timely and accurately filed all currency transaction reports
required by the Bank Secrecy Act, as amended, and has timely and accurately
filed all required information returns and reports, including without limitation
forms 1099, and has exercised due diligence in obtaining certified taxpayer
identification numbers as required by the Code and Treasury Regulations. Pacific
State has not received notice of any federal, state or other income, franchise
or other tax assessment or notice of a deficiency to date which has not been
paid or for which adequate reserve has not been provided, and Pacific State does
not know of any pending or threatened audit or investigation of Pacific State
with respect to any tax liabilities. There are currently no agreements in effect
with respect to either Pacific State to extend the period of limitations for
assessment or collection of any tax. Pacific State has delivered to SBHC as
Schedule 2.18 copies of its federal and state tax returns for years 1994 through
1996.
2.19 Real Property, Leased Personal Property. Pacific State has delivered
to SBHC as Schedule 2.19 a list setting forth all real property owned by Pacific
State as present, former or future bank premises and all real property currently
held as other real estate owned. Except as set forth in that Schedule or except
for disposition of other real estate owned in the ordinary course of business,
Pacific State will own all of such real property presently owned, on the
Effective Date. Except as may be noted on that Schedule, all real property
reflected in the Pacific State Financial Report as of March 31, 1997 is included
in that Schedule. The leases pursuant to which Pacific State leases real and
personal property, copies of which have also been delivered to SBHC as part of
Schedule 2.19, are valid and effective in accordance with their respective terms
and there is not under any such lease any default nor has there occurred any
event which, with the giving of notice, lapse of time, or otherwise, would
constitute an event of default. The real and personal property leased by Pacific
State is free of any adverse claims. Except as noted on Schedule 2.19, all
buildings and structures on the real property, the equipment located thereon,
and the real and personal property leased by Pacific State, are in all material
respects in good operating condition and repair and conform in all material
respects to all applicable laws, ordinances and regulations. Pacific State has
good and marketable title to all of its real and personal property, subject to
no mortgages, pledges, encumbrances, liens or charges of any kind, except liens
for taxes not delinquent and except as shown in Schedule 2.19 delivered to SBHC.
Pacific State owns or leases all property on which its continued business
operations are materially dependent.
2.20 Insurance. Except as set forth in Schedule 2.20, for each of the past
six years and continuing to date, Pacific State has insured its business and
real and personal property against all risks of a character usually insured
against by banks, including but not limited to financial institution bond,
directors and officers liability, property and casualty and commercial liability
insurance, with customary amounts of coverage, deductibles and exclusions by
reputable insurers authorized to transact insurance in the state of Oregon and
such other jurisdictions where Pacific State operates or owns property, and it
will maintain all existing insurance through the Effective Date. Pacific State
is in compliance with all existing insurance policies and has not failed to give
timely notice or present any material claim thereunder. Pacific State has
provided to SBHC as part of Schedule 2.20 copies of all insurance policies
currently in force with respect to Pacific State's business and real and
personal property.
2.21 Trademarks. Pacific State owns all patents, trademarks, copyrights or
trade names which it considers to be material to its business taken as a whole,
and have not been charged with infringement or violation of any patent,
trademark, copyright or trade name which would be likely to have a material
adverse effect on its business.
-8-
Appendix A - 8
<PAGE>
2.22 Contracts and Agreements. Pacific State has delivered to SBHC as
Schedule 2.22, copies of all material outstanding contracts, agreements, leases
or understandings to which Pacific State is a party or to which any of its
properties are subject, except those referred to in Schedules furnished pursuant
to other sections of this Agreement, and except for any contracts or agreements
entered into with Pacific State customers in the ordinary course of business.
Such documents include, without limitation, all agreements, contracts, leases or
understandings with officers and directors of Pacific State or SBHC, all of
which are related to, and have been entered into in the ordinary course of,
Pacific State's banking business. Pacific State is not in material default or
breach, nor has there occurred any event which with notice or lapse of time
would constitute a material breach or default, under any contract, agreement,
instrument, lease or understanding, and, excluding any loan agreements or
notices with customers of Pacific State reflected in Pacific State's regular
delinquent loan reports which have been and will be made available to SBHC,
Pacific State does not know of any default by any other party thereto; and no
contract, agreement, lease or undertaking referred to in Schedule 2.22, or in
such other schedules will be modified or changed prior to the Effective Date
without the prior written consent of SBHC. No consent or approval by the parties
thereto is required by reason of this Agreement to maintain such contracts,
agreements, leases and undertakings in effect. No waiver or indulgence has been
granted by any of the landlords under any such leases.
2.23 Employee Benefits.
(a) Each Employee Benefit Plan sponsored or maintained by Pacific State
("Benefit Plan") is set forth in Schedule 2.23. Except as set forth in such
Schedule, Pacific State neither has nor has sponsored any other pension, profit
sharing, thrift, savings, bonus, retirement, vacation, life insurance, health
insurance, severance, sickness, disability, medical or death benefit plans.
Except as set forth on Schedule 2.23, there are no employment contracts
entered into by Pacific State and no other deferred compensation contracts,
agreements, arrangements or commitments maintained or agreed to by it. There are
no other compensation, employment or collective bargaining agreements, stock
options, stock purchase agreements, life, health, accident or other insurance,
bonus, deferred or incentive compensation, change-in-control, severance or
separation, profit sharing, retirement, or other employee fringe benefit
policies or arrangements of any kind, covering employees or former employees or
other persons of Pacific State.
(b) The only "employee welfare benefit plans" (as defined in section 3(1)
of ERISA) sponsored or maintained by Pacific State, or to which Pacific State
contributes ("Welfare Benefit Plan") or are required to contribute, are as set
forth in Schedule 2.23. Schedule 2.23 includes the amount of liability of
Pacific State for payments more than thirty days past due with respect to such
employee welfare benefit plans as of December 31, 1996, the amount of monthly
payments due and owing for each month that such plans are continued, and the
amount of liability for claims if Pacific State were to terminate such plans and
the costs involved in any such termination.
(c) Other than as set forth in Schedule 2.23, Pacific State has not
maintained a pension benefit plan that is subject to title 1, subtitle B, part 3
of ERISA ("Pension Benefit Plan"). With respect to any such Pension Benefit
Plan, the amount of liability for any contribution paid or owing with respect to
such Pension Benefit Plan for the last or current plan year and the plan year in
which the Effective Date occurs are set forth on Schedule 2.23. There are no
other material liabilities of Pacific State that would be incurred in connection
with a termination of the Plan, and the Plan is fully funded.
(d) Pacific State and, to the knowledge of the executive officers and
directors of Pacific State, all persons having fiduciary or other
responsibilities or duties with respect to any Benefit
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Plan, are, and have since inception been, in compliance in all material respects
with, and each such Benefit Plan is and has been operated in accordance with,
its provisions and in compliance with the applicable laws, rules and regulations
governing such Plan, including, without limitation, the rules and regulations
promulgated by the Department of Labor, the Pension Benefit Guaranty Corporation
and the Internal Revenue Service under ERISA or the Code. Each Pension Benefit
Plan and any related trust agreements or annuity contracts (or any other funding
instruments) comply currently, and have complied in the past, both as to form
and operation, with the provisions of ERISA and the Code (including section
410(b) of the Code relating to coverage), where required in order to be
tax-qualified under section 401(b) or 403(a) or other applicable provisions of
the Code, and all other applicable laws, rules and regulations; all necessary
governmental approvals for the Benefit Plans have been obtained; and a favorable
determination as to the qualification under the Code of each Pension Benefit
Plan set forth in Schedule 2.23 and each amendment thereto has been made by the
Internal Revenue Service.
(e) Each Welfare Benefit Plan and each Pension Benefit Plan has been
administered to date in material compliance with the requirements of the claims
procedure of the Code and ERISA. All reports required by any government agency
and disclosures to participants with respect to each Welfare Benefit Plan and
each Pension Benefit Plan have been timely made or filed. Each Benefit Plan has
been operated since inception in material compliance with the governing
instruments and applicable federal or state law. In particular, but without
limitation, each Welfare Benefit Plan has been administered in material
compliance with federal law, including without limitation the health care
continuation requirements of federal law ("COBRA"). Other than as required by
COBRA, and amounts due Participants under each Pension Benefit Plan, Pacific
State has no obligation to furnish health, severance or other benefits under any
Benefit Plan after retirement or other severance of an employee.
(f) Neither Pacific State nor, to Pacific State's knowledge, any plan
fiduciary of any Welfare Benefit Plan or Pension Benefit Plan, has engaged in
any transaction in violation of section 406(a) or (b) of ERISA (for which no
exemption exists under section 408 of ERISA) or any "prohibited transaction" (as
defined in section 4975(c)(1) of the Code) for which no exemption exists under
section 4975(c)(2) or (d) of the Code or in any prohibited transactions under
predecessor provisions of the Code.
(g) Pacific State has had no liability to the Pension Benefit Guaranty
Corporation ("PBGC"). No material liability to the PBGC has been or will be
incurred by Pacific State or other trade or business under "common control" with
Pacific State (as determined under section 414(c) of the Code) ("Common Control
Entity") on account of any termination of an employee pension benefit plan
subject to title IV of ERISA. Except as set forth in Schedule 2.23, since
September 1, 1974, no filing has been made by Pacific State (or any Common
Control Entity) with the PBGC (and no proceeding has been commenced by the PBGC)
to terminate any employee pension benefit plan subject to title IV of ERISA
maintained, or wholly or partially funded by Pacific State (or any Common
Control Entity). Neither Pacific State nor any Common Control Entity has (i)
ceased operations at a facility so as to become subject to the provisions of
section 4062(e) of ERISA, (ii) withdrawn as a substantial employer so as to
become subject to the provisions of section 4063 of ERISA, (iii) ceased making
contributions on or before the Effective Date to any employee pension benefit
plan subject to section 4064(a) of ERISA to which Pacific State (or any Common
Control Entity) made contributions during the five years prior to the Effective
Date, or (iv) made a complete or partial withdrawal from a multi-employer plan
(as defined in section 3(37) of ERISA) so as to incur withdrawal liability as
defined in section 4201 of ERISA (without regard to subsequent reduction or
waiver of such liability under section 4207 or 4208 or ERISA).
(h) Complete and correct copies of the following documents have been
furnished to SBHC as Schedule 2.23:
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(i) Each Benefit Plan and any related trust agreements;
(ii) The most recent summary plan descriptions of each Benefit Plan subject
to ERISA;
(iii) The most recent determination letters of the Internal Revenue Service
with respect to the qualified status of a Pension Benefit Plan;
(iv) Annual Reports (on form 5500 series) required to be filed with any
governmental agency for the last two years;
(v) Financial information which identifies (x) all asserted or unasserted
claims arising under any Benefit Plan, (y) all claims presently outstanding
against any Benefit Plan, and (z) a description of any future compliance action
required with respect to any Benefit Plan under ERISA, or federal or state law.
(i)Each Welfare Benefit Plan and each Pension Benefit Plan is legally valid
and binding and in full force and effect.
2.24 Employment Disputes. There is no labor strike, dispute, slowdown or
stoppage pending or, to the best knowledge of Pacific State, threatened against
Pacific State, and Pacific State does not have any knowledge of any attempt to
organize any employees of Pacific State into a collective bargaining unit.
Consummation of the Plan of Merger will not (either alone or in combination with
any other act or event) result in any payment of severance pay or any other
payment becoming due from Pacific State to any of its employees except as set
forth in Schedule 2.23. Pacific State is not a party to any agreement involving
payments to any person or entity based upon the profits, revenues or other
financial performance of Pacific State except as set forth on Schedule 2.23.
2.25 Reserve for Loan Losses. Pacific State's reserve for loan losses, as
established from time to time, is adequate as determined by the standards
applied to Pacific State by the applicable bank regulatory agencies and pursuant
to generally accepted accounting principles. At the time of closing, the
percentage of the reserve to total loans will not be less than such percentage
was at March 31, 1997.
2.26 Repurchase Agreement. Pacific State has valid and perfected first
position security interests in all government securities subject to repurchase
agreements and the market value of the collateral securing each such repurchase
agreement equals or exceeds the amount of the debt secured by such collateral
under such agreement.
2.27 Shareholder List. The list of shareholders of Pacific State dated June
30, 1997, provided to SBHC as Schedule 2.27, is a true, correct and complete
list of the names, addresses and holdings of all record holders of Pacific State
Stock as of that date. Pacific State shall notify SBHC of any change in such
stock ownership of over one percent (1%) through the Effective Date.
2.28 Proxy Statement. The registration statement to be filed by SBHC on
Form S-4 with the SEC and the proxy statement to be used by Pacific State to
solicit proxies from the holders of Pacific State Stock for the meeting of
shareholders held to consider and vote upon this Agreement and the Plan of
Merger, and the transactions contemplated thereby (in its definitive form the
"Proxy Statement"), will fairly describe the transaction and Pacific State, and
will contain no untrue statement of any material fact and will not omit to state
any material fact required to be stated therein or necessary to make the
statements therein not misleading, except those statements in or omission from
the Proxy Statement which
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may be made with respect to SBHC. Pacific State will promptly advise SBHC
in writing if at any time prior to the Effective Date Pacific State shall obtain
knowledge of any facts that might make it necessary or appropriate to amend or
supplement the Proxy Statement in order to make the statements therein not
misleading or to comply with applicable law.
2.29 Interests of Directors and Others. Except as shown on Schedule 2.29,
no officer or director of Pacific State has any material interest in any assets
or property (whether real or personal, tangible or intangible), of or used in
the business of Pacific State other than as an owner of outstanding securities
or deposit accounts of Pacific State, or as borrowers under loans fully
performing in accordance with their terms, which terms are no more favorable
than those available to unaffiliated parties made at or about the same time by
Pacific State.
2.30 Pacific State Schedules. Pacific State has delivered to SBHC the
following schedules, as described in the preceding Sections 2.1 through 2.29:
2.3 Articles of Incorporation and Bylaws.
2.5 Reports to Shareholders since January 1, 1995.
2.6 Pacific State Call Reports of Condition and Income
for December 31, 1994, 1995 and 1996.
2.7 Pacific State Financial Reports
2.9 Schedule of Litigation.
2.10 Schedules of Law/Regulatory Violations.
2.11 Schedule of Commitments.
2.13 Schedule of Contingent and other Liabilities.
2.14 Schedule of Changes.
2.18 Federal and State Tax Returns for 1994 through 1996.
2.19 Schedule of Owned Real Property and Real and
Personal Property; Schedule of
Encumbrances on Real and Personal Property.
2.20 Schedule of Insurance Policies.
2.22 Schedule of Contracts and Agreements.
2.23 Employee Benefit Plans
2.27 Shareholders List as of June 30, 1997.
2.29 Schedule of Interests of Management in Property or
Business of Pacific State.
The information in the schedules constitutes additional representations
and warranties made by Pacific State hereunder and is incorporated herein by
reference. The copies of documents furnished as part of these schedules are
true, correct and complete copies and include all amendments, supplements, and
modifications thereto and all waivers applicable thereunder.
2.31 No Misstatements or Omissions. No representation or warranty of
Pacific State in this Agreement or in any statement, certificate or schedule
furnished or to be furnished by Pacific State pursuant to this Agreement or in
connection with the transaction contemplated by this Agreement or in the Plan of
Merger, contains or will contain any untrue statements of a material fact or
omits or will omit to state any material fact.
2.32 No Solicitation. Between the date hereof and the Effective Date,
Pacific State, its Board of Directors and the shareholders of Pacific State
executing this Agreement, shall not directly or indirectly initiate contact with
any person or entity in an effort to solicit any Alternative Acquisition
Transaction (as defined below), nor will Pacific State authorize or knowingly
permit any officer or any other person representing or retained by Pacific State
to directly furnish or cause to be furnished any non-published
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information concerning its business, properties, or assets to any person or
entity in connection with any possible Alternative Acquisition Transaction.
Pacific State shall promptly orally notify SBHC followed by written notice, of
any Alternative Acquisition Transaction, whether oral or written, by any person
or persons to Pacific State, or any indication from any person that it is
considering making any Alternative Acquisition Transaction. Such persons further
agree to use his or her best efforts to obtain the approval of the Agreement by
Pacific State shareholders and to vote his or her Pacific State Stock and any
shares over which he or she have voting control in favor of the Agreement.
Neither Pacific State nor any of its directors or officers shall be required by
this section to violate the duties imposed by law on Pacific State's directors
or officers to Pacific State's shareholders.
For purposes of this Agreement, an "Alternative Acquisition
Transaction" means any tender offer, agreement, understanding or other proposal
of any nature pursuant to which any corporation, partnership, person or other
entity, other than SBHC, would directly or indirectly (i) acquire or participate
in a merger, share exchange, consolidation or any other business combination
involving Pacific State; (ii) acquire in excess of fifteen percent (15%) of the
outstanding Pacific State Stock or the right to vote fifteen percent (15%) or
more of the Pacific State Stock; or (iii) acquire a significant portion of the
assets or earning power of Pacific State.
3. REPRESENTATIONS AND WARRANTIES OF SBHC
SBHC represents and warrants to Pacific State, as of the Effective
Date, as follows:
3.1 Organization, Existence, Authority of SBHC. SBHC is a corporation,
duly organized and validly existing under the laws of the State of Oregon with
all requisite corporate power and authority to own, lease and operate its
properties and assets and to carry on its business in the manner then being
conducted. Its activities do not require it to be qualified to do business in
any foreign jurisdiction.
3.2 Subsidiaries. SBHC has no direct or indirect subsidiaries other
than Security Bank, Alland Inc., Security Financial Insurance Agency and Lincoln
Security Bank (68.44% owned), collectively herein called "Subsidiaries". Unless
the context otherwise requires, representations and warranties of SBHC shall
also be deemed to include the representations and warranties of the
Subsidiaries. All Subsidiaries are duly organized and validly existing under the
laws of the State of Oregon and have all requisite power to own, lease and
operate their properties and assets and to carry on their businesses in the
manner then being conducted. Their activities do not require any of them to be
qualified to do business in a foreign jurisdiction.
3.3 SBHC Public Reports. SBHC has delivered to Pacific State as
Schedule 3.3 copies of SBHC's Form 10-KSB report filed with the SEC for the
years ended December 31, 1996 and any Form 10-QSB or Form 8-K or other similar
reports filed since that date (which, together with such reports filed
subsequent to such date, the "SBHC Public Reports"). Until the Effective Date,
SBHC will file with the SEC (and will furnish to Pacific State within two days
thereafter) all additional reports and other documents which SBHC is required by
the Securities Exchange Act of 1934 or regulations promulgated thereunder to
file or otherwise files with the SEC. The SBHC Public Reports have been and will
be prepared in accordance with generally accepted accounting principles,
consistently applied and present fairly the financial position and results of
operation of SBHC and its Subsidiaries on the dates and for the periods covered
thereby. As of the date filed, each SBHC Public Report has and will be accurate
and complete, and complies or will comply with all requirements applicable to
such filing.
3.4 Authorized and Outstanding Stock, Rights. The authorized capital stock
of SBHC consists of 10,000,000 shares of common stock, with a par value of $5.00
per share, of which [3,169,700] shares
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are outstanding and are validly issued, fully paid and nonassessable, 5,000,000
shares of voting preferred stock ($5.00 par value), and 5,000,000 shares of
non-voting preferred stock ($5.00 par value), none of which preferred stock is
issued or outstanding. No subscriptions, options, warrants, convertible
securities or other rights or commitments which would enable the holder to
acquire any shares of capital stock or other investment securities of SBHC, or
which enable or require SBHC to acquire shares of its capital stock or other
investment securities from any holder, are authorized, issued or outstanding
except as used in the SBHC Public Reports.
3.5 Articles of Incorporation, Bylaws, Minutes. The copies of the
Articles of Incorporation and the Bylaws of SBHC delivered to Pacific State as
Schedule 3.5, are true, correct and complete copies of existing Articles of
Incorporation and Bylaws of SBHC, as amended to date. SBHC is not in violation
of any provision of its Articles of Incorporation or Bylaws. The minute books of
SBHC contain accurate and complete minutes of all meetings and all consents
evidencing actions taken without a meeting by the Board of Directors (and any
committees thereof) and by the shareholders of SBHC.
3.6 No Holding Company or Joint Venture. No corporation or other entity
except the Security Bank Holding Company Employee Stock Ownership Plan Trust is
registered or, to the knowledge of SBHC is required to be registered as a bank
holding company under the Bank Holding Company Act of 1956, as amended, because
of ownership or control of SBHC. SBHC does not directly or indirectly own or
control, either by power to control the investment or power to vote, any shares
of capital stock of any other corporation or entity other than set forth in
Section 3.2, other than shares held in a fiduciary or custodial capacity in the
ordinary course of business and shares representing less than five percent of
the outstanding shares of such corporation acquired in partial or full
satisfaction of debts previously contracted. SBHC is not a part of any joint
venture, or general or limited partnership, or a member of any unincorporated
association.
3.7 Shareholder Reports. SBHC has delivered to Pacific State as
Schedule 3.7 copies of all of SBHC's reports and other communications to
stockholders since January 1, 1997, including all proxy statements and notices
of shareholder meetings. Until the Effective Date, SBHC will furnish to Pacific
State copies of all future communications within two days such materials are
first sent to its shareholders.
3.8 Books and Records. The books and records of SBHC accurately reflect
in all material respects the transactions to which it is a party or by which its
properties are bound or subject. Such books and records have been and are
accurate and complete and comply in all material respects with applicable legal,
regulatory and accounting requirements.
3.9 Legal Proceedings. Except for regulatory examinations conducted in
the normal course of regulation of SBHC, and except as disclosed in Schedule 3.9
delivered to Pacific State, there are no actions, suits, proceedings, claims or
governmental investigations pending or, to the knowledge of SBHC, threatened
against or affecting SBHC before any court, administrative officer or agency,
other governmental body or arbitration which might, individually or in the
aggregate, result in any material adverse change in the business, assets,
earnings, operation or condition (financial or otherwise) of SBHC or which might
hinder or delay the consummation of the transactions contemplated by this
Agreement or the Plan of Merger.
3.10 Compliance with Lending Laws and Regulations. Except as disclosed in
Schedule 3.10 delivered to Pacific State:
(a) The conduct by it of its business and the operation by
SBHC of the properties or other assets owned or leased by it does not violate or
infringe any domestic or foreign laws, statutes,
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<PAGE>
ordinances, rules or regulations, the enforcement of which, individually or in
the aggregate, would materially and adversely affect SBHC. Specifically, but
without limitations, SBHC is in compliance in all material respects with every
local, state or federal law or ordinance, and any regulation or order issued
thereunder, now in effect and applicable to SBHC governing or pertaining to fair
housing, anti-redlining, equal credit opportunity, truth-in-lending, real estate
settlement procedures, fair credit reporting and every other prohibition against
unlawful discrimination in residential lending, or governing consumer credit,
including, but not limited to, the Community Reinvestment Act, the Consumer
Credit Protection Act, Truth-in-Lending Law, and Regulation Z promulgated by the
FRB, and the Real Estate Settlement Procedures Act of 1974. All loans, leases,
contracts and accounts receivable (billed and unbilled), security agreements,
guarantees and recourse agreements, of SBHC, as held in its portfolios, or as
sold into the secondary market represent and are valid and binding obligations
of their respective parties and debtors, enforceable in accordance with their
respective terms; each of them is based on a valid, binding and enforceable
contract or commitment, each of which has been executed and delivered in full
compliance, in form and substance, with any and all federal, state or local laws
applicable to SBHC, or to the other party or parties to the contract(s) or
commitment(s), including without limitation the Truth-in-Lending Act,
Regulations Z and U of the FRB, laws and regulations providing for
non-discriminatory practices in the granting of loans or credit, applicable
usury laws, and laws imposing lending limits; and all such contracts or
commitments have been administered in full compliance with all applicable
federal, state or local laws or regulations. All Uniform Commercial Code
filings, or filings of trust deeds, or of lien or other security interest
documentation that are required by any applicable federal, state or local
government laws and regulations to perfect the security interests referred to in
any and all of such documents or other security agreements have been made, and
all security interests under such deeds, documents or security agreements have
been perfected, and all contracts have been entered into or assumed in full
compliance with all applicable material legal or regulatory requirements.
(b) All loan files of SBHC are complete and accurate in all
material respects and have been maintained in accordance with good banking
practice.
(c) All notices of default, foreclosure proceedings or
repossession proceedings against any real or personal property collateral have
been issued, initiated and conducted by SBHC in full formal and substantive
compliance with all applicable federal, state or local laws and regulations, and
no loss or impairment of any security interest, or exposure to meritorious
lawsuits or other proceedings against SBHC has been or will be suffered or
incurred by SBHC.
(d) SBHC is not in violation of any applicable servicer or any
other requirements of the FHA, VA, FNMA, GNMA, FHLMC, SBA or any private
mortgage insurer which insured or guaranteed any loans owned by SBHC or as to
which SBHC has sold to other investors, the effect of which violation would
materially and adversely affect the business, assets, earnings, operation or
condition (financial or otherwise) of SBHC, and with respect to such loans SBHC
has not done or failed to do, or caused to be done or omitted to be done, any
act the effect of which act or omission impairs or invalidates (i) any FHA
insurance or commitments of the FHA to insure, (ii) any VA guarantee or
commitment of the VA to guarantee, (iii) any SBA guarantees or commitments of
the SBA to guarantee, (iv) any private mortgage insurance or commitment of any
private mortgage insurer to insure, (v) any title insurance policy, (vi) any
hazard insurance policy, or (vii) any flood insurance policy required by the
National Flood Insurance Act of 1968, as amended, which would materially and
adversely affect the business, assets, earnings, operation or condition
(financial or otherwise) of SBHC.
(e) SBHC is not knowingly engaged principally, or as one of
its important activities, in the business of extending credit for the purpose of
purchasing or carrying any margin stock.
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3.11 Hazardous Wastes. To the best knowledge of the directors and officers
of SBHC, neither SBHC nor any other person having an interest in any property
which SBHC owns or leases, or has owned or leased, or in which either holds any
security interest, mortgage, or other liens or interest including but not
limited to as beneficiary of a trust deed ("Property") has engaged in the
generation, use, manufacture, treatment, transportation, storage (in tanks or
otherwise), or disposal of Hazardous Material on or from such Property.
Individually or in the aggregate, there has been no: (i) presence, use,
generation, handling, treatment, storage, release, threatened release, migration
or disposal of Hazardous Material; (ii) condition that could result in any use,
ownership or transfer restriction; or (iii) condition of nuisance on or from
such Property, any of which individually or collectively would have a material
adverse effect on the business, assets, earnings, operation or condition
(financial or otherwise) of SBHC. SBHC has not received notice of, or has reason
to know of, a condition that could give rise to any private or governmental
suit, claim, action, proceeding or investigation against SBHC, any such other
person or such Property as a result of any of the foregoing events. "Hazardous
Material" means any chemical, substance, material, object, condition, or waste
harmful to human health or safety or to the environment due to its
radioactivity, ignitability, corrosivity, reactivity, explosivity, toxicity,
carcinogenicity, infectiousness or other harmful or potentially harmful
properties or effects, including, without limitation, petroleum or petroleum
products, and all of those chemicals, substances, materials, objects,
conditions, wastes or combinations of them which are now or become listed,
defined or regulated in any manner by any federal, state or local law based,
directly or indirectly, upon such properties or effects.
3.12 Contingent and Other Liabilities. Except as set forth in the SBHC
Public Reports or SBHC Call Reports or in Schedules delivered by SBHC to Pacific
State, and except for FDIC insured deposits and federal funds purchased and
securities sold under agreements to repurchase arising out of transactions
subsequent to the date of such Reports, SBHC has no obligations or liabilities
of any nature (whether accrued, absolute, contingent or otherwise) which is
material or which, when combined with all other such obligations or liabilities
would be material to the business, assets, earnings, operation or condition
(financial or otherwise) of SBHC.
3.13 No Adverse Changes. Since March 31, 1997, there has been no material
adverse change in the business, assets, earnings, operations, (financial or
otherwise) of SBHC and its Subsidiaries taken as a whole.
3.14 Regulatory Approvals Required. The nature of business and operations
of SBHC do not require any approval, authorization, consent, license, clearance
or order of, any declaration or notification to, or any filing or registration
with, any governmental or regulatory authority in order to permit SBHC and PSB
Interim to perform their obligations under this Agreement or Plan of Merger
except for:
(a) Approval of the Merger by the Oregon Director;
(b) Approval from the FRB of the acquisition of Pacific State by SBHC;
(c) Approval of the Plan of Merger by the FDIC and the Oregon Director;
(d) Issuance of an interim banking charter by the Oregon Director to PSB
Interim;
(e) Filing of the Plan of Merger with the Oregon Director; and
(f) Registration with the SEC and state blue sky administrators of the SBHC
Stock to be issued to the Pacific State shareholders.
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3.15 Corporate and Shareholder Approval of Agreement, Binding
Obligations. SBHC has all requisite corporate power to execute, deliver and
perform its obligations under this Agreement and the Plan of Merger. The
execution, delivery and performance of this Agreement and the Plan of Merger,
and the transactions contemplated thereby, have been duly authorized by the
Board of Directors of SBHC. No other corporate action on the part of SBHC (other
than the approval of this Agreement, the Plan of Merger and the transactions
contemplated thereby by SBHC's shareholders) is required to authorize this
Agreement or the Plan of Merger to which it is a party or the consummation of
the transactions contemplated thereby. This Agreement has been duly executed and
delivered by SBHC and constitutes the legal, valid and binding obligation of
SBHC enforceable against SBHC in accordance with its terms. The Plan of Merger,
when duly executed and delivered by SBHC, will constitute the legal, valid and
binding obligation of SBHC enforceable against it in accordance with its terms.
3.16 No Violations. The execution, delivery and performance of this
Agreement and the Plan of Merger to which it is a party will not violate the
Articles of Incorporation or Bylaws of SBHC. Assuming the accuracy of Pacific
State's representations and warranties, its compliance with its covenants, and
its performance of its obligations under this Agreement and the Plan of Merger,
the consummation of the transactions contemplated by this Agreement will not
result in any material adverse change in the business, assets, earnings,
operations or condition (financial or otherwise) of SBHC and its Subsidiaries,
taken as a whole.
3.17 Employee Benefits.
Each Employee Benefit Plan sponsored or maintained by SBHC
("Benefit Plan") is set forth in Schedule 3.17. Except as set forth in such
Schedule, SBHC neither has nor sponsors any other pension, profit sharing,
thrift, savings, bonus, retirement, vacation, life insurance, health insurance,
severance, sickness, disability, medical or death benefit plans.
SBHC and, to the knowledge of the executive officers and
directors of SBHC, all other persons having fiduciary or other responsibilities
or duties with respect to any Benefit Plan, are, and have since inception been,
in compliance in all material respects with, and each such Benefit Plan is and
has been operated and administered in accordance with, its provisions and in
compliance with the applicable laws, rules and regulations governing such Plan,
including, without limitation, the rules and regulations promulgated by the
Department of Labor, the Pension Benefit Guaranty Corporation and the Internal
Revenue Service under ERISA or the Code.
Neither SBHC nor, to SBHC's knowledge, any plan fiduciary of
any Benefit Plan has engaged in any transaction in violation of section 406(a)
or (b) of ERISA (for which no exemption exists under section 408 of ERISA) or
any "prohibited transaction" (as defined in section 4975(c)(1) of the Code) for
which no exemption exists under section 4975(c)(2) or (d) of the Code or in any
prohibited transactions under predecessor provisions of the Code. SBHC has had
no liabilities to the Pension Benefit Guaranty Corporation ("PBGC").
3.18 Proxy Statement. The registration statement to be filed by SBHC on
Form S-4 with the SEC and the proxy statement to be used by SBHC to solicit
proxies for the meeting of SBHC shareholders held to consider and vote upon this
Agreement, and the transactions contemplated thereby (in its definitive form the
"Proxy Statement"), will fairly describe the transaction and the parties, and
will contain no untrue statement of any material fact and will not omit to state
any material fact required to be stated therein or necessary to make the
statements therein not misleading, except those statements in or omission from
the Proxy Statement which may be made in reliance upon and in conformity with
information furnished by Pacific State for use in the Proxy Statement. SBHC will
promptly advise Pacific
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State in writing if at any time prior to the Pacific State or SBHC shareholders'
meetings, SBHC shall obtain knowledge of any facts that might make it necessary
or appropriate to amend or supplement the Proxy Statement in order to make the
statements therein not misleading or to comply with applicable law.
3.19 Organization, Existence, and Authority of the Interim Bank. As of the
Effective Date, PSB Interim will be a state banking corporation, duly organized,
validly existing, and in good standing under the laws of the State of Oregon,
with all requisite power and authority to own, lease, and operate its properties
and assets and carry on their businesses in the manner then being conducted. PSB
Interim will not have any significant assets other than cash and cash
equivalents and no liabilities other than organizational expenses and its
obligation under the Plan of Merger. PSB Interim will not be authorized to
conduct any banking business and will not have conducted any business other than
that necessary to effect the transactions contemplated by the Plan of Merger.
3.20 SBHC Schedules. SBHC has delivered to Pacific State the following
schedules, as described in the preceding Sections 3.1 through 3.19:
3.3 SBHC Public Reports.
3.5 Articles of Incorporation and Bylaws.
3.7 Reports to Shareholders since January 1, 1997.
3.9 Schedule of Litigation.
3.10 Schedules of Law/Regulatory Violations.
3.17 Employee Benefit Plans
The information in the schedules constitutes additional representations
and warranties made by SBHC hereunder and is incorporated herein by reference.
The copies of documents furnished as part of these schedules are true, correct
and complete copies and include all amendments, supplements, and modifications
thereto and all waivers applicable thereunder.
3.21 No Misstatements or Omissions. No representation or warranty of
SBHC to this Agreement or in any statement, certificate or schedule furnished or
to be furnished by SBHC pursuant to this Agreement, contains or will contain any
untrue statement of a material fact.
4. COVENANTS OF PACIFIC STATE
4.1 Certain Actions. During the period between the date hereof and the
earlier of the Effective Date or the termination of this Agreement, Pacific
State shall not, without first obtaining the written approval of SBHC:
(a) Amend its Articles of Incorporation or Bylaws;
(b) Declare or pay any dividend; redeem, repurchase or
otherwise acquire or agree to acquire any of Pacific State's Stock; or make or
commit to make any other distribution to Pacific State's stockholders except
that it will declare and pay (or has declared and paid) a cash dividend equal to
its regular semi-annual cash dividend of $0.56 per share provided such dividend
does not exceed Pacific State's after tax income from April 1, 1997 through the
Effective Date.
(c) Except under options and convertible securities identified
in Schedule 2.2, issue, sell, or deliver; agree to issue, sell or deliver; or
grant or agree to grant any shares of any class of the stock of Pacific State;
any securities convertible into any of such shares; or any options, warrants, or
other rights to purchase;
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(d) Except in the ordinary course of business, borrow or agree to borrow
any funds or voluntarily incur, assume or become subject to, whether directly or
by way of guarantee or otherwise, any commitment, obligation or liability
(absolute or contingent); or cancel or agree to cancel any debts or claims;
(e) Except (for the sale of the surplus rental building or in the ordinary
course of business, lease, sell or transfer; agree to lease, sell or transfer;
or grant or agree to grant any preferential rights to lease or acquire, any of
its assets, property or rights; make or permit any amendment or termination of
any contract, agreement, instrument or other right to which Pacific State is a
party and which is material to Pacific State's business, assets, earnings,
operation or condition (financial or otherwise); or mortgage, pledge or subject
to a lien or any other encumbrance any of its assets, tangible or intangible;
(f) Violate, or commit a breach of or default under any contract, agreement
or instrument to which it is a party or to which any of its assets may be
subject and which is material to its business, assets, earnings, operation or
condition (financial or otherwise); or violate any applicable law, regulation,
ordinance, order, injunction or decree or any other requirements of any
governmental body or court, relating to its assets or business;
(g) Increase or agree to increase the compensation payable to any officer,
director, employee or agent, except for merit increases to non-management
personnel in the ordinary course of business consistent with past practices;
enter into any contract of employment for a period greater than 30 days or
providing for payments upon termination of employment or the occurrence of any
other event including but not limited to the consummation of the Plan of Merger;
or enter into or make any change in any Employee Benefit Plan except as required
by law;
(h) Except in the ordinary course of business through foreclosure or
transfer in lieu thereof in the collection of loans to customers, acquire
control of or any other ownership interest in any other corporation,
association, joint venture, partnership, business trust or other business
entity; acquire control or ownership of all or a substantial portion of the
assets of any of the foregoing; merge, consolidate or otherwise combine with any
other corporation; or enter into any agreement providing for any of the
foregoing;
(i) Acquire an ownership or leasehold interest in any real property whether
by foreclosure, deed in lieu of foreclosure or otherwise without making an
appropriate environmental evaluation and without providing such evaluation and
advance notice to SBHC at least 30 days in advance;
(j) Make any payment in excess of $10,000 in settlement of any pending or
threatened legal proceeding involving a claim against Pacific State;
(k) Engage in any activity or transaction which is other than in the
ordinary course of business including the sale of any properties, securities,
servicing rights, loans or other assets except as specifically contemplated
hereby, or which would have a material adverse effect on the business, assets,
earnings, operation or condition (financial or otherwise) of Pacific State;
(l) Acquire, open or close any office or branch;
(m) Do any act which causes Pacific State not to remain in good standing
with all regulatory authorities having jurisdiction over its business
operations;
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(n) Make or commit to make any capital expenditures, capital additions or
capital improvements involving an amount in excess of $10,000;
(o) Make, renew, commit to make, or materially modify any loan over
$100,000 or a series of loans or commitments over $100,000 to any person or
related persons without furnishing a copy of the report provided to Pacific
State's loan committee to SBHC within three (3) business days after such
approval;
(p) Enter into or modify any agreement or arrangement (except for renewals
of previously disclosed indebtedness) which alone or together with all similar
arrangements exceeds $25,000, with any director or officer of Pacific State, any
person who owns more than five percent (5%) of the outstanding capital stock of
Pacific State, or any business or entity in which such director, officer or
beneficial owner has an ownership interest in excess of ten percent (10%);
(q) Since March 31, 1997 has not and will not sell any investment
securities at a gain except as necessary to provide liquidity, in accordance
with past practices;
(r) Since March 31, 1997 and through the date of closing has accrued for
year end employee discretionary bonuses at the rate of six percent (6%) of
compensation and the anticipated profit sharing contribution at the rate of
fifteen percent (15%) of compensation.
4.2 Filing Reports and Returns, Payment of Taxes. During the period between
the date hereof and the earlier of the Effective Date or the termination of this
Agreement, Pacific State shall duly and timely (by the due date or any duly
granted extension thereof) file all reports and returns required to be filed
with federal, state, local, foreign and other regulatory authorities, including,
without limitation, reports required to be filed with the FDIC or Oregon
Director and all required federal, state and local tax returns. Unless it is
contesting the same in good faith and, if appropriate, has established
reasonable reserves therefore, Pacific State will promptly pay all taxes and
assessments indicated by tax returns as due or otherwise lawfully levied or
assessed upon it or any of its properties and withhold or collect and pay to the
proper governmental authorities or hold in separate bank accounts for such
payment all taxes and other assessments which are required by law to be so
withheld or collected.
4.3 Preservation of Business. During the period between the date hereof and
the earlier of the Effective Date or the termination of this Agreement, Pacific
State shall use its best efforts to preserve intact its business organization;
to preserve its relationships and goodwill with its customers, employees and
other having business dealings with it; and to keep available the services of
its present officers, agents and employees. Pacific State will not institute any
novel, unusual or material change in its methods of management, lending
policies, personnel policies, accounting, marketing, investments or operations.
4.4 Best Efforts. Pacific State will use its best efforts to obtain and to
assist SBHC in obtaining all necessary approvals, consents and orders, including
but not limited to approval of the FDIC, FRB and the Oregon Director, to the
transactions contemplated by this Agreement and the Plan of Merger, and to
obtain the approval of the shareholders of Pacific State to the Agreement and to
the Plan of Merger. Further, Pacific State will use its best efforts to cause
the written assent at the end of this Agreement of the Directors of Pacific
State.
4.5 Continuing Accuracy of Representatives and Warranties. During the
period between the date hereof and the earlier of the Effective Date or the
termination of this Agreement, Pacific State will not take any action which
would cause or constitute a breach of any of the representations or warranties
of Pacific State contained in this Agreement or which would cause any such
representations or warranties,
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if made on and as the date of such event or the Effective Date, to be untrue or
inaccurate in any material respect (other than an event so affecting a
representation or warranty which is permitted hereby or is expressly limited to
a state of facts existing at a time prior to the occurrence of such event). In
the event of, and promptly upon becoming aware of the occurrence of or the
pending or threatened occurrence of any event which would cause or constitute
such a breach or inaccuracy, Pacific State will give detailed written notice
thereof to SBHC and will use its best efforts to prevent or promptly remedy such
breach or inaccuracy.
4.6 Updating Schedules. During the period between the date hereof and the
earlier of the Effective Date or the termination of this Agreement, Pacific
State will, from time to time and as appropriate to ensure that the schedules
provided to SBHC remain at all times accurate and complete, to and including the
Effective Date, promptly supplement the schedules. Notwithstanding anything to
the contrary contained herein, supplementation of such schedules following the
execution of this Agreement shall not be deemed a modification of Pacific
State's representations or warranties contained herein.
4.7 Rights of Access. During the period between the date hereof and the
earlier of the Effective Date or the termination of this Agreement, Pacific
State agrees to permit SBHC, and its employees, agents and representatives full
access to the premises of Pacific State on reasonable notice and to all books,
files and records of Pacific State, including but not limited to loan files,
litigation files and federal and state examination reports, and to furnish to
SBHC such financial and operating data and other information with respect to the
business and assets of Pacific State as SBHC shall reasonably request. Further,
Pacific State agrees to provide such access, information and written assurances
and representations as SBHC's certified public accountants may reasonably
request in order to enable them to audit Pacific State's balance sheet at
December 31, 1996 and March 31, 1997 and the results of operations for the year
and three months, then ended, respectively.
4.8 Delivery of Reports. During the period between the date hereof and the
earlier of the Effective Date or the termination of this Agreement, Pacific
State will deliver to SBHC promptly upon preparation copies of:
(a) Minutes of meetings of Pacific State's shareholders, Board of
Directors, and management or director committees;
(b) Pacific State loan committee reports and reports of loan delinquencies,
foreclosures and other adverse developments regarding loans; and of developments
regarding other real estate owned or other assets acquired through foreclosure
or action in lieu thereof;
(c) All regularly prepared internal financial statements of Pacific State,
which shall be issued not less frequently than monthly; and
(d) Quarterly statements of condition and income verified by Pacific
State's chief financial officer and complying with either regulatory accounting
principles or generally accepted accounting principles consistently applied,
which present fairly the financial condition and results of operations of
Pacific State on the dates and for the periods covered.
4.9 Payment of Obligations. During the period between the date hereof and
the earlier of the Effective Date or the termination of this Agreement, Pacific
State will pay promptly upon receipt of billings all accounts payable, including
professional fees for legal, financial and accounting services, and will
maintain its assets in accordance with good business practices.
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4.10 Shareholder Meeting. Upon effectiveness with the SEC of the Proxy
Statement, Pacific State shall promptly call a meeting of its shareholders to
consider and vote upon this Agreement, the Plan of Merger and the transactions
contemplated thereby. Pacific State shall give notice of the meeting in
accordance with Oregon law and all requirements of laws and regulations
applicable to the merger transaction. Pacific State shall deliver to its
shareholders a proxy statement complying with the representations and warranties
of Section 2.28 hereof in connection with the shareholders meeting. Provided
that the representations and warranties of SBHC contained herein continue to be
accurate, the Board of Directors of Pacific State will recommend approval of all
matters submitted to the shareholders unless, upon advise of counsel, their
fiduciary duties otherwise requires and the shareholders of Pacific State
signing this Agreement agree to vote all Pacific State shares held or controlled
by them for the approval of all such matters.
4.11 Other Actions. Pacific State covenants and agrees to execute, file and
record such documents and do such other acts and things as are necessary or
appropriate to obtain required government and regulatory approvals to and to
otherwise accomplish this Agreement and the Plan of Merger.
4.12 Appointment to Pacific State Board. As of or immediately after the
Effective Date, Pacific State will cause to be appointed two current members of
SBHC's Board, designated by SBHC, to serve on the Pacific State Board of
Directors until its next annual meeting of shareholders.
5. COVENANTS OF SBHC
5.1 Certain Actions. During the period between the date hereof and the
earlier of the Effective Date or the termination of this Agreement, SBHC shall
not, without first obtaining the written approval of Pacific State:
(a) Amend its Articles of Incorporation or Bylaws;
(b) Declare or pay any dividend; redeem, repurchase or otherwise acquire or
agree to acquire any of SBHC's capital stock; or make or commit to make any
other distribution to SBHC's stockholders except a regular cash dividend of not
more than $0.12 per share;
(c) Issue, sell, or deliver; agree to issue, sell or deliver; or grant or
agree to grant any shares of any class of the stock of SBHC; any securities
convertible into any of such shares; or any options, warrants, or other rights
to purchase, at a price less than the prevailing market price for such SBHC
securities except as may be permitted pursuant to existing stock option or other
compensation plans identified in the SBHC Public Reports;
(d) Except in the ordinary course of business, or to finance the
transactions contemplated by the Agreement, borrow or agree to borrow any funds
or voluntarily incur, assume or become subject to, whether directly or by way of
guarantee or otherwise, any liability (absolute or contingent); or cancel or
agree to cancel any debts or claims;
(e) Except in the ordinary course of business or otherwise anticipated or
permitted by the Agreement, lease, sell or transfer; agree to lease, sell or
transfer; or grant or agree to grant any preferential rights to lease or
acquire, any of its assets, property or rights; make or permit any amendment or
termination of any contract, agreement, instrument or other right to which it is
a party and which is material to its business, assets, earnings, operation or
condition (financial or otherwise); mortgage, pledge or subject to a lien or any
other encumbrance any of its assets, tangible or intangible
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<PAGE>
or agree to acquire or be acquired by way of merger or otherwise, any other
financial institution except for the creation of a subsidiary to operate
Security Bank's Brookings branch;
(f) Violate, or commit a breach of or default under any contract, agreement
or instrument to which it is a party or to which any of its assets may be
subject and which is material to its business, assets, earnings, operation or
condition (financial or otherwise); or violate any applicable law, regulation,
ordinance, order, injunction or decree or any other requirements of any
governmental body or court, relating to its assets or business;
(g) Acquire an ownership or leasehold interest in any real property whether
by foreclosure, deed in lieu of foreclosure or otherwise without making an
appropriate environmental evaluation;
(h) Engage in any activity or transaction which would have a material
adverse effect on the business, assets, earnings, operation or condition
(financial or otherwise) of SBHC;
(i) Do any act which causes SBHC not to remain in good standing with all
regulatory authorities having jurisdiction over their business operations;
5.2 Filing Reports and Returns, Payment of Taxes. During the period between
the date hereof and the earlier of the Effective Date or the termination of this
Agreement, SBHC shall duly and timely (by the due date or any duly granted
extension thereof) file all reports and returns required to be filed with
federal, state, local, foreign and other regulatory authorities, including,
without limitation, reports required to be filed with the FRB, FDIC and the
Oregon Director and all required federal, state and local tax returns. Unless it
is contesting the same in good faith and, if appropriate, has established
reasonable reserves therefore, SBHC will promptly pay all taxes and assessments
indicated by tax returns as due or otherwise lawfully levied or assessed upon it
or any of its properties and withhold or collect and pay to the proper
governmental authorities or hold in separate bank accounts for such payment all
taxes and other assessments which are required by law to be so withheld or
collected.
5.3 Preservation of Business. During the period between the date hereof and
the earlier of the Effective Date or the termination of this Agreement, SBHC
shall use its best efforts to preserve intact its business organization; to
preserve its relationships and goodwill with its customers, employees and other
having business dealings with it; and to keep available the services of its
present officers, agents and employees. SBHC will not institute any novel,
unusual or material change in its methods of management, lending policies,
personnel policies, accounting, marketing, investments or operations.
5.4 Best Efforts. SBHC will use its best efforts to obtain and to assist
Pacific State in obtaining, all necessary approvals, consents and orders,
including but not limited to approvals of the FRB, FDIC and the Oregon Director,
to the transactions contemplated by this Agreement and the Plan of Merger, and
to obtain the approval of the shareholders of SBHC to the Agreement and to the
Plan of Merger.
5.5 Continuing Accuracy of Representatives and Warranties. During the
period between the date hereof and the earlier of the Effective Date or the
termination of this Agreement, SBHC will not take any action which would cause
or constitute a breach of any of the representations or warranties of SBHC
contained in this Agreement or which would cause any such representations or
warranties, if made on and as the date of such event or the Effective Date, to
be untrue or inaccurate in any material respect (other than an event so
affecting a representation or warranty which is permitted hereby or is expressly
limited to a state of facts existing at a time prior to the occurrence of such
event). In the event of, and
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<PAGE>
promptly upon becoming aware of the occurrence of or the pending or threatened
occurrence of any event which would cause or constitute such a breach or
inaccuracy, SBHC will give detailed written notice thereof to Pacific State and
will use its best efforts to prevent or promptly remedy such breach or
inaccuracy.
5.6 Updating Schedules. During the period between the date hereof and the
earlier of the Effective Date or the termination of this Agreement, SBHC will,
from time to time and as appropriate to ensure that the Schedules provided to
Pacific State remain at all times accurate and complete, to and including the
Effective Date, promptly supplement the Schedules. Notwithstanding anything to
the contrary contained herein, supplementation of such Schedules following the
execution of this Agreement shall not be deemed a modification of SBHC's
representations or warranties contained herein.
5.7 Rights of Access. During the period between the date hereof and the
earlier of the Effective Date or the termination of this Agreement, SBHC agrees
to permit Pacific State and its employees, agents and representatives full
access to the premises of SBHC on reasonable notice and to all books, files and
records of SBHC, including but not limited to loan files, litigation files and
federal and state examination reports, and to furnish to Pacific State such
financial and operating data and other information with respect to the business
and assets of SBHC as Pacific State shall reasonably request.
5.8 Delivery of Reports. During the period between the date hereof and the
earlier of the Effective Date or the termination of this Agreement, SBHC will
deliver to Pacific State promptly upon preparation copies of:
(a) All regularly prepared internal financial statements of SBHC, which
shall be issued not less frequently than monthly; and
(b) Quarterly statements of condition and income verified by SBHC's chief
financial officer and complying with generally accepted accounting principles
consistently applied, which present fairly the financial condition and results
of operations of SBHC on the dates and for the periods covered.
5.9 Payment of Obligations. During the period between the date hereof and
the earlier of the Effective Date or the termination of this Agreement, SBHC
will pay promptly upon receipt of billings all accounts payable, including
professional fees for legal and accounting services, and will maintain its
assets in accordance with good business practice.
5.10 Shareholder Meeting. Upon the effectiveness with the SEC of the Proxy
Statement, SBHC shall promptly call a meeting of its shareholders to consider
and approve this Agreement, the Plan of Merger and the issuance of SBHC Stock
contemplated thereby. SBHC shall give notice of the meeting in accordance with
Oregon law and all requirements of laws and regulations applicable to the
approval. SBHC shall deliver to its shareholders a proxy statement complying
with the representations and warranties of Section 3.18 hereof in connection
with the shareholders meeting. Provided that the representations and warranties
of Pacific State contained herein continue to be accurate, the Board of
Directors of SBHC will recommend approval of this Agreement and the transactions
contemplated thereby to the SBHC shareholders.
5.11 Organize Interim Bank and Approve Plan of Merger. Promptly following
execution of this Agreement, SBHC will organize and file with the Oregon
Director Articles of Incorporation for PSB Interim and will promptly seek
approval from all regulatory bodies of the Plan of Merger and the transactions
contemplated by this Agreement. Further, SBHC will cause the Board of Directors
of PSB Interim to approve the Plan of Merger and will consent to such Plan of
Merger as Interim's sole
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<PAGE>
shareholder and provide the shares of SBHC Stock and other consideration
required in order to consummate the Plan of Merger.
5.12 Other Actions. SBHC covenant and agree to execute, file and record
such documents and do such other acts and things as are necessary or appropriate
to obtain required government and regulatory approvals to and to otherwise
accomplish this Agreement and the Plan of Merger.
5.13 Appointment to SBHC and Security Bank Boards. As of or immediately
following the Effective Date, SBHC will cause to be appointed to its Board of
Directors two current members of Pacific State's Board selected by such Board
and acceptable to SBHC and to nominate such persons (or their replacements as
selected by the Pacific State Board) to serve an ensuing term of at least two
years, subject to a required shareholder vote at the 1998 Annual Shareholders
Meeting. Further SBHC will cause to be appointed to Security Bank's Board of
Directors a current member of Pacific State's Board of Directors for a term or
terms to expire no sooner than March, 1999. SBHC agrees that it will not amend
the Articles of Incorporation or Bylaws of PSB or take any other action which
would materially diminish the right of indemnification currently afforded the
Board of Directors of PSB.
5.14 PSB and Employee Matters. The Board of Directors of Pacific State
shall continue to have the authority to establish and determine PSB policies and
practices and the compensation for Pacific State officers and employees,
including the President's Deferred Compensation Plan consistent with corporate
wide policies.
Promptly after the Effective Date, SBHC's shall ensure that Pacific State
employees are permitted to participate in the employee benefit programs then
made available to Security Bank employees with credit for service with PSB
deemed service with SBHC for eligibility and vesting purposes, provided,
however, that employees of Pacific State as of the Effective Date shall be
entitled to have health insurance premiums for themselves and their dependents
paid by Pacific State so long as such dependents are eligible for coverage by
the group health insurance provided and such payment does not violate ERISA or
other applicable rules. Pacific State shall not pay for dependent coverage for
employees whose employment commences after the Effective Date. It is the intent
of SBHC to include PSB employees within its Employee Stock Ownership Plan and
Trust in lieu of such employees receiving the full amount of PSB's 1997 profit
sharing contribution to its 401(k) plan if such is legally permissible.
6. CONDITIONS TO OBLIGATIONS OF SBHC
The obligation of SBHC under this Agreement and the Plan of Merger to
consummate the Merger, shall be subject to the satisfaction, on or before the
Effective Date, of the following conditions (unless waived by SBHC in writing
and not required by law):
6.1 Shareholders Approvals. Approval of this Agreement and the Plan of
Merger by the stockholders of SBHC and Pacific State and holders of fewer than
seven percent of Pacific State shall have voted against and otherwise taken
steps to perfect their dissenter appraisal rights.
6.2 No Litigation. Absence of any suit, action, or proceeding (made or
threatened) against SBHC, Pacific State, PSB Interim, or any of their directors
or officers, seeking to challenge, restrain, enjoin, or otherwise affect this
Agreement or the Plan of Merger or the transactions contemplated thereby;
seeking to restrict the rights of the parties or the operation of the business
of Pacific State or SBHC after consummation of the Plan of Merger; or seeking to
subject the parties to this Agreement or the Plan of Merger or any of their
officers or directors to any liability, fine, forfeiture or penalty on the
grounds that the parties hereto or their directors or officers have violated or
will violate their fiduciary
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<PAGE>
duties to their respective shareholders or will violate any applicable law or
regulation in connection with the transactions contemplated by this Agreement
and the Plan of Merger.
6.3 No Banking Moratorium. Absence of a banking moratorium or other
suspension of payment by banks in the United States or any new limitation on
extension of credit by commercial banks in the United States.
6.4 Regulatory Approvals. Procurement of all consents, orders and approvals
required by law, and the satisfaction of all other necessary or appropriate
legal requirements, including but not limited to declaration by the SEC of
effectiveness of the Registration Statement, and approvals by FRB, FDIC and the
Oregon Director of the transaction contemplated by the Agreement and the Plan of
Merger, without any conditions which SBHC determines to be materially
disadvantageous or burdensome, and the expiration of all regulatory waiting
periods.
6.5 Other Consents. Receipt of all other consents and approvals necessary
for consummation of the transactions contemplated by this Agreement and the Plan
of Merger.
6.6 Opinion of Counsel. Receipt by SBHC of a favorable opinion by Schwabe
Williams & Wyatt, counsel to Pacific State, in form and substance satisfactory
to SBHC and its counsel, to the effect that:
(a) Pacific State is a state chartered bank, duly organized, validly
existing and in good standing under the laws of the State of Oregon and has all
requisite corporate power and authority to own, lease and operate its properties
and assets and carry on its business in the manner being conducted on the
Effective Date;
(b) Pacific State has all requisite corporate power and authority to
execute, deliver and perform its obligations under the Agreement and the Plan of
Merger; the execution, delivery and performance of the Agreement and the Plan of
Merger, and the consummation of the transactions contemplated thereby, have been
duly authorized by all requisite corporate action on the part of Pacific State;
and the Agreement and the Plan of Merger has been duly executed and delivered by
Pacific State and constitute the legal, valid, and binding obligation of Pacific
State, enforceable in accordance with their terms, except as the same may be
limited by bankruptcy, insolvency, reorganization, moratorium or similar laws or
by equitable principles; and
(c) The authorized capital stock of Pacific State consists of 406,875
shares of common stock, $1.00 par value per share, of which 406,875 shares have
been duly issued and are validly outstanding, fully paid and nonassessable
except as provided by the Oregon Bank Act. Such shares are the only shares of
capital stock of Pacific State authorized, issued or outstanding; and to the
best of counsel's knowledge, Pacific State is not a party to, and is not
obligated by, any commitment, plan or arrangement to issue or to sell any shares
of capital stock or any equity interest in Pacific State. None of the shares of
common stock has been issued in violation of the pre-emptive rights of any
stockholder.
6.7 Corporate Documents. Receipt by SBHC of:
(a) A copy certified by the appropriate state officer of the Articles of
Incorporation of Pacific State;
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<PAGE>
(b) A current certificate of existence or good standing certificate for
Pacific State issued by the Oregon Director as of a date immediately prior to
the Effective Date; and
(c) Copies certified by the Secretary of Pacific State of the Bylaws of
Pacific State as amended to date and of resolutions adopted by the Board of
Directors and shareholders of Pacific State approving this Agreement and the
Plan of Merger.
6.8 Continuing Accuracy of Representations and Warranties. Except as
expressly contemplated hereby, the representations and warranties of Pacific
State being true at and as of the Effective Date as though such representations
and warranties were made at and as of the Effective Date.
6.9 Compliance with Covenants and Conditions. Compliance by Pacific State
with all agreements, covenants and conditions on its part required by this
Agreement to be performed or complied with prior to or at the Effective Date.
6.10 No Adverse Changes. Between March 31, 1997 and the Effective Date, the
absence of any material adverse change in the business, assets, liabilities,
income, or conditions, financial or otherwise, of Pacific State, except changes
contemplated by this Agreement and such changes as may have been previously
approved in writing by SBHC.
6.11 Reserve for Loan Losses. As of the Effective Date, Pacific State'
reserve for loan losses, after any required charge-offs, shall conform to the
representations and warranties of Section 2.25.
6.12 Certificate. Receipt by SBHC of a Certificate of the President and the
Chief Financial Officer of Pacific State, dated as of the Effective Date,
certifying to the best of their knowledge the fulfillment of the conditions
specified in Sections 6.1, 6.2, 6.4, 6.5, 6.8. 6.9, 6.10 and 6.11 hereof, and
such other matters with respect to the fulfillment by Pacific State of any of
the conditions of this Agreement as SBHC may reasonably request.
6.13 Satisfactory Compliance. Establishment to the satisfaction of SBHC,
based upon a review of the records and assets of Pacific State pursuant to
Section 4.7 hereof, that the business and assets of Pacific State are
substantially as represented by Pacific State and by the Pacific State Call
Reports and Pacific State Financial Reports and that Pacific State has complied
with all covenants of Pacific State hereunder and the foregoing conditions.
6.14 Tax Opinion. Receipt of a favorable opinion of Foster Pepper &
Shefelman PLLC, special counsel to SBHC, dated as of the Effective Date, in form
and substance satisfactory to SBHC to the effect that the transaction
contemplated by the Agreement and the Plan of Merger will be a reorganization
within the meaning of Section 368 of the Code; that the parties to the Agreement
and to the Plan of Merger will each be "a party to a reorganization" within the
meaning of Section 368(b) of the Code; and no taxable gain or loss will be
recognized by the shareholders of Pacific State who will receive solely SBHC
Stock (except for cash, if any, received in lieu of fractional shares); that the
basis in the SBHC Stock to be received by the recipients will be the same as the
basis in their stock in Pacific State exchanged (except for cash to be received
for any fractional share interests); and that, provided the stock exchanged was
held as a capital asset on the Effective Date, the holding period of the SBHC
Stock to be received will include the holding period of the stock of Pacific
State previously held, prior to the Effective Date.
6.15 Fairness Opinion. Pacific State will have received from Columbia
Financial Advisors, an opinion, dated as of the date the Board of Directors of
Pacific State shall have approved this
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<PAGE>
Agreement and updated immediately before Pacific State mails the Proxy Statement
to its shareholders, to the effect that the financial terms of the Merger are
financially fair to Pacific State's shareholders. SBHC will provide Pacific
State's investment advisor with such information as it may reasonably request in
order to render its opinion.
6.16 Accounting Treatment. It will have been determined to the satisfaction
of SBHC that the Merger will be treated for account purposes as a "pooling of
interests" in accordance with APB Opinion No. 16, and SBHC will have received a
letter to such effect from KPMG Peat Marwick LPP, certified public accountants.
7 CONDITIONS TO OBLIGATIONS OF PACIFIC STATE
The obligations of Pacific State under this Agreement and the Plan of
Merger to consummate the merger, shall be subject to the satisfaction, on or
before the Effective Date, of the following conditions (unless waived by Pacific
State in writing and not required by law):
7.1 Shareholder Approval. Approval of this Agreement and the respective
Plan of Merger by the stockholders of Pacific State and SBHC.
7.2 No Litigation. Absence of any suit, action, or proceeding (made or
threatened) against SBHC, Pacific State, PSB Interim or their directors or
officers, seeking to challenge, restrain, enjoin, or otherwise affect this
Agreement or the Plan of Merger or the transactions contemplated thereby; or
seeking to subject any of them or their officers or directors to any liability,
fine, forfeiture or penalty on the grounds that such parties have violated or
will violate their fiduciary duties to their respective shareholders or will
violate any applicable law or regulation in connection with the transactions
contemplated by this Agreement and the Plan of Merger.
7.3 No Banking Moratorium. Absence of a banking moratorium or other
suspension of payment by banks in the United States or any new limitation on
extension of credit by commercial banks in the United States.
7.4 Regulatory Approvals. Procurement of all consents, orders and approvals
required by law, and the satisfaction of all other necessary or appropriate
legal requirements, including but not limited to declaration by the SEC of
effectiveness of the Registration Statement, and approvals by FRB, FDIC and the
Oregon Director of the transaction contemplated by the Agreement and the Plan of
Merger, without any conditions which PSB determines to be materially
disadvantageous or burdensome, and the expiration of all regulatory waiting
periods.
7.5 Other Consents. Receipt of all other consents and approvals necessary
for consummation of the transactions contemplated by this Agreement and the Plan
of Merger.
7.6 Opinions of Counsel. Receipt by Pacific State of a favorable opinion of
Foster Pepper & Shefelman PLLC, special counsel to SBHC, dated as of the
Effective Date, in form and substance satisfactory to Pacific State and its
counsel to the effect that:
(a) SBHC is a corporation, duly organized and validly existing under the
laws of the state of Oregon, and has all requisite corporate power and authority
to own, lease, and operate its properties and assets and carry on its business
in the manner being conducted on the Effective Date;
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<PAGE>
(b) PSB Interim is a state banking corporation, duly organized, validly
existing and in good standing under the laws of the State of Oregon, has all
requisite corporate power and authority to own, lease, and operate its
properties and assets but is not licensed or chartered to carry on a general
banking business;
(c) SBHC and PSB Interim each have all requisite corporate power and
authority to execute, deliver and perform its obligations under the Agreement
and the Plan of Merger; the execution, delivery and performance of the Agreement
and the Plan of Merger and the consummation of the transactions contemplated
thereby, have been duly authorized by all requisite corporate action on the part
of each; and the Agreement and the Plan of Merger have been duly executed and
delivered by them and constitute the legal, valid and binding obligation of
each, enforceable in accordance with its terms, except as the same may be
limited by bankruptcy, insolvency, reorganization, moratorium or similar laws or
by equitable principles;
(d) The authorized capital stock of SBHC consists of 10,000,000 shares of
common stock, $5.00 par value per share, of which 3,169,700 shares are
outstanding and are validly issued, fully paid and nonassessable, 5,000,000
shares of voting preferred stock ($5.00 par value), and 5,000,000 shares of
non-voting preferred stock ($5.00 par value), none of the preferred stock of
which is issued or outstanding. Such shares are the only shares of capital stock
of SBHC authorized, issued or outstanding; and to the best of our knowledge,
SBHC is not a party to, and is not obligated by, any commitment, plan or
arrangement to issue or to sell any shares of capital stock or any other equity
interest in SBHC, except as set forth in the SBHC Public Reports.
(e) All of the issued and outstanding capital stock of PSB Interim is owned
by SBHC.
(f) The common stock to be issued by SBHC in accordance with the Plan of
Merger, when delivered in exchange (or in partial exchange) for the shares of
Pacific State Stock as contemplated by the Plan of Merger, will be authorized,
validly issued, fully paid and nonassessable; and
(g) The Registration Statement (Proxy Statement) registering the SBHC Stock
to be issued to the Pacific State shareholders under the Securities Act of 1933
("Act") has become effective and to the best of our knowledge no stop order
suspending the effectiveness of the Registration Statement or any part thereof
or the issuance of the shares in any jurisdiction has been issued and no
proceeding for that purpose has been initiated or pending or are contemplated
under the Act or any other securities laws.
7.7 Corporate Documents. Receipt by Pacific State of:
(a) Copy certified by the appropriate governmental officer of the Articles
of Incorporation of SBHC and PSB Interim;
(b) A current good standing certificate or certificate of existence for
SBHC and PSB Interim issued by the appropriate governmental officer as of a date
immediately prior to the Effective Date; and
(c) Copy certified by each Secretary of the Bylaws of SBHC and PSB Interim
as amended to date and of the resolutions adopted by the Board of Directors of
each approving this Agreement and the Plan of Merger.
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<PAGE>
7.8 Continuing Accuracy with Representations and Warranties. Except as
contemplated hereby, the representations and warranties of SBHC being true at
and as of the Effective Date as though such representations and warranties were
made at and as of the Effective Date.
7.9 Compliance with Covenants and Conditions. SBHC having complied with all
agreements, covenants and conditions on their part required by this Agreement to
be performed or complied with prior to or at the Effective Date.
7.10 No Adverse Changes. Between the date hereof and the Effective Date,
the absence of any material adverse change in the business, assets, liabilities,
income or condition, financial or otherwise, of SBHC and its Subsidiaries taken
as a whole, except changes contemplated by this Agreement and such changes that
may have been previously approved in writing by Pacific State.
7.11 Tax Opinion. Receipt of a favorable opinion of Foster Pepper &
Shefelman PLLC, special counsel to SBHC, dated as of the Effective Date, in form
and substance satisfactory to Pacific State to the effect that the transaction
contemplated by the Agreement and the Plan of Merger will be a reorganization
within the meaning of Section 368 of the Code; that the parties to the Agreement
and to the Plan of Merger will each be "a party to a reorganization" within the
meaning of Section 368(b) of the Code; and no taxable gain or loss will be
recognized by the shareholders of Pacific State who will receive solely SBHC
Stock (except for cash, if any, in lieu of fractional shares); that the basis in
the SBHC Stock to be received by the recipients will be the same as the basis in
their stock in Pacific State (except for cash to be received for any fractional
share interests); and that, provided the stock exchanged was held as a capital
asset on the Effective Date, the holding period of the SBHC Stock to be received
will include the holding period of the stock of Pacific State previously held,
prior to the Effective Date.
7.12 Certificates. Receipt by Pacific State of a Certificate of the
President and Chief Financial Officer of SBHC dated as of the Effective Date,
certifying to the best of their knowledge the fulfillment of the conditions
specified in Sections 7.1, 7.2, 7.4, 7.5, 7.8, 7.9 and 7.10 hereof and such
other matters with respect to the fulfillment by SBHC of any of the conditions
of this Agreement as Pacific State may reasonably request.
7.13 Fairness Opinion. Pacific State will have received from Columbia
Financial, an opinion, dated as of the date the Board of Directors of Pacific
State shall have approved this Agreement and updated immediately before Pacific
State mails the Proxy Statement to its shareholders, to the effect that the
financial terms of the Merger are financially fair to Pacific State's
shareholders.
8. CLOSING
The transactions contemplated by this Agreement and the Plan of Merger will
close in the office of Foster Pepper & Shefelman PLLC at such time and on such
date within seven (7) days following the satisfaction of all conditions prior to
closing set forth in Sections 6 and 7 (not waived or to be satisfied by delivery
of documents or opinions or a state of facts to exist at closing), as set by
notice from SBHC to Pacific State or such other time and place as the parties
may agree.
9. TERMINATION
9.1 Procedure for Termination. This Agreement may be terminated before the
Effective Date:
(a) By the mutual consent of the Boards of Directors of SBHC and Pacific
State acknowledged in writing;
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<PAGE>
(b) By SBHC or Pacific State acting through their Boards of Directors upon
written notice to the other parties, if (i) at the time of such notice the
mergers shall not have become effective by March 31, 1998 (or such later date as
shall have been agreed to in writing by SBHC and Pacific State acting through
their respective Boards of Directors), (ii) shareholders of Pacific State Bank
holding at least two-thirds of the Pacific State shares outstanding shall not
have approved the Agreement, the Plan of Merger and the transaction as
contemplated thereby prior to December 31, 1997, (iii) shareholders of SBHC
shall not have approved the Agreement and the transactions contemplated thereby
prior to December 31, 1997, or (iv) KPMG Peat Marwick, SBHC's auditors, advise
that the transaction proposed by the Agreement and the Plan of Merger would not
be accounted for as a pooling-of-interests;
(c) By SBHC, acting through its Board of Directors upon written notice to
Pacific State, if there has been a material misrepresentation or material breach
on the part of Pacific State in its representations, warranties and covenants
set forth herein or if there has been any material failure on the part of
Pacific State to comply with its obligations hereunder which misrepresentation,
breach or failure is not cured within thirty (30) days notice to Pacific State
of such misrepresentation, breach or failure; or by Pacific State, acting
through its Board of Directors upon written notice to SBHC, if there has been a
material misrepresentation or material breach by SBHC in its representations,
warranties and covenants set forth herein or if there has been a material
failure on the part of SBHC to comply with its obligations hereunder which
misrepresentation, breach or failure is not cured within thirty (30) days notice
to SBHC of such misrepresentation, breach or failure;
(d) By Pacific State upon advise of Schwabe Williamson & Wyatt that the
fiduciary duties of the Directors so require;
(e) By SBHC on written notice to Pacific State.
9.2 Effect of Termination. In the event this Agreement is terminated
pursuant to Section 9.1(a), 9.1(b)(i) or 9.1(b)(iv), it shall become wholly void
and of no further force and effect and there shall be no liability on the part
of any party or their respective Boards of Directors as a result of such
termination or abandonment.
If the Agreement is terminated by Pacific State pursuant to Section 9.1(c)
or by Pacific State or SBHC pursuant to 9.1(b)(iii), SBHC shall pay to Pacific
State its reasonable out-of-pocket costs to compensate it for the expenses and
effort taken to enter into and attempt to consummate the transactions.
If the Agreement is terminated by SBHC pursuant to Section 9.1(c) or by
Pacific State or SBHC pursuant to Section 9.1(b)(ii) or by Pacific State
pursuant to Section 9.1(d), then as an alternative to any specific performance
available to SBHC, Pacific State agrees to pay to SBHC to compensate it for the
reasonable expenses and efforts taken to enter into and attempt to consummate
the transaction; however, if Pacific State enters into an Alternative
Acquisition Transaction within one (1) year of such termination, Pacific State
will immediately pay SBHC an additional $350,000.
If the Agreement is terminated by SBHC pursuant to Section 9.1(e), in
addition to reimbursement to Pacific State of its reasonable out-of-pocket costs
and expenses, SBHC shall pay an additional sum of $175,000.
9.3 Documents from Pacific State. In the event of termination of this
Agreement, SBHC will promptly deliver to Pacific State all originals and copies
of documents and work papers obtained by SBHC from Pacific State, whether so
obtained before or after the execution hereof, and will not use any information
so obtained, and will not disclose or divulge such information so obtained;
provided,
-31-
Appendix A - 31
<PAGE>
however, that any disclosure of such information may be made to the extent
required by applicable law or regulation or judicial or regulatory process; and
provided further that SBHC shall not be obligated to treat as confidential any
such information which is publicly available or readily ascertainable from
public sources, or which was known to SBHC at the time that such information was
disclosed to it by Pacific State or which is rightfully received by SBHC from a
third party. The obligations arising under this Section 9.3 shall survive any
termination or abandonment of this Agreement.
9.4 Documents from SBHC. In the event of termination of this Agreement,
Pacific State will promptly deliver to SBHC all originals and copies of
documents and work papers obtained by Pacific State from SBHC, whether so
obtained before or after the execution hereof, and will not use, disclose or
divulge any information so obtained; provided, however, that any disclosure of
such information may be made to the extent required by applicable law,
regulation or judicial or regulatory process; and provided further, Pacific
State shall not be obligated to treat as confidential any information which is
publicly available or readily ascertainable from public sources, or which was
known to Pacific State at the time that such information was disclosed to it by
SBHC or which is rightfully received by Pacific State from a third party. The
obligations arising under this Section 9.4 shall survive any termination or
abandonment of this Agreement.
10. MISCELLANEOUS PROVISIONS
10.1 Amendment or Modification. Prior to the Effective Date, this Agreement
and the Plan of Merger may be amended or modified, either before or after
approval by the shareholders of Pacific State and SBHC, only by an agreement in
writing executed by the parties hereto upon approval of their respective boards
of directors; provided, however, that no such amendment or modification shall
increase the amount or modify the form of consideration to be received by the
Pacific State shareholders pursuant to the Plan of Merger without the approval
of the SBHC shareholders, or decrease the amount or modify the form of
consideration to be received by the Pacific State shareholders pursuant to the
Plan of Merger without the approval of the Pacific State shareholders.
10.2 Public Statements. No party to this Agreement shall issue any press
release or other public statement concerning the transactions contemplated by
this Agreement without first providing the other parties hereto with a written
copy of the text of such release or statement and obtaining the consent of the
other parties to such release or statement, which consent will not be
unreasonably withheld. The consent provided for in this Section shall not be
required if the delay would preclude the timely issuance of a press release or
public statement required by law or any applicable regulations. The provisions
of this Section shall not be construed as limiting the parties from
communications consistent with the purposes of this Agreement, including but not
limited to seeking regulatory and shareholder approvals necessary to complete
the transactions contemplated by this Agreement and the Plan of Merger.
10.3 Confidentiality. Each party shall use the non-public information that
it obtains from the other parties to this Agreement solely for the effectuation
of the transactions contemplated by this Agreement and the Plan of Merger or for
other purposes consistent with the intent of this Agreement and the Plan of
Merger and shall not use any such information for other purposes, including but
not limited to the competitive detriment of the other parties. Each party shall
maintain strictly confidential all non-public information it receives from the
other parties and shall, upon termination of this Agreement prior to the
Effective Date, return such information in accordance with Sections 9.3 and 9.4
hereof. The provisions of this Section shall not prohibit the use of information
consistent with the provisions of those sections or to prohibit disclosure of
information to the parties respective counsel, accountants, tax advisors, and
consultants, provided that those parties also agree to maintain such information
confidential in accordance with this Section and Sections 9.3 and 9.4 hereof.
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Appendix A - 32
<PAGE>
10.4 Waivers and Extensions. Each of the parties hereto may, by an
instrument in writing, extend the time for or waive the performance of any of
the obligations of the other parties hereto or waive compliance by the other
parties hereto of any of the covenants or conditions contained herein or in the
Plan of Merger, other than those required by law. No such waiver or extension of
time shall constitute a waiver of any subsequent or other performance or
compliance. No such waiver shall require the approval of the shareholders of any
party.
10.5 Expenses. Each of the parties hereto shall pay their respective
expenses in connection with this Agreement and the Plan of Merger and the
transactions contemplated thereby, except as otherwise may be specifically
provided.
10.6 Financial Advisors. Each party is solely responsible for the payment
of their own financial advisor fees, and any fee owing or to be owing by Pacific
State as a result of the consummation of the transactions shall be recorded as a
liability in determining its book value and earnings pursuant to the Plan of
Merger.
10.7 Binding Effect, No Assignment. This Agreement and all the provisions
hereof shall be binding upon and inure to the benefit of the parties hereto and
their respective successors and permitted assigns, but neither this Agreement
nor any of the rights, interests or obligations hereunder, shall be assigned by
any of the parties hereto without the prior written consent of the other
parties.
10.8 Representations and Warranties. The respective representations and
warranties of each party hereto contained herein shall not be deemed to be
waived or otherwise affected by any investigation made by the other parties, and
except for claims based upon fraud of the parties or their representatives,
shall not survive the closing hereof.
10.9 Remedies. Except for claims based upon fraud of the parties or their
representatives, or as provided in Section 9.2, the only remedy available to any
party hereunder is for specific performance.
10.10 No Benefit to Third Parties. Nothing herein expressed or implied is
intended or shall be construed to confer upon or give any person or entity,
other than the parties hereto, any right or remedy under or by reason hereof.
10.11 Notices. Any notice, demand or other communication permitted or
desired to be given hereunder shall be in writing and shall be deemed to have
been sufficiently given or served for all purposes if personally delivered or
mailed by registered or certified mail, return receipt requested, or sent via
confirmed facsimile to the respective parties at their addresses or telephone
numbers set forth below:
If to SBHC:
Security Bank Holding Company
170 South Second Avenue, Suite 200
Coos Bay, Oregon 97420
Attn: Charles D. Brummel, President
Fax: 541-267-6068
Copies of Notices to SBHC to:
Kenneth E. Roberts, Esq.
Foster Pepper & Shefelman PLLC
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Appendix A - 33
<PAGE>
One Main Place, 15th Floor
101 S.W. Main Street
Portland, OR 97204-3223
Fax: 1-800-601-9234
If to Pacific State:
Pacific State Bank
1975 Winchester Avenue
Reedsport, Oregon 97467
Attn: R.T. Green, President
Fax: 541-271-5020
-34-
Appendix A - 34
<PAGE>
Copies of Notices to Pacific State to:
Stephen J. Smith, Esq.
Schwabe Williamson & Wyatt
431 1st Avenue W.
P.O. Box 759
Kalispell, MT 59903
Fax: 406-752-5108
Any party from time to time may change such address or facsimile telephone
number by so notifying the other parties hereto of such change, which address or
number shall thereupon become effective for purposes of this section.
10.12 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Oregon.
10.13 Entire Agreement. This Agreement, including all of the schedules and
exhibits hereto and other documents or agreements referred to herein constitute
the entire agreement between the parties with respect to the mergers and other
transactions contemplated hereby and supersedes all prior agreements and
understandings between the parties with respect to such matters.
10.14 Headings. The article and section headings in this Agreement are for
the convenience of the parties and shall not affect the interpretation of this
Agreement.
10.15 Counterparts. At the convenience of the parties, this Agreement may
be executed in counterparts, and each such executed counterpart shall be deemed
to be an original instrument, but all such executed counterparts together shall
constitute but one Agreement.
10.16 Non-Competition Agreement. The members of the Board of Directors of
Pacific State signing at the end of this Agreement agree that they will not, for
a period of two years following their service on the Board of Directors of SBHC,
Pacific State of Security Bank, be associated in any way with any financial
institution other than Pacific State or SBHC (or any of their affiliates) with
branches in Coos, Curry, Lincoln or Douglas Counties, Oregon, whether directly
or indirectly, alone or as a member of a partnership, or as an officer,
director, stockholder or employee. Ownership of less than one percent of the
stock of a publicly held corporation shall not be deemed to be prohibited by
this provision.
10.17 Restrictions On Transfer. SBHC will not deliver any SBHC Stock into
which the outstanding shares of Pacific State are to be converted pursuant to
the provisions of the Plan of Merger to any shareholder who, in the opinion of
counsel for SBHC, is or may be an "affiliate" (as defined in Rule 144
promulgated by the SEC pursuant to the Securities Act of 1933) of Pacific State,
except upon receipt by SBHC of a letter or other written commitment from that
shareholder to comply with Rule 145 as promulgated by the SEC, in a form
acceptable to its counsel.
The certificates representing shares to be issued to "affiliates" of
Pacific State will bear the following legend until such time as SBHC shall have
received an opinion of counsel satisfactory to SBHC to the effect that the
shares may be transferred without restriction and that the legend is no longer
needed:
"The shares represented by this certificate (i) were issued
pursuant to a business combination and (ii) may be sold only in
accordance with the provisions of Rule 145
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Appendix A - 35
<PAGE>
under the Securities Act of 1933, as amended (the "Act"), or pursuant
to an effective registration statement under the Act or an exemption
therefrom."
10.18 Pooling Accounting Issues.
(a) The parties hereto intend for the Merger to be treated as a pooling of
interests for accounting purposes. From and after the date of this Agreement and
until the Effective Date, neither SBHC nor Pacific State nor any of their
affiliates (i) shall knowingly take any action, or shall knowingly fail to take
any action, that would jeopardize the treatment of the Merger as a "pooling of
interests" for accounting purposes; or (ii) shall enter into any contract,
agreement, commitment or arrangement with respect to the foregoing; provided,
however, that no action or omission by any party shall constitute a breach of
this sentence if such action or omission is specifically permitted by the terms
of this Agreement or is made with the written consent of the other parties
hereto. The members of the Board of Directors of Pacific Bank may be deemed to
be "affiliates" of Pacific State ("Pacific State Affiliates") for purposes of
the SEC's Codification of Financial Reporting Policies Section 201.01 and the
SEC's Staff Accounting Bulletin No. 65 (collectively "SAB 65"). SBHC will
receive from each person so identified a written agreement in the form of
Schedule 10.18. Prior to the Effective Date, Pacific State agrees to use all
reasonable efforts to cause any additional person who becomes or is identified
as a "Pacific State Affiliate" to execute such a letter agreement.
(b) SBHC shall have the right to place a restrictive legend on all shares
of SBHC Stock to be received by a Pacific State Affiliate so as to preclude
their transfer or disposition in violation of such letter agreement, to instruct
its transfer agent not to permit the transfer of any such shares and/or to take
any other steps reasonably necessary to ensure compliance with SAB 65. Prior to
30 days before the Effective Date, stock certificates evidencing ownership of
all Pacific State Stock by Pacific State Affiliates shall be delivered to
Pacific State and Pacific State (prior to the Effective Date) and SBHC (after
the Effective Time) shall retain such certificates or the certificates of SBHC
Stock into which they are exchanged until such time as financial results
covering at least 30 days of combined operations of SBHC and Pacific State shall
have been published, at which time such certificates shall be released. SBHC
covenants and agrees to promptly return such certificates to the Pacific State
Affiliates with such restrictive legends removed after the publication of such
combined results.
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Appendix A - 36
<PAGE>
IN WITNESS WHEREOF, the parties hereto, pursuant to the approval and
authority duly given by resolutions adopted by a majority of their respective
Boards of Directors, have each caused this Agreement to be executed by its duly
authorized officers.
SECURITY BANK HOLDING COMPANY PACIFIC STATE BANK
By: /s/ Charles D. Brummel By: /s/ R. T. Green
President President
By: /s/ Michael J. Delvin By:
Secretary (Assistant Secretary) Secretary
The undersigned, Members of the Board of Directors and Shareholders of Pacific
State execute this Agreement for the limited purpose of Sections 2.32, 4.10,
10.16, 10.17 and 10.18 hereof.
/s/ R. T. Green /s/ Thomas S. Tymchuk
R.T. GREEN THOMAS S. TYMCHUK
/s/ David G. Morgan /s/ Gretchen A. McNeff
DAVID G. MORGAN GRETCHEN A. McNEFF
/s/ Robert L. Fullhart /s/ Albert E. Lewis
ROBERT L. FULLHART ALBERT E. LEWIS
/s/ Gary L. Waggoner /s/ Louis Lorenz
GARY L. WAGGONER LOUIS LORENZ
-37-
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<PAGE>
Exhibit A to Agreement and Plan of Reorganization
PLAN OF MERGER
This Plan of Merger (the "Plan of Merger") is dated this _____ day of
__________, 1997, and is by and between Pacific State Bank ("Pacific State") and
PSB Interim Bank ("Interim"), both Oregon state-chartered banks, joined by
Security Bank Holding Company ("SBHC"), an Oregon corporation.
RECITALS
A. Pacific State and Interim are each banking institutions duly organized
under the laws of the State of Oregon. Interim is not authorized to do a general
banking business but is formed for the purpose of effectuating the merger
contemplated by this Plan of Merger (the "Merger"). SBHC owns all of the capital
stock of Interim.
B. Pacific State has its administrative and main office at 1975 Winchester
Avenue, Reedsport, Oregon 97467
C. Interim has no banking offices but has its administrative office at 170
South Second Street, Suite 200, Coos Bay, Oregon 97420.
D. The Board of Directors of each of Pacific State, Interim and SBHC has
approved this Plan of Merger and authorized its execution and the performance of
all of its obligations hereunder.
E. This Plan of Merger is part of an Agreement and Plan of Reorganization,
dated as of July ___, 1997 between SBHC and Pacific State (the "Reorganization
Agreement"), which agreement sets forth certain conditions precedent to the
effectiveness of this Plan of Merger and other matters relative to the Merger.
F. At or prior to the date the Merger becomes effective, the parties shall
have taken all such actions as may be necessary or appropriate in order to
effectuate the Merger.
AGREEMENT
In consideration of the mutual covenants herein contained, the parties
hereby adopt this Plan of Merger:
1. The effective date of this Plan of Merger (the "Effective Date") shall
be set forth in a Certificate of Merger issued with respect to this Plan of
Merger by the Director of the Oregon Department of Consumer and Business
Services (the "Oregon Director").
2. On the Effective Date, Interim shall merge with and into Pacific State
which will be the continuing resulting bank ("Resultant Bank"). The name of the
Resultant Bank shall be Pacific State Bank.
Appendix A - Ex.A-1
<PAGE>
3. Until altered, amended or repealed, the Articles of Incorporation and
Bylaws of Pacific State on the Effective Date shall be the Articles of
Incorporation and Bylaws of Resultant Bank. Until their successors are elected
or appointed and qualified, and subject to prior death, resignation or removal,
the officers and directors of Pacific State on the Effective Date shall be the
officers and directors of the Resultant Bank with the provision that Charles D.
Brummel and a second director selected by SBHC shall become additional directors
of the Resultant Bank.
4. Until changed by the Board of Directors of Resultant Bank, the locations
and name of the existing office of Pacific State shall remain the location and
name of the office of the Resultant Bank after the Effective Date and, until
thereafter changed, all corporate acts, plans, policies, contracts, approvals
and authorizations of Pacific State and Interim, and their shareholders,
officers, agents, Boards of Directors, and committees elected or appointed
thereby, which were valid and effective immediately prior to the Effective Date
shall be taken for all purposes as the acts, plans, policies, contracts,
approvals and authorizations of Resultant Bank and shall be as effective and
binding thereon as the same were with respect to Pacific State and Interim prior
to the Effective Date.
5. At the Effective Date, the corporate existence of Pacific State and
Interim shall, as provided by Oregon law, be merged into and continued in
Resultant Bank, and the separate existence of Pacific State and Interim shall
terminate. All rights, franchises and interests of Pacific State and Interim,
respectively, in and to every type of property (real, personal, and mixed) and
chooses in action shall be transferred to and vested in Resultant Pacific State
by virtue of such merger without any deed or other transfer, and Resultant Bank,
without any order or action on the part of any court or otherwise, shall hold
and enjoy all such rights and property, franchises, and interests, including
appointments, designations and nominations, and in every other fiduciary
capacity, in the same manner and to the same extent as such rights, franchises,
and interests were held or enjoyed by Pacific State and Interim, respectively,
on the Effective Date.
6. On the Effective Date, Resultant Bank shall be liable for all
liabilities of Pacific State and Interim; and all deposits, debts, liabilities,
and contracts of Pacific State and Interim, respectively, matured or unmatured,
whether accrued, absolute, contingent or otherwise, and whether or not reflected
or reserved against on balance sheets, books of accounts, or records of Pacific
State and Interim, shall be those of Resultant Bank and shall not be released or
impaired by the Merger; and all rights of creditors and other obligees and all
liens on property shall be preserved unimpaired.
7. The present authorized capital of Pacific State consists of 406,875
authorized shares of common stock ($1.00 par value), of which 406,875 are,
issued, outstanding, and fully paid. No stock options, warrants or rights to
purchase or receive Pacific Bank's securities are outstanding.
8. The present authorized capital of Interim consists of 1,000 shares of
common stock ($1.00 par value), all of which are issued, outstanding and fully
paid. All of the outstanding shares of Interim are held by SBHC. No stock
options, warrants or rights to purchase or receive Interim's securities are
outstanding.
9. Consummation of the transactions contemplated by this Agreement will not
conflict with or result in the breach of any of the terms, conditions or
provisions of the Articles of Incorporation or Bylaws of Pacific State or the
Articles of Incorporation or Bylaws of Interim, or of any statute, regulation or
existing order, writ, injunction or decree of any court or governmental agency,
or of any contract or agreement or instrument to which either is bound or a
party.
10. Upon the Effective Date:
Appendix A - Ex.A-2
<PAGE>
a. Each share of common stock of Pacific State (except for
Dissenting Shares) shall be converted into SBHC stock at an exchange
ratio determined as follows:
two (2) times the Stockholders Equity under generally
accepted accounting principles (with the exception that any
unrealized securities gains or losses will not be reflected
and prior practices in reporting loan fees will be followed)
of Pacific State at March 31, 1997, divided by the number of
shares of Pacific State outstanding (406,875) and the
resultant divided by $11.375, SBHC's approximate market value
per share at March 31, 1997;
plus an additional per share amount determined by
dividing the increase, if any, in Pacific State's Stockholders
Equity from April 1, 1997 to the day prior to the Effective
Date, determined in accordance with generally accepted
accounting principles (with the exception that any unrealized
securities gains or losses will not be reflected) as may be
modified by the terms of the Reorganization Agreement, by
406,875 and by dividing the resultant by $11.375.
SBHC shall not issue fractional shares. In lieu thereof,
Pacific State Stockholders otherwise entitled to receive a fractional
share shall receive a cash payment equal to $11.375 times the fraction,
determined to the nearest cent.
b. The common stock of Interim will be converted into shares
of Resultant Pacific State stock, the exact number of such shares being
equal to the number of and having the same rights, preferences and par
value per share as the currently authorized and issued shares of
Pacific State's common stock.
c. The shareholders of record of Pacific State shall, upon the
surrender by them to Resultant Bank or SBHC, of all certificates
representing shares of common stock held by them of record, be entitled
to receive in exchange therefor a certificate or certificates
representing the number of shares of common stock of SBHC (and cash for
any fractional share) to which they are entitled.
Until so surrendered, each outstanding certificate which,
prior to the Effective Date, represented shares of common stock of
Pacific State shall be deemed for all corporate purposes, other than
the payment of dividends, to evidence the ownership of the number of
shares of common stock of the SBHC into which such shares shall have
been so converted. Unless and until any such outstanding certificates
shall be so surrendered, no dividends payable to the holders of common
stock of the SBHC, as of any time subsequent to the Effective Date,
shall be paid to the holders of such outstanding certificates.
Upon surrender and exchange of such outstanding certificates
which, prior to the Effective Date, represented shares of stock of
Pacific State, there shall be paid to the record holders of the
certificates issued in exchange therefor, the amount, without interest
thereon, of dividends and other distributions, if any, which
theretofore were declared and became payable with respect to the number
and class of shares of stock of the SBHC, together with cash for any
fractional share.
11. This Plan of Merger shall be submitted to the shareholders of Pacific
State and Interim for ratification and approval at meetings to be called and
held in accordance with the applicable provisions of law and their respective
Articles of Incorporation and Bylaws. Each of
Appendix A - Ex.A-3
<PAGE>
Pacific State and Interim shall proceed expeditiously and cooperate fully in the
procurement of any other consents and approvals and the taking of any other
actions, and the satisfaction of all other requirements prescribed by law or
otherwise, necessary for consummation of the Merger on the terms herein
provided.
12. SBHC, as the sole shareholder of Interim, has no right to dissent from
this Plan of Merger. Notwithstanding Oregon Revised Statute 711.045(8)(a),
shareholders of Pacific State are granted the right to elect to dissent from the
Plan of Merger and receive the fair value for their shares (the "Dissenting
Shares") as otherwise provided by certain provisions of the Oregon Bank Act
attached hereto. Notwithstanding any other provision of this Plan of Merger, any
Dissenting Shares shall not, after the Effective Date, be entitled to vote for
any purpose or receive any dividends or other distributions and shall be
entitled only to such rights as are afforded in respect of Dissenting Shares
pursuant to the Oregon Bank Act.
13. Effectiveness of this Plan of Merger is conditioned upon fulfillment or
waiver of conditions precedent set forth in the Reorganization Agreement. The
Reorganization Agreement also provides certain conditions for termination of
this Plan of Merger prior to the Effective Date and terms that may not be
defined herein.
Appendix A - Ex.A-4
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Plan of Merger to
be executed by their duly authorized officers as of the date first above
written.
Pacific State:
PACIFIC STATE BANK
By:
R.T. Green, President
Interim:
PSB INTERIM BANK
By:
Charles D. Brummel, President
SBHC hereby joins in the foregoing Plan of Merger and undertakes that it
will be bound thereby and that it will do and perform all of the acts and things
therein referred to or provided to be done by it.
IN WITNESS WHEREOF, SBHC has caused this undertaking to be made by its duly
authorized officer as of the date first above written.
SBHC:
SECURITY BANK HOLDING COMPANY
By:
Charles D. Brummel, President
Appendix A - Ex.A-5
<PAGE>
APPENDIX B
July 9, 1997
Board of Directors
Pacific State Bank
1975 Winchester Avenue
Reedsport, Oregon 97467
Members of the Board:
You have requested our opinion as to the fairness, from a financial
point of view, to the shareholders of Pacific State Bank ("PSB" or the "Bank"),
of the consideration to received by such shareholders pursuant to the terms of
the Merger Agreement and Plan of Merger, dated June 23, 1997, (the "Agreement")
between PSB and Security Bank Holding Company ("SBHC").
In connection with the proposed merger transaction (the "Merger")
whereby PSB will be merged into SBHC, each issued and outstanding share of the
Bank common stock (along with its associated rights) at the effective time of
the Merger (other than (I) shares of holders of which are exercising appraisal
rights pursuant to applicable law) shall be converted into the right to receive
2.99199 shares of SBHC common stock (the Merger "Consideration"), except for
fractional shares which will receive a proportional amount of cash.
Columbia Financial Advisors, Inc. ("CFAI") as a part of its investment
banking services, is periodically engaged in the valuation of banks and advises
the directors, offices and shareholders of both public and private banks and
thrift institutions with respect to the fairness, from a financial point of
view, of the consideration to be received in transactions such as that proposed
by the Agreement. With particular regard to our qualifications for rendering an
opinion as to the fairness, form a financial point of view, of the Consideration
to be received by holders of the shares from SBHC pursuant to the Merger, CFAI
has advised Oregon and Washington community banks regarding fairness of capital
transactions. PSB has agreed to pay CFAI a fee for this opinion letter.
In connection with rendering this opinion, we have, among other things:
(I) reviewed the Agreement; (ii) reviewed PSB's financial information for the
twelve months ended December 31, 1996 and the three months ended March 31, 1997;
(iii) reviewed certain internal financial analyses and certain other forecasts
for the Company prepared by and reviewed with the management of the Company;
(iv) conducted interviews with senior management of the company regarding the
past and current business operations, results thereof, financial condition and
future prospects of the Company; (v) reviewed the current market environment
generally and the banking and thrift environment in particular; (vi) reviewed
the prices paid in certain recent mergers and acquisitions in the banking and
thrift industries on a regional basis; (vii) reviewed SBHC's audited financial
information for the fiscal year ended December 31, 1996 and financial
information for the 3 months ended March 31, 1997 including Form 10-KSB and the
Form 10-QSB filed with the U.S. Securities Exchange Commission; (ix) reviewed
the price ranges and dividend history for SBHC common stock; (x) and reviewed
such
Appendix B - 1
<PAGE>
Board of Directors
Pacific State Bank
July 9, 1997
other information, studies and analyses and performed such other investigations
and took into account such other matters as we deemed appropriate.
In conducting our review and arriving at our opinion we have relied on
the accuracy and completeness of all information supplied or otherwise made
available to us, and we have not independently verified such information nor
have we undertaken an independent appraisal of the assets or liabilities of the
Bank or SBHC. With respect to the financial forecasts referred to above, we have
assumed that they have been reasonably prepared on bases reflecting the best
currently available estimates and judgment of the senior management of the Bank.
This opinion is necessarily based upon circumstances and conditions as they
exist and can be evaluated as of the date of this letter. We have not been
authorized to solicit and did not solicit other entities of purposes of a
business combination with PSB.
This opinion is based upon the information available to us and facts
and circumstances as they exist and are subject to evaluation on the date
hereof. We are not expressing any opinion herein as to the prices at which
shares of SBHC Common Stock have traded or may trade at any future date.
This opinion is not intended to be and does not constitute a
recommendation to any stockholder as to how such stockholder should vote with
respect to the merger.
In reliance upon and subject to the foregoing, it is our opinion that,
as of the date hereof, the Merger Consideration to be received by the
shareholders of PSB pursuant to the Agreement is fair, from a financial point of
view, to the shareholders of PSB.
We hereby consent to the reference to our firm in the proxy statement
or prospectus related to the merger transaction and to the inclusion of our
opinion as an exhibit to the proxy statement or prospectus related to the merger
transaction.
Very truly yours,
COLUMBIA FINANCIAL ADVISORS, INC.
By: _______________________________________
Robert J. Rogowski
Principal
Appendix B - 2
<PAGE>
APPENDIX C
DISSENTERS RIGHTS
ORS 711.042 Right of stockholder to dissent from plan of merger;
perfection of right; splitting vote prohibited. Any stockholder of a bank may
dissent from a plan of merger to which the bank is a party. To perfect a
stockholder's right to dissent, the stockholder must send or deliver a notice of
the dissent to the bank prior to or at the meeting of the stockholders at which
the plan of merger is submitted to a vote, or must vote against the proposed
action. A stockholder shall not dissent as to less than all the shares
registered in the name of the stockholder; except a stockholder holding, as a
fiduciary, shares registered in the stockholder's name for the benefit of more
than one beneficiary, may dissent as to less than all of the shares registered
in the fiduciary's name if any dissent as to the shares held for a beneficiary
is made as to all the shares held by the fiduciary for the beneficiary. The
fiduciary's rights shall be determined as if the shares to which the fiduciary
has dissented and the other shares are registered in the names of different
stockholders.
ORS 711.045 Rights of stockholder dissenting to merger; demand
required; notice and offer by bank; costs of appraisal of shares; when rights
not applicable. (1) Within 30 days after the stockholder's meeting at which a
vote to approve a plan of merger was taken, any stockholder who dissented to the
plan of merger and who desires to receive the value of cash of those shares
shall make written demand upon the stockholder's bank or the resulting bank and
accompany the demand with the surrender of the share certificates, properly
indorsed. Any stockholder failing to make written demand within the 30-day
period shall be bound by the terms of the proposed plan of merger.
(2) Within 30 days after the plan of merger is effected, the resulting
bank shall give written notice thereof to each dissenting stockholder who has
made demand under this section at the address of the stockholder on the stock
record books of the bank, and shall make,a written offer to each such
stockholder to pay for the shares at a specified price in cash determined by the
bank to be the fair value of the shares as of the effective date of the plan of
merger. The notice and offer shall be accompanied by a statement of condition of
the bank the shares of which the dissenting stockholder held, as of the latest
available date and not more than four months prior to the consummation of the
plan of merger, and a statement of income of the bank for a period ending on the
date of the statement of condition.
(3) Any stockholder who accepts the offer of the resulting bank within
30 days following the date on which notice of the offer was mailed or delivered
to dissenting stockholders shall be paid the price per share, offered in cash,
within 30 days following the date on which the stockholder communicates
acceptance to the resulting bank. Upon payment, the dissenting stockholder shall
cease to have any interest in the shares previously held by the stockholder.
(4) If, within 30 days after notice of the offer, one or more
dissenting stockholders do not accept the bank's offer or if no offer is made,
then the value of the shares of the dissenting stockholders who have not
accepted the offer of the bank shall be ascertained, as of the effective date of
the plan of merger, by three appraisers. One appraiser shall be selected by a
vote of the owners of two-thirds of the shares involved, at a meeting called by
the director on 10 days' notice, one selected by the board of directors of the
resulting bank and the third selected by the two so chosen. The valuation agreed
upon by any two appraisers shall govern, and all the dissenting stockholders
involved shall be bound by the amount so
Appendix C - 1
<PAGE>
fixed. If any necessary appraiser is not appointed within 90 days after the
effective date of the plan of merger or if the appraisal is not completed within
120 days after the plan of merger becomes effective, the director shall cause an
appraisal to be made.
(5) The costs and expenses of the appraisal proceeding shall be
apportioned and assessed by the appraiser as they deem equitable against the
resulting bank or against any of the dissenting stockholders. The appraiser
shall assess the costs and expenses to the dissenting stockholders if the
appraisers find that the failure of the dissenting stockholders to accept the
offer made by the resulting bank under subsection (2) of this section was
arbitrary or vexatious or not in good faith. The expenses shall include
reasonable compensation for and reasonable expenses of the appraisers, but shall
exclude the fees and expenses of counsel for and experts employed by any party.
However, if the fair value of the shares as determined by the appraisers
materially exceeds the amount which the resulting bank offered to pay for them,
or if no offer was made, the appraisers may award to any stockholder who was a
party to the proceedings any sum that they determine to be reasonable
compensation to any expert or experts employed by the stockholders in the
proceeding.
(6) The amount due under the appraisal shall constitute a debt of the
resulting bank.
(7) The director may require as a condition of approving the plan of
merger the replacement of all or a portion of the capital of the resulting bank
expended in payment to dissenting stockholders under this section.
(8) A stockholder may not receive the fair value of the stockholder's
shares under this section:
(a) If the plan of merger provides that all stockholders of
the resulting bank receive common stock of a holding company pursuant
to a merger with an interim bank chartered under ORS 707.025, and the
stockholder's bank and the interim bank are the only parties to the
merger; or
(b) If the shares held by the dissenting stockholder
immediately before the effective date of the plan of merger are listed
on any national securities exchange or are included on the list of
over-the-counter margin stocks issued by the Board of Governors of the
Federal Reserve System.
ORS 711.047 Withdrawal by stockholders of demand for value of shares
under ORS 711,045. A dissenting stockholder making a demand under ORS 711.045
may not withdraw the demand unless the merging bank consents to the withdrawal.
When a dissenting stockholder withdraws the demand, the stockholder's right to
be paid the value of the shares shall end and the stockholder's status as a
stockholder shall be restored without prejudice to any corporate proceedings
taking place in the interim:
(1) If the demand is withdrawn upon consent;
(2) If the board of directors abandons or rescinds the proposed
corporate action or the stockholders revoke the authority to take the action;
(3) If no demand or petition for the determination of value by the
parties is made or filed within the time provided in ORS 711.045(4); or
(4) If a court of competent jurisdiction determines that the dissenting
stockholder is not entitled to relief under ORS 711.045.
Appendix C - 2
<PAGE>
PART II -- INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers
As an Oregon corporation, SBHC is subject to the Oregon Business
Corporation Act (the "Business Corporation Act"). Under the Business Corporation
Act, a corporation may provide in its Articles of Incorporation or in its Bylaws
for the indemnification of directors and officers against liability where the
director or officer has acted in good faith and with a reasonable belief that
actions taken were in the best interests of the corporation or at least not
adverse to the corporation's best interests and, if in a criminal proceeding,
the individual had no reasonable cause to believe that the conduct in question
was unlawful. Under the Business Corporation Act, a corporation may not
indemnify an officer or director against liability in connection with a claim by
or in the right of the corporation in which such officer or director was
adjudged liable to the corporation or in connection with any other proceeding in
which the officer or director was adjudged liable for receiving an improper
personal benefit, however a corporation may indemnify against the reasonable
expenses associated with such proceeding. A corporation may not indemnify
against breaches of the duty of loyalty. The Business Corporation Act provides
for mandatory indemnification of directors against all reasonable expenses
incurred in the successful defense of any claim made or threatened whether or
not such claim was by or in the right of the corporation. A court may order
indemnification if it determines that the director or officer is fairly and
reasonably entitled to indemnification in view of all the relevant circumstances
whether or not the director or officer met the good faith and reasonable belief
standards of conduct set out in the statute. Unless otherwise stated in the
Articles of Incorporation, officers of the corporation are also entitled to the
benefit of the above statutory provisions.
The Business Corporation Act also provides that the corporation may, by so
providing in its Articles of Incorporation, eliminate or limit the personal
liability of a director to the corporation or its shareholders for monetary
damages for conduct as a director, provided that the Articles of Incorporation
may not eliminate or limit liability for any breach of the director's duty of
loyalty, acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, any unlawful distribution, or any
transaction from which the director received an improper personal benefit.
In accordance with Oregon law, the Articles of Incorporation of SBHC
provide that directors are not personally liable to the corporation or its
shareholders for monetary damages for conduct as a director, except for (i) any
breach of a director's duty of loyalty to the corporation, (ii) acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of the law, (iii) any distribution to shareholders which is unlawful,
or (iv) any transaction from which the director received an improper personal
benefit.
The Articles of Incorporation also provide for indemnification of any
person who is or was a party, or is threatened to be made a party, to any civil,
administrative or criminal proceeding by reason of the fact that the person is
or was a director or officer of the corporation or any of its subsidiaries, or
is or was serving at the request of the corporation as a director, officer,
partner, agent or employee of another corporation or entity, against expenses,
including attorneys' fees, judgments, fines and amounts paid in settlement,
actually and reasonably incurred by that person if (i) the person acted in good
faith and in a manner reasonably believed to not be opposed to the best
interests of the corporation, or (ii) the act or omission giving rise to such
action or proceeding is ratified, adopted or confirmed by the corporation, or
the benefit thereof was received by the corporation. Indemnification is
available under this provision of the Articles of Incorporation in the case of
derivative actions, unless the person is adjudged to be liable for gross
negligence or deliberate misconduct in the performance of the person's duty to
the corporation. To the extent a director, officer, employee or agent (including
an attorney) is successful on the merits or otherwise in defense of any action
to which this provision is applicable, the person is entitled to indemnification
for expenses actually and reasonably incurred by the person in connection with
that defense.
Item 21. Exhibits and Financial Statement Schedules
The exhibits filed with this registration statement are listed on
the Exhibit Index.
II - 1
<PAGE>
Item 22. Undertakings
The undersigned registrant hereby undertakes that:
(A) 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 registrant pursuant to the foregoing provisions,
or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense
of any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
(B) For determining any liability under the Act, the registrant will treat
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant under Rule 424(b)(1), or (4), or
497(h) under the Act as part of this registration statement as of the time
the Commission declared it effective.
(C) For determining any liability under the Act, the registrant will treat
each post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration
statement, and that offering of the securities at that time as the initial
bona fide offering of those securities.
(D) The registrant will supply, by means of an post-effective amendment all
information concerning the transaction and the company being acquired
involved therein, that was not the subject of and included in the
registration statement when it became effective.
II - 2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Coos Bay, State of
Oregon, on July 30, 1997.
SECURITY BANK HOLDING COMPANY
By:/s/Charles D. Brummel
Charles D. Brummel, President
POWER OF ATTORNEY
Each person whose individual signature appears below hereby authorizes and
appoints Charles D. Brummel and Michael J. Delvin, and each of them, with full
power of substitution, to act as his true and lawful attorney-in-fact and agent
to act in his name, place and stead, and to execute in the name and on behalf of
each person, individually and in each capacity stated below, and to file any and
all amendments to this Registration Statement, including any and all
post-effective amendments.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement and Power of Attorney has been signed by the following
persons in the capacities indicated on July 30, 1997:
/s/Michael J. Delvin
Michael J. Delvin, Executive Vice President and Chief Financial Officer
/s/William A. Lansin /s/Kenneth C. Messerle
William A. Lansing, Director Kenneth C. Messerle, Director
/s/Glenn A. Thomas /s/Charles D. Brummel
Glenn A. Thomas, Director Charles D. Brummel, Director
/s/Ronald R. LaFranchi
Ronald R. LaFranchi, Director
<PAGE>
EXHIBIT INDEX
Exhibit
2.0 Agreement and Plan of Reorganization, dated July 9, 1997, by and
between Security Bank Holding Company and Pacific State Bank, and related Plan
of Merger.
3.1 Articles of Incorporation of Security Bank Holding Company *
3.2 Bylaws of Security Bank Holding Company *
4.0 Specimen Common Stock Certificate *
5.0 Opinion of Foster Pepper & Shefelman PLLC regarding legality of shares
to be issued in Merger (to be filed by amendment)
8.0 Opinion of Foster Pepper & Shefelman PLLC regarding tax matters (to be
filed by amendment)
10.1 Commercial Lease Agreement, dated September 26, 1995, between George
L. and Mary E. Carter and Security Mortgage, a Division of Security Bank,
relating to the Eugene, Oregon, mortgage office *
10.2 Commercial Lease, dated November 18, 1988 between South Coast Center
and Security Bank, relating to the Brookings-Harbor branch *
10.3 Lease Agreement, dated November 1, 1978, between Philip J. and Ann
Keizer and Security Bank, relating to the North Bend branch, and Assignment of
Lease, dated July 25, 1986 *
10.4 Termination Allowance Agreement, dated September 28, 1981, and amended
December 15, 1988, between Security Bank and Charles D. Brummel *
10.5 Shareholders Agreement between Class A Common and Class B Common
Shareholders of Lincoln Security Bank *
10.6 1995 Stock Option Plan of Security Bank Holding Company *
10.7 1997 Directors Compensation Plan, incorporated by reference to the
registrant's registration statement on Form S-8 (file number 333-28095) as filed
with the Securities and Exchange Commission on May 30, 1997.
10.8 Schedule of 1991 Incentive Bonus Plan *
10.9 Security Bank Phantom Stock Deferred Compensation Plan *
21.0 Subsidiaries of Security Bank Holding Company
23.1 Consent of KPMG Peat Marwick LLP relating to Financial Statements of
Security Bank Holding Company
23.2 Consent of KPMG Peat Marwick LLP relating to Financial Statements of
Pacific State Bank
23.3 Consent of Columbia Financial Advisors (included in its opinion
attached as Appendix B to the Prospectus/Proxy Statement)
23.4 Consent of Foster Pepper & Shefelman PLLC relating to opinion
regarding legality (included in Exhibit 5.0)
<PAGE>
23.5 Consent of Foster Pepper & Shefelman PLLC relating to tax opinion
(included in Exhibit 8.0)
24.0 Powers of Attorney, included in the signature page to the Registration
Statement.
99.1 Fairness Opinion of Columbia Financial Advisors (including in this
Registration Statement as Appendix B to the Prospectus/Proxy Statement
99.2 Form of Proxy to be mailed to PSB shareholders
99.3 Form of Proxy to be mailed to SBHC shareholders
* Incorporated by reference to the registrant's registration statement on
Form SB-1 (File No. 33-80795) as declared effective by the Securities and
Exchange Commission on September 12, 1996.
<PAGE>
EXHIBIT 21.0
SUBSIDIARIES OF SECURITY BANK HOLDING COMPANY
<TABLE>
<CAPTION>
Jurisdiction of Name(s) under which
Name of Subsidiary Incorporation Business is Conducted
<S> <C> <C>
Security Bank Oregon Security Bank
Alland, Inc.
Security Financial Insurance Agency
Lincoln Security Bank Oregon Lincoln Security Bank
PSB Interim Bank Oregon PSB Interim Bank
Alland, Inc. Oregon Alland, Inc.
(subsidiary of Security Bank)
Security Financial Insurance Agency Oregon Security Financial Insurance Agency
(subsidiary of Security Bank)
<PAGE>
</TABLE>
EXHIBIT 23.1
Consent of Independent Certified Public Accountants
The Board of Directors
Security Bank Holding Company
Coos Bay, Oregon:
We consent to the use of our report dated January 24, 1997, relating to the
consolidated financial statements of Security Bank Holding Company and
subsidiaries, included herein and to the reference to our firm under the heading
"Experts" in the prospectus. Our report refers to changes in accounting for
investments in certain debt and equity securities.
/s/ KPMG Peat Marwick LLP
Portland, Oregon
August 5, 1997
<PAGE>
EXHIBIT 23.2
Consent of Independent Certified Public Accountants
The Board of Directors
Pacific State Bank
Reedsport, Oregon:
We consent to the use of our report dated June 27, 1997, relating to the
financial statements of Pacific State Bank, included herein and to the reference
to our firm under the heading "Experts" in the prospectus.
/s/ KPMG Peat Marwick LLP
Portland, Oregon
August 5, 1997
<PAGE>
EXHIBIT 99.2
REVOCABLE PROXY
PACIFIC STATE BANK
SPECIAL MEETING OF SHAREHOLDERS
, 1997
PROXY SOLICITED BY THE BOARD OF DIRECTORS
The undersigned hereby appoints R.T. Green and Thomas S. Tymchuk, and each
of them, proxies with power of substitution to vote on behalf of the undersigned
all shares of common stock of Pacific State Bank (the "Bank") at the Annual
Meeting to be held on , 1997, and any adjournments thereof, with all powers the
undersigned would possess if personally present, with respect to the following:
1. Merger of Pacific State Bank with PSB Intermim Bank. Approval of
Agreement and Plan of Reorganization and related Plan of Merger, pursuant to
which PSB Interim Bank would merge with and into Pacific State Bank.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. Other Matters. At the discretion of the proxy holder, on such other
business as may properly come before the meeting and any adjournments thereof.
THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED AS SPECIFIED ABOVE, BUT IF NO
SPECIFICATION IS MADE, THIS PROXY WILL BE VOTED FOR THE ELECTION OF ALL
NOMINEES. Proxies may vote in their discretion as to other matters which may
come before the meeting.
Number of Shares Held:
Dated: , 1997
Please date and sign exactly as your name appears on your stock
certificate(s) (which should be the same as the name on the address
label on the envelope in which this proxy was sent to you), including
designation as executor, trustee, etc., if applicable. A corporation
must sign its name by the president or other authorized officer. All
co-owners must sign.
<PAGE>
EXHIBIT 99.3
REVOCABLE PROXY
SECURITY BANK HOLDING COMPANY
SPECIAL MEETING OF SHAREHOLDERS
, 1997
PROXY SOLICITED BY THE BOARD OF DIRECTORS
The undersigned hereby appoints Charles D. Brummel and Michael J. Delvin,
and each of them, proxies with power of substitution to vote on behalf of the
undersigned all shares of common stock of Security Bank Holding Company (the
"Company") at the Annual Meeting to be held on , 1997, and any adjournments
thereof, with all powers the undersigned would possess if personally present,
with respect to the following:
1. Acquisition of Pacific State Bank. Approval of Agreement and Plan of
Reorganization and related Plan of Merger, pursuant to which Security Bank
Holding Company would issue approximately 1,244,607 shares of Class A Common
Stock in exchange for all of the outstanding shares of Pacific State Bank.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. Other Matters. At the discretion of the proxy holder, on such other
business as may properly come before the meeting and any adjournments thereof.
THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED AS SPECIFIED ABOVE, BUT IF NO
SPECIFICATION IS MADE, THIS PROXY WILL BE VOTED FOR THE ELECTION OF ALL
NOMINEES. Proxies may vote in their discretion as to other matters which may
come before the meeting.
Number of Shares Held:
Dated: , 1997
Please date and sign exactly as your name appears on your stock
certificate(s) (which should be the same as the name on the address
label on the envelope in which this proxy was sent to you), including
designation as executor, trustee, etc., if applicable. A corporation
must sign its name by the president or other authorized officer. All
co-owners must sign.
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