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U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 [No Fee Required]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [No Fee Required]
For the transition period from to
Commission file number 0-27590
SECURITY BANK HOLDING COMPANY
(Name of small business issuer in its charter)
Oregon 93-0800253
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
170 S. Second St., Coos Bay, Oregon 97420
(Address of Principal Executive Offices) (Zip Code)
(541) 267-5356
(Issuer's telephone number)
Securities registered under Section 12(b) of the Exchange Act:NONE
Securities registered under Section 12(g) of the Exchange Act:Common Stock,
$5.00 par value
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES X NO
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
Revenue for most recent fiscal year: $20,091,000
Aggregate market value of voting Common Stock held by non-affiliates of
Registrant as of March 2, 1998: $43,262,578
Number of shares of Common Stock, $5.00 par value, outstanding as of
March 2, 1998: 4,445,486
Documents incorporated by reference and parts of Form 10-KSB into which
incorporated: None
Transitional Small Business Disclosure Format (check one): YES NO X
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FORM 10-KSB TABLE OF CONTENTS
PART I Page
Item 1.Description of Business 4-12
Item 2.Description of Property 12-13
Item 3.Legal Proceedings 13
Item 4.Submission of Matters to a Vote of Security Holders 13
PART II
Item 5.Market for Common Equity and Related Stockholder Matters 14
Item 6.Management's Discussion and Analysis or Plan of Operation 15-30
Item 7.Financial Statements 31-52
Item 8.Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure 53
PART III
Item 9.Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the
Exchange Act 53-55
Item 10.Executive Compensation 56-59
Item 11.Security Ownership of Certain Beneficial Owners
and Management 60
Item 12.Certain Relationships and Related Transactions 61
Item 13.Exhibits and Reports on Form 8-K 62
Signatures 63
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DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
The following discussion includes forward-looking statements within the meaning
of the "safe-harbor" provisions of the Private Securities Litigation Reform Act
of 1995. Such forward-looking statements are based on the beliefs of Security
Bank Holding Company's (the Company) management and on assumptions made by and
information currently available to management. All statements other than
statements of historical fact, regarding the Company's financial position,
business strategy and plans and objectives of management for future operations
of the Company are forward-looking statements. When used herein, the words
"anticipate," "believe," "estimate," "expect," and "intend" and words or phrases
of similar meaning, as they relate to the Company or management, are intended to
identify forward-looking statements. Although the Company believes that the
expectations reflected in such forward-looking statements are reasonable, it can
give no assurance that such expectations will prove to have been correct.
Forward-looking statements are subject to certain risks and uncertainties, which
could cause actual results to differ materially from those indicated by the
forward-looking statements. These risks and uncertainties include the Company's
ability to maintain or expand its market share, net interest margins, or
implement its marketing and growth strategies. Further, actual results may be
affected by the Company's ability to compete on price and other factors with
other financial institutions; customer acceptance of new products and services;
general trends in the banking industry and the regulatory environment, as they
relate to the Company's cost of funds and returns on assets. In addition, there
are risks inherent in the banking industry relating to collectibility of loans
and changes in interest rates. The reader is advised that this list of risks is
not exhaustive and should not be construed as any prediction by the Company as
to which risks would cause actual results to differ materially from those
indicated by the forward-looking statements.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
General
Security Bank Holding Company ("SBHC" or "the Company"), 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. Until 1996, SBHC conducted 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 acquired a 68%
controlling interest in Lincoln Security Bank, a newly-organized state-chartered
commercial bank located in Newport, Oregon, and in 1997, completed the
acquisition of Pacific State Bank, a state-chartered commercial bank located in
Reedsport, Oregon. Security Bank, Lincoln Security Bank and Pacific State Bank
are collectively referred to herein as the "Banks".
SBHC has enjoyed this growth and performance from its primary markets of Coos,
Curry Douglas and Lincoln 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.
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 of local community banks. 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, SBHC has opened mortgage banking offices in Eugene, Bend, and
Tigard, Oregon. The recent acquisition of Pacific State Bank is expected to
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, operating in a number of
other markets, with 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
and Pacific State Bank to enjoy strong net interest margins. 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 and Pacific State 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, Curry and Douglas 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. Pacific State Bank
dominates its market with a 65% share.
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.
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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 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.
Lincoln Security Bank
Lincoln Security is an Oregon state-chartered bank organized in 1996, 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 the equity of Lincoln Security Bank. The remaining equity consists of
shares of Class A common stock owned by local investors. 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 SBHC, 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.
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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.
Pacific State Bank
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. Pacific State Bank
engages in a general commercial banking business in Douglas County and offers
commercial banking services to small and medium size businesses, professionals
and retail customers in their market area.
SBHC acquired Pacific State Bank in 1997. At December 31, 1997, Pacific State
Bank had total assets of $54.7 million, total loans of $29.6 million, and total
deposits of $46.7 million. Pacific State Bank continues to operate as a
separate subsidiary bank, with a local Board of Directors.
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:
- Personalized Customer Service
- Development of Innovative Products
- 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.
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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 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, Bend, and Portland, Oregon.
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.
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.
In particular, SBHC has identified Springfield, Oregon as a community which the
Company believes would support a new bank offering services and products similar
to those provided by Security Bank, Pacific State Bank and Lincoln Security
Bank. John A Moretti, an experienced banker most recently serving as a
Commercial Loan Officer in the Springfield Branch of another community bank, has
joined SBHC to organize the new bank under the name "McKenzie State Bank" , and
help raise the needed capital and serve as its president. SBHC has committed to
fund at least 51% of the anticipated $4,000,000 in initial capital of McKenzie
State Bank. Although the land has been secured which would serve as the bank's
head office and an application to organize the bank has been filed, no
assurances can be made that the necessary capital can be raised, or that Federal
and State regulatory approvals will be obtained.
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. Applications to organize
the bank have been filed, under the name "Family Security Bank". The spin-off
has not yet been approved by federal and state regulators, and is not expected
to be completed until the second quarter of 1998. At that time, it will operate
as a separate bank with its own directors and executive officers, with some
representation by SBHC directors.
Economic Conditions and Demographics
SBHC and its subsidiary banks primarily receive deposits and make loans in Coos,
Curry Lincoln and Douglas 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.
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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 unemployment, has recovered, and
is growing at a 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, according to the
Oregon Employment Department.
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.
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DOUGLAS COUNTY
Pacific State 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.
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. 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 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.
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.
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SUPERVISION AND REGULATION
GENERAL
The Company and the Banks are extensively regulated under federal and state law.
These laws and regulations are intended to protect depositors, not
shareholders. To the extent that the following information describes statutory
or regulatory provisions, it is qualified in its entirety by reference to the
particular statutory or regulatory provisions.
Any change in applicable laws or regulations may have a material effect on the
business and prospects of the Company and the Banks. The operations of the
Company and the Banks may be affected by legislative changes and by the policies
of various regulatory authorities. The Company is unable to predict the nature
or the extent of the effects on its business and earnings that fiscal or
monetary policies, economic control or new federal or state legislation may have
in the future.
FEDERAL BANK HOLDING COMPANY REGULATION
The Company is a bank holding company within the meaning of the Bank Holding
Company Act ("BHCA"), and as such, it is subject to regulation, supervision and
examination by the Board of Governors of the Federal Reserve System ("Federal
Reserve"). The Company is required to file annual reports with the Federal
Reserve and to provide the Federal Reserve such additional information as the
Federal Reserve may require.
BHCA requires every bank holding company to obtain the prior approval of the
Federal Reserve before (i) acquiring, directly or indirectly, ownership or
control of any voting shares of another bank or bank holding company it, after
such acquisition, would own or control more than 5% of such shares (unless it
already owns or controls the majority of such shares); (ii) acquiring all or
substantially all of the assets of another bank or bank holding company; or
(iii) merging or consolidating with another bank holding company. The Federal
Reserve will not approve any acquisition, merger or consolidation that would
have a substantial anti-competitive result, unless the anti-competitive effects
of the proposed transaction are clearly outweighed by a greater public interest
in meeting the convenience and needs of the community to be served. The Federal
Reserve also considers capital adequacy and other financial and managerial
factors in reviewing acquisitions or mergers.
With certain exceptions, BHCA also prohibits a bank holding company from
acquiring or retaining direct or indirect ownership or control of more than 5%
of the voting shares of any company which is not a bank or bank holding company,
or from engaging directly or indirectly in activities other than those of
banking, managing or controlling banks, or providing services for its
subsidiaries. The principal exceptions to these prohibitions involve certain
non-bank activities which, by statute or by Federal Reserve regulation or order,
have been identified as activities closely related to the business of banking or
of managing or controlling banks. In making this determination, the Federal
Reserve considers whether the performance of such activities by a bank holding
company can be expected to produce benefits to the public such as greater
convenience, increased competition or gains in efficiency in resources, which
can be expected to outweigh the risks of possible adverse effects such as
decreased or unfair competition, conflicts of interest or unsound banking
practices.
Subsidiary banks of a bank holding company are subject to certain restrictions
imposed by the Federal Reserve Act on extensions of credit to the bank holding
company or its subsidiaries, on investments in their securities and on the use
of their securities as collateral for loans to any borrower. These regulations
and restrictions may limit the Company's ability to obtain funds from the Banks
for its cash needs, including funds for payment of dividends, interest and
operating expenses. Further, under the Federal Reserve Act and certain
regulations of the Federal Reserve, a bank holding company and its subsidiaries
are prohibited from engaging in certain types of arrangements in connection
with any extension of credit, lease or sale of property or furnishing of
services.
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For example, the Bank may not generally require a customer to obtain other
services from the Bank or the Company, and may not require that the customer
promise not to obtain other services from a competitor, as a condition to an
extension of credit to the customer.
FEDERAL AND STATE BANK REGULATION
The Banks, as state-chartered banks with deposits insured by the Federal Deposit
Insurance Corporation ("FDIC"), that are not members of the Federal Reserve
System, are subject to the supervision and regulation of the Director of the
Oregon Department of Consumer and Business Services, through the Division of
Finance and Corporate Securities ("Oregon Director"), and to the supervision and
regulation of the FDIC. These agencies may prohibit the Banks from engaging in
what they believe constitute unsafe or unsound banking practices.
As of July 1, 1989, Oregon permits out-of-state banking institutions to acquire
banks or holding companies that have been in existence for a period of no fewer
than three years. Generally, such acquisitions are subject to the approval of
the Federal Reserve Board and the Oregon Director. As a result of 1993 Oregon
legislation and 1995 federal law changes, Oregon banks may merge with
out-of-state national or state banks, and out-of-state national and state banks
may acquire Oregon branches or may merger with or acquire branches of Oregon or
federal savings associations. Initial acquisitions must involve institutions
which 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 and
Pacific State Bank both have "Satisfactory" ratings.
The Banks are also subject to certain restrictions imposed by the Federal
Reserve Act on extensions of credit to executive officers, directors, principal
shareholders or any related interest of such persons. Extensions of credit
(i) must be made on substantially the same terms, including interest rates and
collateral as, and following credit underwriting procedures that are not less
stringent than, those prevailing at the time for comparable transactions with
persons not covered above and who are not employees, and (ii) must not involve
more than the normal risk of repayment or present other unfavorable features.
The Banks are also subject to certain lending limits and restrictions on
overdrafts to such persons. A violation of these restrictions may result in the
assessment of substantial civil monetary penalties on the affected bank or any
officer, director, employee, agent or other person participating in the conduct
of the affairs of that bank, the imposition of a cease and desist order, and
other regulatory sanctions.
Under the Federal Deposit Insurance Corporation Improvement Act ("FDICIA"), each
Federal banking agency has established, 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. The
Company believes that the Banks meet all the standards, and therefore does not
believe that these regulatory standards materially affect the Company's business
operations.
<PAGE>
DEPOSIT INSURANCE
As FDIC member institutions, the deposits of the Banks are currently insured to
a maximum of $100,000 per depositor through the Bank Insurance Fund ("BIF"),
administered by the FDIC. The Banks are required to pay semiannual deposit
insurance premium assessments to the FDIC.
The FDICIA includes provisions to reform the Federal deposit insurance system,
including the implementation of risk-based deposit insurance premiums. The
FDICIA also permits the FDIC to make special assessments on insured depository
institutions in amounts determined by the FDIC to be necessary to give it
adequate assessment income to repay amounts borrowed from the U.S. Treasury and
other sources or for any other purpose the FDIC deems necessary. Pursuant to
the FDICIA, the FDIC implemented a transitional risk based insurance premium
system on January 1, 1993. Generally, under this system, banks are assessed
insurance premiums according to how much risk they are deemed to present to BIF.
Banks with higher levels of capital and a low degree of supervisory concern are
assessed lower premiums than banks with lower levels of capital or involving a
higher degree of supervisory concern.
DIVIDENDS
The principal source of the Company's cash inflow is dividends received from
Security Bank and Pacific State Bank. Lincoln Security Bank does not currently
pay dividends and is not expected to in the near future, as earnings will be
retained to fund future growth. Under the Oregon Bank Act, the Banks are
subject to restrictions on its payment of cash dividends to the Company. A bank
may not pay cash dividends if that payment would reduce the amount of its
capital below that necessary to meet minimum applicable regulatory capital
requirements. In addition, the amount of the dividend may not be greater than
its net undivided profits then on hand, after first deducting (i) all losses;
(ii) all bad debts, unless the debts are well-secured, (a) on which interest for
a period of one year is past due and unpaid, and (b) upon which final judgment
has been obtained, but for more than one year the judgment has been unsatisfied
and interest has not been paid; (iii) all assets or depreciation charged off as
required by the Oregon Director; and (iv) all accrued expenses, interest and
taxes of the bank. Lincoln Security is not able to pay dividends as a result of
the lack of retained earnings.
In addition, the appropriate regulatory authorities are authorized to prohibit
banks and bank holding companies from paying dividends which would constitute an
unsafe or unsound banking practice. The Banks and the Company are not currently
subject to any regulatory restrictions on their dividends other than those noted
above.
EMPLOYEES
As of December 31, 1997, SBHC and its subsidiaries had a total of 160 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.
<PAGE>
ITEM 2. DESCRIPTION OF PROPERTY
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 Company'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. SBHC has mortgage lending offices located at 200 East
11th Avenue, Suite 14A, Eugene, Oregon, at 2106 N.E. 4th St., Bend, Oregon and
at 6950 S.W. Hampton St., Suite 100, Tigard, Oregon. The Eugene and Bend
offices are leased under a lease agreements which expire October 14, and October
31, 1998, respectively. The Tigard office is leased under a monthly rental
agreement.
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.
PACIFIC STATE BANK. Pacific State's principal office is located at 1975
Winchester Avenue in Reedsport, Oregon. The building and land are owned by the
bank.
COOS BAY PROPERTY. The Company owns the land located at 700 South Broadway
Street, Coos Bay, Oregon. Construction of a branch at this location is
currently underway and will replace the Bunker Hill Branch located at 900 Hwy
101 South, Coos Bay, Oregon.
NORTH BEND PROPERTY. The Company owns the building and land located at 2330
Broadway, North Bend, Oregon. Construction of a branch at this location is
currently underway and will replace the North Bend Branch located at 3451
Broadway, North Bend, Oregon.
<PAGE>
ITEM 3. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On October 21, 1997, a special meeting of the shareholders of SBHC was called to
approve the acquisition of Pacific State Bank. The results of the vote were:
Number of votes cast for 2,356,155
Number of votes cast against 12,811
Number of votes abstained 8,750
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock is traded on the NASDAQ National Market System under the symbol
"SBHC". Prior to the Offering of the Common Stock in September 1996, the
Common Stock had been traded over-the-counter through the OTC Bulletin Board and
the Pink Sheet Service of the National Quotation Bureau. The following lists
the high, low and closing prices at the end of each period through the second
quarter of 1996, obtained from Black & Company, Inc., the principal market maker
in the Company's Common Stock, and from NASDAQ thereafter:
<TABLE>
<CAPTION>
Fiscal 1996: High Low Close Cash dividend per share
<S> <C> <C> <C> <C>
First Quarter ............... $8.75 $7.75 $7.88 $0.10
Second Quarter .............. $9.50 $8.00 $8.50 $0.00
Third Quarter ............... $8.75 $8.00 $8.25 $0.10
Fourth Quarter .............. $9.00 $8.25 $8.50 $0.00
Fiscal 1997:
First Quarter ...............$11.75 $8.50 $11.38 $0.11
Second Quarter ..............$12.50 $11.00 $11.25 $0.00
Third Quarter ...............$15.75 $11.25 $15.25 $0.11
Fourth Quarter ..............$16.25 $12.25 $12.25 $0.00
</TABLE>
As of January 31, 1998, the Common Stock was held of record by approximately 614
shareholders, a number which does not include beneficial owners who hold shares
in "street name".
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
The following summary financial data and the discussion and analysis should be
read in conjunction with the Company's audited consolidated financial statements
and the notes thereto for the years ended December 31, 1997 and 1996. The
consolidated entity includes Security Bank Holding Company (the Company, or
SBHC), a bank holding company, its wholly-owned subsidiaries, Security Bank and
Pacific State Bank, and its majority owned subsidiary, Lincoln Security Bank.
Collectively within this document, the consolidated entity is referred to as the
Company.
ACQUISITION OF PACIFIC STATE BANK
In June 1997, the Company and Pacific State Bank (PSB) announced a definitive
agreement to merge in a stock-for-stock exchange. The transaction, accounted
for as a pooling of interests, was consummated on November 22, 1997, in an
exchange of 3.10 shares of SBHC common stock for each share of PSB common stock.
There were 1,261,313 shares of SBHC common stock issued for 406,875 shares of
PSB common stock. All prior period financial data has been restated to include
PSB.
The acquisition of PSB was pursued due to their excellent historical financial
performance, excessively strong capital levels and their geographic location.
PSB is located on the Oregon coast, approximately 30 miles north of Coos Bay.
As such, it was a natural extension of the Company's franchise of community
banks. PSB's performance numbers (both Return on Equity and Return on Assets)
will strengthen those of the overall Company. Finally, the additional capital
will enable the Company to pursue other aspects of it's growth strategy.
RESULTS OF OPERATIONS
The operating results of the Company depends primarily on net interest income.
The Company's net interest income is determined by 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
interest-earning assets and interest-bearing liabilities. Interest rate spread
is the difference between the yields earned on interest-earning assets and the
rates paid on interest-bearing liabilities. The Company'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.
<PAGE>
SUMMARY INCOME STATEMENTS
<TABLE>
<CAPTION>
(Dollars in thousands) 1997 1996 $ change % change
------- ------- -------- --------
<S> <C> <C> <C> <C>
Interest income $20,091 $17,752 $2,339 13.18%
Interest expense 8,337 7,037 1,300 18.47%
------ ------ ----- ------
Net interest income before provision 11,754 10,715 1,039 9.70%
Provision for loan loss 263 232 31 13.36%
------ ------ ----- ------
Net interest income 11,491 10,483 1,008 9.62%
Non-interest income 3,869 3,476 393 11.31%
Merger related expense 253 -- 253 100.00%
ESOP compensation expense 716 459 257 55.99%
Other non-interest expense 10,409 9,115 1,294 14.20%
------ ----- ----- -------
Income before taxes and minority interest 3,982 4,385 (403) (9.19)%
Income taxes 1,247 1,353 (106) (7.83)%
----- ----- ----- -------
Income before minority interest 2,735 3,032 (297) (9.80)%
Loss attributable to minority interest 30 37 (7) (18.92)%
------ ------ ------ --------
Net income $2,765 $3,069 $(304) (9.91)%
====== ====== ====== =======
Return on average assets 1.06% 1.35%
Return on average equity 10.40% 13.93%
Dividend payout ratio 32.35% 23.81%
</TABLE>
General. Net income decreased to $2.8 million for the year ended December 31,
1997 from $3.1 million for the year ended December 31, 1996, a 9.91% decrease.
The primary reason for the decrease in net income were merger related expense
and an increase in ESOP compensation expense.
Net Interest Income. Net interest income before the provision for loan losses
increased $1.0 million or 9.7% for the year ended December 31, 1997 over the
same period in 1996. The increase resulted from a $2.3 million increase in
interest income offset by a $1.3 million increase in interest expense. The
increase in interest income is due primarily to an increase in average earning
assets of $30.8 million or 14.5% for the year ended December 31, 1997, over the
same period in 1996. Although loans continued to increase during 1997, 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 1997 over 1996. Average interest-bearing liabilities
increased $29.1 million or 14.4% for the year ended December 31, 1997, compared
to the same period in 1996. The weighted average yields earned were 8.25% and
8.34% for the years ended December 31, 1997 and 1996, respectively. Average
yields earned decreased 9 basis points or 1.08% for the year ended December 31,
1997 compared to the same period in 1996. Average rates paid were 3.61% and
3.48% for the years ended December 31, 1997 and 1996, respectively. This
represents an increase of 13 basis points or 3.74% for the year ended December
31, 1997, compared to 1996.
<PAGE>
Provision for Loan Loss. The provision for loan loss increased during the year
ended December 31, 1997 to $263,000 as compared to $232,000 for the same period
in 1996. Net charge-offs during the years were $298,000 and $218,000 for 1997
and 1996, respectively. Management believes the loan loss provision maintains
the reserve for loan losses at an appropriate level. The reserve for loan losses
was $1,429,000 at December 31, 1997, as compared to $1,336,000 at December 31,
1996. The Company's ratio of reserve for loan losses to total loans was 1.00%
at December 31, 1997, compared to 1.07% at December 31, 1996.
Non-performing assets (defined as loans on non-accrual status, loans 90 days or
more past due, and other real estate owned) were $756,000 and $516,000 at
December 31, 1997 and 1996, respectively. The increase in non-performing assets
is attributable to a small number of non-performing loans secured by multiple
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 11.31% for the year ended
December 31, 1997 as compared to the same period in 1996. In 1996, the Company
had a nonrecurring sale of $683,000 of mortgage servicing rights, recognizing a
gain of $380,000. Service charges on deposit accounts were $1,129,000 in 1997,
compared to $1,101,000 in 1996, a 2.5% increase, resulting primarily from an
increase in deposits. Mortgage loan origination's were $57.1 million in the
year ended December 31, 1997, compared to $62.6 million for the same period in
1996. Loans sold were $57.1 million and $63.1 million for the years ended
December 31, 1997 and 1996, respectively, generating $1,351,000 and $1,033,000
of sold loan fee income during each respective period, an increase of 30.8% over
1996. A strong refinance market resulting from low interest rates, as well as
expansion of Security Mortgage into the Portland market supported mortgage
origination activity.
MERGER RELATED COSTS, comprised of professional fees incurred in connection with
the acquisition of Pacific State Bank, were $253,000 for the year ended December
31, 1997.
ESOP COMPENSATION EXPENSE. The Company sponsors an Employee Stock Ownership
Plan (ESOP), a leveraged employee-retirement benefit plan which owns
approximately 22% of the common stock of the Company.
The ESOP owns 976,127 shares, of which 591,343 are allocated to plan
participants. The remaining 384,784 shares are unallocated, and will be
allocated over the remaining debt service period. The current ESOP debt of
$1,858,000 is to be extinguished over the next six years, ending in 2003. As
the debt is paid, shares are released for allocation. The release of shares is
comprised of shares released through dividends on allocated shares, and shares
released through compensation expense (a non-cash charge to the income
statement). Compensation expense is calculated by multiplying the shares
released as compensation by the average share price of the Company's common
stock for the year. Two components of shareholders' equity are also affected.
There is a reduction in unearned ESOP shares at cost, and an increase in surplus
at the difference between the fair market value and the cost of the shares,
thereby creating no impact on shareholders' equity and off-setting the
compensation expense. As shares are released, they are considered outstanding
for the purposes of calculating earnings per share and book value per share.
In 1997, the average share price was $12.14, a 47% increase over the average
price in 1996 of $8.24. This significant price appreciation has caused the
compensation charge to increase proportionately, well beyond the originally
planned 7% of eligible salaries. The resulting non-cash charge to earnings in
1997 of $716 represented 22% of eligible salaries, and the charge in 1996 of
$459 was 17% of eligible salaries.
Because of the growing impact on the Company's earnings, in July 1997, the
Company requested a Private Letter Ruling (PLR) from the Internal Revenue
Service (IRS) to extend the repayment of the debt, thereby reducing the number
of shares being released each year. This would return the retirement benefit to
the originally planned levels.
<PAGE>
In December 1997, the Company received a preliminary response from the IRS
indicating that it would not be ruling in favor of the PLR request. After
further discussion with the IRS in January 1998, the IRS removed the preliminary
decline status pending development of guidelines concerning debt extension
requests. The IRS has indicated a six month time frame to draft these
guidelines.
At this time, the Company is aware of three possible scenarios regarding the
timing of the release of the remaining unallocated shares, as follows:
Option 1. Follow the current debt amortization, the remaining unallocated
shares will be released over the next six years,
Option 2. Upon notification of a favorable PLR, extend the debt four years
and release the remaining unallocated shares over the next ten
years. Note the actual extension period and number of shares
released would be dependent upon the provisions allowed by the
IRS, or
Option 3. Shorten the ESOP tax year, permitting the Company to accelerate
the debt and release all remaining unallocated shares during
1998.
The following table presents the release of the remaining unallocated shares
under the three possible options under consideration by the Company:
<TABLE>
<CAPTION>
Year Option 1 Option 2 Option 3
<S> <C> <C> <C>
1998 .. 71,910 47,520 384,784
1999 .. 74,675 41,839 ---
2000 .. 53,823 40,766 ---
2001 .. 57,334 40,359 ---
2002 .. 61,489 39,117 ---
2003 .. 65,553 37,821 ---
2004 .. --- 35,024 ---
2005 .. --- 35,891 ---
2006 .. --- 35,090 ---
2007 .. --- 31,357 ---
------- ------- -------
Total .. 384,784 384,784 384,784
======= ======= =======
</TABLE>
If the PLR is approved by the IRS, the Company would likely revise the debt
repayment schedule as described in Option 2. The Company may consider Option 3
to lower the burden of compensation expense for future years. Option 3 may be
considered regardless of the outcome of the PLR request and regardless of any
subsequent debt extension. If Option 3 were selected, an extraordinary non-cash
charge would be incurred in 1998, which would substantially lower earnings and
may result in a loss for the year. Because the expense is based on the average
market value of the Company's common stock for the year, it is not possible to
accurately determine the final amount of charge if Option 3 were followed.
However, no final response has been received regarding the PLR and the Company
has made no determination other than to currently accrue compensation expense in
accordance with Option 1.
<PAGE>
OTHER NON-INTEREST EXPENSE. Other non-interest expense increased 18.8% for the
year ended December 31, 1997, as compared to the year ended December 31, 1996.
Primary reasons for the increase include a full year of operating expense for
Lincoln Security Bank (noting Lincoln's operations started May 1996), increased
salary and related benefits and increased furniture & fixture costs relating to
depreciation on new equipment.
PROVISION FOR INCOME TAXES. The provision for income taxes decreased 7.8% for
the year ended December 31, 1997 as compared to the same period in 1996. The
Company's effective tax rate decreased resulting from a lower state tax rate for
1997, and the removal of a deferred tax asset valuation allowance, as it is more
likely than not the deferred tax asset will be realized through future taxable
income.
LOAN LOSSES AND RECOVERIES
The provision for loan losses charged to operating expense is based on the
Company's loan loss experience and such factors which, in management's judgment,
deserve recognition in estimating possible loan losses. Management monitors the
loan portfolio to ensure that the reserve for loan losses is adequate to cover
outstanding loans on non-accrual status and any current loans deemed to be in
serious doubt of repayment according to each loan's repayment plan. The
following table summarizes the Company's reserve for loan losses, and charge-off
and recovery activity:
<TABLE>
<CAPTION>
Year ended December 31
(Dollars in thousands) 1997 1996
-------- --------
<S> <C> <C>
Loans outstanding at end of period $142,728 $124,241
======== ========
Average loans outstanding during the period $134,051 $116,236
======== ========
Reserve balance, beginning of period $1,336 $1,257
Recoveries:
Commercial 43 28
Real estate 1 4
Installment 62 30
Credit card 22 3
--- --
128 65
Loans Charged off:
Commercial (69) (24)
Real estate (3) _
Installment (120) (153)
Credit card (106) (41)
----- -----
(298) (218)
Net loans charged off (170) (153)
Provision charged to operations 263 232
------ ------
Reserve balance, end of period $1,429 $1,336
====== ======
Ratio of net loans charged off to average loans outstanding 0.13% 0.13%
===== =====
<PAGE>
</TABLE>
LENDING AND CREDIT MANAGEMENT
Although a risk of nonpayment exists with respect to all loans, certain specific
types of risks are associated with different types of loans. Due to the nature
of the Company's customer base and the growth experienced in Coos, Curry,
Lincoln and Douglas Counties, real estate is frequently a material component of
collateral for the Company's loans. The expected source of repayment of these
loans is generally the operations of the borrower's business or personal income,
but real estate provides an additional measure of security. Risks associated
with real estate loans include fluctuating land values, local economic
conditions, changes in tax policies, and a concentration of loans within a
limited geographic market area.
The Company mitigates risk on construction loans by generally lending funds to
customers that have been pre-qualified for long term financing and who are using
contractors acceptable to the Company. The commercial real estate risk is
further mitigated by making the majority of commercial real estate loans on
owner-occupied properties.
The Company manages the general risks inherent in the loan portfolio by
following loan policies and underwriting practices designed to result in prudent
lending activities. For example, the Company 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. Residential loans with a
loan to value greater than 80% carry private mortgage insurance.
The following table presents information with respect to non-performing assets:
<TABLE>
<CAPTION>
December 31,
(Dollars in thousands) 1997 1996
---- ----
<S> <C> <C>
Loans on non-accrual status $506 $516
Loans past due greater than 90 days, not on non-accrual status 250 --
Other real estate owned, net -- --
---- ----
Total non-performing assets $756 $516
==== ====
Percentage of non-performing assets to total assets .28% .21%
</TABLE>
Interest income which would have been realized on non-accrual or past-due loans
if they had remained current was insignificant.
ALLOCATION OF RESERVE FOR LOAN LOSSES
The Company does not normally allocate the reserve for loan losses to specific
loan categories with the exception of credit cards. An allocation by credit
quality is made below for presentation purposes. This allocation process does
not necessarily measure anticipated future credit losses; rather, it seeks to
measure the Company'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
(Dollars in thousands) 1997 Total loans 1996 Total loans
---- ----------- ---- -----------
<S> <C> <C> <C> <C>
Unclassified loans.... $769 0.54% $881 0.71%
Letters of credit..... -- 0.00% 3 0.00%
Credit cards.......... 62 0.04% 42 0.03%
Watchlist............. 226 0.15% 104 0.08%
Substandard........... 293 0.21% 292 0.24%
Doubtful ............. 79 0.06% 14 0.01%
Specific-reserve...... -- 0.00% -- 0.00%
------ ----- ------ -----
Total .............$1,429 1.00% $1,336 1.07%
====== ===== ====== =====
</TABLE>
<PAGE>
ANALYSIS OF NET INTEREST INCOME
The following table presents average balances of interest-earning assets and
interest-bearing liabilities, along with yields earned/paid, net interest spread
and net interest margin for the periods indicated (amounts in thousands, except
percentages):
<TABLE>
<CAPTION>
Analysis for the years ended Increase
December 31, 1997 and 1996 1997 1996 (Decrease) % Change
- ----------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Average interest-earning assets....................... $243,590 $212,779 $30,811 14.48%
Average interest-bearing liabilities.................. $231,176 $202,075 $29,101 14.40%
Average yields earned................................. 8.25% 8.34% -0.09% -1.08%
Average rates paid.................................... 3.61% 3.48% 0.13% 3.74%
----- ----- ------ ------
Net interest spread................................... 4.64% 4.86% -0.22% -4.53%
Net interest income to average interest-earning assets 4.83% 5.04% -0.21% -4.17%
</TABLE>
The decrease in net interest margin results from increased competitive
pressures, coupled with the Company's use of higher cost borrowings with the
Federal Home Loan Bank in 1997.
ANALYSIS OF CHANGE IN INTEREST DIFFERENTIAL
The following tables set forth the dollar amount of the change in the Company's
consolidated interest income and interest expense and attributes such dollar
amounts to changes in volume, rates and days. Rate/volume variances which were
immaterial have been allocated equally between rate and volume changes.
<TABLE>
<CAPTION>
Year Ended December 31, 1997 over 1996
Amount of change attributed to
--------------------------------------
(Dollars in thousands) Total Volume Rate Days
----- ------ ------ -----
<S> <C> <C> <C> <C>
Interest income:
Loans, net and mortgage loans held for sale ............... $1,598 $1,822 $(193) $(31)
Investment securities - taxable ........................... 341 282 72 (13)
Investment securities - exempt from
federal income taxes(1) ............... 15 77 (59) (3)
Time deposits - domestic financial institutions ........... (16) (20) 4 _
Dividend income on Federal Home Loan Bank stock ........... 39 42 (3) _
Federal funds sold ........................................ 410 395 16 (1)
Net investment in direct financing leases ................. (48) (27) (20) (1)
------- ------- ------ -----
Total interest income ............................... $2,339 $2,571 $(183) $(49)
------- ------- ------ -----
Interest expense:
Interest on deposits:
Interest-bearing demand .............................. (1) 12 (13) _
NOW accounts ......................................... 46 22 25 (1)
Money market accounts ................................ 219 199 23 (3)
Savings accounts ..................................... (11) (9) (1) (1)
Time deposits ........................................ 440 424 27 (11)
Securities sold under agreement to repurchase ............. 101 97 5 (1)
Short term borrowings ..................................... 1 (2) 3 _
ESOP debt ................................................. (41) _ (41) _
Federal Home Loan Bank borrowings ......................... 546 528 20 (2)
------ ------ --- -----
Total interest expense ............................... $1,300 $1,271 $48 $(19)
------ ------ ------ -----
Net interest income.......................................... $1,039 $1,300 $(231) $(30)
====== ====== ====== =====
</TABLE>
(1) Interest income from investment securities exempt from federal income tax is
not reported on a tax equivalent basis.
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31, 1996 over 1995
Amount of change attributed to
--------------------------------------
(Dollars in thousands) Total Volume Rate Days
----- ------ ---- ----
<S> <C> <C> <C> <C>
Interest income:
Loans, net and mortgage loans held for sale ................ $510 $686 $(206) $30
Investment securities - taxable ............................ 1,221 1,184 27 10
Investment securities - exempt from
federal income taxes(1) ................................ (17) 10 (30) 3
Time deposits - domestic financial institutions ............ (39) (49) 10 _
Dividend income on Federal Home Loan Bank stock ............ 56 31 25 _
Federal funds sold ......................................... (4) 18 (23) 1
Net investment in direct financing leases .................. 92 63 28 1
------ ------ ------ ---
Total interest income ................................ $1,819 $1,943 $(169) $45
------ ------ ------ ---
Interest expense:
Interest on deposits:
Interest-bearing demand ............................... 35 31 4 --
NOW accounts .......................................... (96) (8) (89) 1
Money market accounts ................................. 171 108 61 2
Savings accounts ...................................... (51) (23) (30) 2
Time deposits ......................................... 879 667 203 9
Securities sold under agreement to repurchase .............. 38 39 (1) --
Short term borrowings ...................................... (2) -- (2) --
ESOP debt .................................................. (21) (19) (2) --
Federal Home Loan Bank borrowings .......................... 291 333 (44) 2
------ ------ ---- ---
Total interest expense ................................ $1,244 $1,128 $100 $16
------ ------ ------ ---
Net interest income........................................... $575 $815 $(269) $29
==== ==== ====== ===
</TABLE>
(1) Interest income from investment securities exempt from federal income tax
is not reported on a tax equivalent basis.
<PAGE>
FINANCIAL CONDITION
SUMMARY BALANCE SHEETS
<TABLE>
<CAPTION>
(Dollars in thousands) 1997 1996 $ change % change
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Loans, net.............................................. $141,299 $122,905 $18,394 14.97%
Investments, net........................................ 87,970 98,451 (10,481)(10.65)%
Other assets............................................ 40,963 22,859 18,104 79.20%
-------- -------- ------- ------
Total assets ......................................... $270,232 $244,215 $26,017 10.65%
======== ======== ======= ======
Deposits ............................................... $213,841 $193,964 $19,877 10.25%
Borrowings.............................................. 24,528 22,168 2,360 10.65%
Other liabilities....................................... 2,532 1,822 710 38.97%
------- ------- ------- ------
Total liabilities .................................... 240,901 217,954 22,947 10.53%
Minority interest....................................... 908 938 (30) (3.20)%
Shareholders' equity.................................... 28,423 25,323 3,100 12.24%
-------- -------- ------- ------
Total liabilities, minority interest and equity .... $270,232 $244,215 $26,017 10.65%
======== ======== ======= ======
Equity to asset ratio................................... 10.52% 10.37%
Loan to deposit ratio................................... 66.08% 63.36%
</TABLE>
As shown in the table above, total assets have continued to grow in 1997 as
compared to the prior year. Assets have grown 10.65% at December 31, 1997,
compared to December 31, 1996. The growth in 1997 is the result of increased
deposits which were invested in loans, 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 66.08%
at December 31, 1997, compared to 63.36% at December 31, 1996.
The growth in interest-earning assets has been predominantly in loans. Net
loans increased $18.5 million at December 31, 1997, over the same period in
1996. The lower, more stable interest rate environment of the last two years and
a stronger, more stable local economy have been major contributors to the
increased activity for the year ended December 31, 1997. Investment securities
decreased $10.5 million as of December 31, 1997, as compared to the same period
in 1996, and were used to fund loan growth.
Deposit growth continued for the years ended December 31, 1997 and 1996. Total
deposits increased $19.9 million at December 31, 1997, compared to December 31,
1996. The growth in 1997 and 1996 has been predominantly in interest-bearing
deposits.
The Company is a member of the Federal Home Loan Bank of Seattle. This
membership allows the Company access to low cost, long-term funding otherwise
unavailable. The Company had $16.0 million in borrowings outstanding as of
December 31, 1997.
LIQUIDITY
Liquidity enables the Company to meet the withdrawals of its depositors and the
borrowing needs of its loan customers. The Company maintains its liquidity
position through maintenance of cash resources and a stable core deposit base.
A further source of liquidity is the Company's ability to borrow funds. The
Company maintains three unsecured lines of credit totaling $11 million for the
purchase of funds on an overnight basis. The Company is also a member of the
Federal Home Loan Bank which provides a secured line of credit in the amount of
$55.4 million, and other funding opportunities for liquidity and asset/liability
matching. Over the past three years these lines have been used periodically.
As of December 31, 1997, there were no borrowings under the Company's unsecured
lines of credit and $16.0 million was borrowed from the Federal Home Loan Bank.
Interest rates charged on the lines are determined by market factors.
<PAGE>
The Company's liquidity has been stable and adequate over the past three years.
Short-term deposits have continued to grow and excess investible cash is loaned
on a short term basis (federal funds sold). The Company's primary source of
funds is consumer deposits and commercial accounts. These funds are not subject
to significant movements as a result of changing interest rates and other
economic factors, and therefore enhance the Company's long term liquidity.
CAPITAL RESOURCES
Beginning in 1990, federal regulators required the calculation of Risk-based
Capital. This is an analysis that weights balance sheet and off-balance sheet
items for their inherent risk. It requires minimum standards for Risk-based
Capital by Capital Tier. Full implementation of this analysis was required in
1992, requiring a minimum total Risk-based Capital ratio of 8.00% and a minimum
Tier 1 Capital Ratio of 4.00%. At December 31, 1997, the Company had a
Risk-based Capital Ratio of 18.33% and Tier 1 Capital Ratio of 17.45%. This was
compared to 19.06% and 18.13% for total Risk-Based Capital and Tier 1 Capital,
respectively, at December 31, 1996. If the Company were fully leveraged
(i.e. if the Company 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 the Company were to seek
additional capital from outside sources.
INTEREST SENSITIVITY
The Company defines interest sensitivity (or interest rate risk) as the risk
that the Company's earnings or capital will change when interest rates change.
Market, or economic risk, by comparison, is the risk that the value of the
Company's assets will change when interest rates change. To ensure consistent
measurement, the Company has developed comprehensive Asset and Liability
Management policies that are followed by all affiliate banks.
"Exposure" is the change in pre-tax earnings, over a 12 month period, when the
Fed Funds rate changes. "Leverage" is the Company's exposure calculated as a
percent of capital and therefore is expressed in terms of a pre-tax Return on
Equity.
If the Company's earnings move in the same direction as interest rates, then the
Company is "asset sensitive" (i.e. interest income changes more than interest
expense). If the earnings move in the opposite direction from the change in
rates, then the Company is "liability sensitive" (i.e. interest expense
changes more than interest income).
Calculation of Interest Rate Risk:
A change in earnings as a result of changes in interest rates is caused by two
factors. First, the rate on each asset and liability changes by a different
amount and at a different time. Second, there are different volumes of assets
and liabilities maturing and repricing (the traditional gap). The combination
causes a change in the Company's net interest margin.
Exposure Calculation of Interest Rate Risk:
The Company will use change in earnings exposure as its primary measure of
interest rate risk. It is the policy of the Company to control the exposure of
the Company's earnings to changing interest rates by generally maintaining a
position within a reasonable range around an "earnings neutral" or "balanced"
position. This is defined as the mix of assets and liabilities that generate a
net interest margin that is not affected by interest rate changes.
There are three reasons for establishing a target range rather than an exact
earnings neutral position. Measuring interest rate risk is not an exact
science. We can only estimate the earnings impact of a change in rates, and
this estimate may change as the rate environment changes (this is often called
"basis risk"). Also, the mix of assets and liabilities available in the
Company's market may not produce an exact earnings neutral position, thus
forcing the Company to forego good business opportunities if it must keep a
totally balanced position. Lastly, a neutral position does not allow the
Company to modestly position itself to take advantage of a rising or falling
rate trend (i.e. keeping investments shorter when rates are rising).
<PAGE>
There can be exceptions to this general rule. If, for example, the Company has
a liquidity or capital problem then this takes priority and the Company would
employ a strategy that protects liquidity by maintaining an asset sensitive
position (i.e. having assets that will reprice quickly to reflect a change in
interest rates). This would keep assets at current rates to allow their sale,
if needed, without recognizing a significant loss.
Interest Rate Risk Exposure/Leverage Limits:
The Company shall normally maintain a mix of assets and liabilities that
produces interest rate risk that will change the Company's net interest income
over the next 12 months less than the following limits, if the Fed Funds rate
changes 2%:
Change in ROE
Leverage
-------------
Asset sensitive....... 4.0%
Liability sensitive... 2.0%
There is a lower risk limit for liability sensitivity because, in a liability
sensitive Company, interest rate risk and market risk move in the same
direction, thereby exaggerating the impact of changing rates. If the Company
were asset sensitive, these two risks would tend to offset each other.
Interest rate risk is calculated quarterly and reported to the Asset/Liability
Management Committee and then to the respective Boards of Directors. Significant
changes in the structure of the Company's finances can be modeled during the
quarters to ensure continued compliance with these policy limits. At no time
during the year were these limitations exceeded.
INFLATION
The primary impact of inflation on the Company's operations is increased asset
yields, deposit costs and operating overhead. Unlike most industrial companies,
virtually all of the assets and liabilities of a financial institution are
monetary in nature. As a result, interest rates generally have a more
significant impact on a financial institution's performance than the effects of
general levels of inflation. Although interest rates do not necessarily move in
the same direction or to the same extent as the prices of goods and services,
increases in inflation generally have resulted in increased interest rates. The
effects of inflation can magnify the growth of assets, and if significant, would
require that equity capital increase at a faster rate than would otherwise be
necessary.
<PAGE>
INVESTMENT PORTFOLIO
The following table shows the amortized costs, estimated market values,
unrealized gains and unrealized losses of the Company's investment portfolio as
of December 31, 1997 and 1996:
<TABLE>
<CAPTION>
Amortized Estimated Unrealized Unrealized
(Dollars in thousands) Cost Market Value Gains Losses
--------- ------------ --------- ----------
1997 Available for sale
- -----------------------
<S> <C> <C> <C> <C>
U.S. Government and federal agencies.......................... $21,756 $21,743 $41 $54
Mortgage-backed securities.................................... 23,118 23,212 122 28
United States Treasury........................................ 18,568 18,686 124 6
Corporate obligations ........................................ 8,230 8,225 4 9
Obligations of state and political subdivisions............... 13,719 14,264 550 5
------- ------- ---- ----
Total available for sale ................................. $85,391 $86,130 $841 $102
======= ======= ==== ====
1996 Available for sale
- -----------------------
U.S. Government and federal agencies.......................... $24,249 $24,149 $30 $130
Mortgage-backed securities.................................... 34,339 34,223 116 232
United States Treasury........................................ 19,443 19,609 178 12
Corporate obligations......................................... 2,745 2,745 7 7
Obligations of state and political subdivisions............... 14,753 15,111 384 26
------- ------- ---- ----
Total available for sale ................................. $95,529 $95,837 $715 $407
</TABLE>
<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,
1997:
<TABLE>
<CAPTION>
Estimated Weighted
Amortized Market Average
(Dollars in thousands) Cost Value Yield
--------- --------- --------
<S> <C> <C> <C>
U.S. Government federal agencies
One year or less .......................$1,499 $1,503 6.30%
After one year through five years ......19,257 19,242 6.29%
After five years through ten years ..... 1,000 998 8.00%
------ ------ -----
Total .............................21,756 21,743 6.37%
------ ------ -----
Mortgage-backed securities
One year or less ....................... 419 419 5.84%
After one year through five years ..... 4,302 4,321 6.80%
After five years through ten years ..... 3,077 3,078 6.43%
After ten years ........................15,320 15,394 6.76%
------ ------ -----
Total .............................23,118 23,212 6.60%
------ ------ -----
United States Treasury
One year or less ...................... 9,455 9,505 5.81%
After one year through five years ...... 9,113 9,181 6.66%
----- ----- -----
Total .............................18,568 18,686 6.23%
------ ------ -----
Corporate obligations
One year or less ...................... 2,103 2,104 6.09%
After one year through five years ...... 6,127 6,121 6.06%
----- ----- -----
Total ............................. 8,230 8,225 6.07%
----- ----- -----
Obligations of state and political
subdivisions (1)
One year or less ...................... 126 127 6.43%
After one year through five years ...... 1,713 1,753 5.39%
After five years through ten years ..... 5,569 5,828 6.04%
After ten years ........................ 6,311 6,556 5.40%
------ ------ -----
Total .............................13,719 14,264 5.67%
------ ------ -----
Total securities available for sale......$85,391 $86,130 6.26%
======= ======= =====
</TABLE>
- --------------------------
(1) Yields on tax-exempt securities have not been stated on a tax-equivalent
basis.
As of December 31, 1997, the Company had no securities classified as
"held to maturity".
<PAGE>
LOAN PORTFOLIO
Interest earned on the loan portfolio is the primary source of income for the
Company. Net loans represented 51.2% of total assets as of December 31, 1997.
Although the Company strives to serve the credit needs of its service area, its
primary focus is on real estate, commercial and consumer installment loans. The
Company makes substantially all of its loans to customers located within the
Company's service area. The Company has no loans defined as highly leveraged
transactions by the Federal Reserve Bank, nor 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. The Company'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, the Company does not lend to start-up businesses or others
lacking operating history, and requires personal guarantees and secondary
sources of repayment. Residential real estate loans include 1-4 family
owner- or non-owner occupied residences, multi-family units, construction and
secondary market loans pending sale. Generally, the risk associated with such
loans is the loss of the borrower's income. The Company attempts to mitigate
the risk by thorough review of the borrower's credit and employment history,
and limits the loan-to-value ratio to 80% to provide protection in the event of
foreclosure. Installment loans consist of personal, automobile or home equity
loans. The Company also offers credit cards to its customers. These unsecured
loans carry significantly higher interest rates than secured loans, which allows
the Company to maintain a higher loss reserve in conjunction with maintaining
strict credit guidelines when considering loan applications. The following
table presents the composition of the Company's loan portfolio, at the dates
indicated:
<TABLE>
<CAPTION>
December 31,
(Dollars in thousands) 1997 1996
------- -------
<S> <C> <C>
Commercial - real estate ..... $31,420 $26,157
Commercial - lines of credit.. 37,172 34,480
Residential - real estate..... 34,811 29,238
Installment................... 32,735 28,328
Credit cards and other........ 3,701 3,205
------- -------
Total loans .............. 139,839 121,408
Deferred loan fees, net....... (167) (169)
Reserve for loan losses....... (1,429) (1,336)
-------- --------
Net loans ................ $138,243 $119,903
======== ========
</TABLE>
At December 31, 1997, the maturities of all loans by category were as follows:
<TABLE>
<CAPTION>
Within One to After
(Dollars in thousands) One Year Five Years Five Years Total
-------- ---------- --------- -----
<S> <C> <C> <C> <C>
Commercial - real estate ..... $10,612 $10,886 $9,922 $31,420
Commercial - lines of credit.. 26,584 8,722 1,866 37,172
Residential - real estate..... 17,238 2,920 14,653 34,811
Installment................... 2,716 18,596 11,423 32,735
Credit cards & other.......... 3,537 111 53 3,701
------- ------- ------- --------
Total ..................... $60,687 $41,235 $37,917 $139,839
======= ======= ======= ========
</TABLE>
Of loans with maturities of one year or more, $66,504,000 were fixed-rate loans,
and $12,648,000 were variable rate loans.
<PAGE>
DEPOSIT LIABILITIES
The following table sets forth the average deposit liabilities of, and rates
paid by, the Company for the periods indicated:
<TABLE>
<CAPTION>
Years ended December 31,
(Dollars in thousands) 1997 1996
Deposit Liabilities Amount Rate Amount Rate
------ ---- ------ ----
<S> <C> <C> <C> <C>
Demand .................... $29,592 n/a $26,197 n/a
Interest-bearing demand .. 2,757 3.72% 2,426 4.27%
NOW accounts ............. 30,245 1.18% 28,081 1.09%
Money market accounts ..... 32,635 3.52% 27,216 3.44%
Savings accounts .......... 20,868 2.49% 21,283 2.50%
Time deposits ............. 84,511 5.31% 76,723 5.27%
------- ----- -------- -----
Total deposits ...... $200,608 3.30% $181,926 3.25%
======== ===== ======== =====
</TABLE>
As of December 31, 1997, the Company's time deposit maturities were as follows:
<TABLE>
<CAPTION>
Time Deposits of All Other
(Dollars in thousands) $100 or more(1) Time Deposits(2)
--------------- ----------------
Remaining Time to Maturity:
<S> <C> <C> <C> <C>
3 months or less ..........$14,417 59.71% $19,972 31.01%
4 to 6 months ............. 2,984 12.36% 14,148 21.97%
7 to 12 months ............ 5,579 23.11% 15,120 23.48%
Over 1 year ............... 1,165 4.82% 15,156 23.54%
----- ----- ------ ------
Total ....................$24,145 100.00% $64,396 100.00%
======= ======= ======= =======
</TABLE>
(1) Time deposits of $100 or more represent 11.29% of total deposits as of
December 31, 1997.
(2) All other time deposits represent 30.11% of total deposits as of
December 31, 1997.
BORROWINGS
The following table sets forth information regarding the Company's Federal Home
Loan Bank (FHLB) borrowings for the years ended December 31, 1997 and 1996:
<TABLE>
<CAPTION>
(Dollars in thousands) 1997 1996
---- ----
FHLB Borrowings:
<S> <C> <C>
Amount outstanding at year end ................$16,000 $17,028
Average outstanding for the year ..............$23,794 $14,914
Maximum outstanding at any month end ..........$32,780 $17,385
Weighted average rate for the year ............ 5.92 % 5.79 %
Weighted average rate at year end ............. 6.13 % 5.70 %
Weighted average maturity at year end (days) .. 723 240
</TABLE>
<PAGE>
AVERAGE BALANCE SHEET AND AVERAGE RATES EARNED AND PAID
The following table presents, for the periods indicated, information regarding
average balances of assets and liabilities of the Company, the total dollar
amounts of interest income from 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>
FISCAL 1997 FISCAL 1996
Average Average Yield Average Average Yield
(Dollars in thousands) Balance Interest or Rates Balance Interest or Rates
------- -------- -------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
Assets
Federal funds sold ............................................. $11,068 $598 5.40% $3,789 $188 4.96%
Time deposits - domestic financial institutions ................ 69 5 7.25% 378 21 5.56%
Investment securities - taxable .............................. 77,902 5,069 6.51% 73,762 4,728 6.41%
Investment securities - exempt
from federal income taxes .............................. 17,877 977 5.47% 16,531 962 5.82%
Loans, gross and mortgage loans
held for sale, at cost which
approximates market(1)(2) ............................ 130,936 12,948 9.89% 112,825 11,350 10.06%
Net investment in direct financing leases ...................... 3,116 292 9.37% 3,411 340 9.97%
Federal Home Loan Bank stock, at cost ......................... 2,622 202 7.70% 2,083 163 7.83%
-------- ------- ----- -------- ------- -----
Total interest-earning assets/
interest income......................................... $243,590 $20,091 8.25% $212,779 $17,752 8.34%
Cash and due from banks .......................................... 7,264 6,371
Premises and equipment, net ...................................... 5,058 3,754
Loan loss reserve................................................. (1,380) (1,273)
Investment market value adjustment................................ 233 189
Other assets ..................................................... 5,917 4,729
-------- --------
Total assets ................................................. $260,682 $226,549
======== ========
Liabilities, Minority Interest and Shareholders' Equity
Demand accounts ................................................ $29,592 $_ _ % $26,197 $_ _ %
Interest-bearing demand accounts ............................... 2,757 103 3.74% 2,426 104 4.29%
NOW accounts ................................................... 30,245 357 1.18% 28,081 311 1.11%
Money market accounts .......................................... 32,635 1,150 3.52% 27,216 931 3.42%
Savings accounts .............................................. 20,868 520 2.49% 21,283 531 2.49%
Time deposits .................................................. 84,511 4,484 5.31% 76,723 4,044 5.27%
Securities sold under agreements to repurchase ................. 6,374 291 4.57% 4,297 190 4.42%
Short-term borrowings .......................................... 400 23 5.75% 435 22 5.06%
ESOP debt ...................................................... _ _ _ % 503 41 8.15%
Federal Home Loan Bank borrowings .............................. 23,794 1,409 5.92% 14,914 863 5.79%
Total interest- bearing liabilities/ ------ ----- ----- ------ --- -----
interest expense ....................................... $231,176 $8,337 3.61% 202,075 7,037 3.48%
Other liabilities................................................ 1,997 1,878
Total liabilities ......................................... 233,173 203,953
Minority Interest................................................ 924 558
--- ---
Shareholders' equity............................................. 26,585 22,038
Total liabilities, minority interest and shareholders' equity. $260,682 $226,549
======== ========
Net interest income............................................... $11,754 $10,715
Net interest spread............................................... 4.64% 4.86%
Net interest income to earning assets............................. 4.83% 5.04%
</TABLE>
(1) Average non-accrual loans included in the computation of average loans were
$511 for 1997 and $508 for 1996
(2) Loan related fees recognized during the period and included in the yield
calculation totaled approximately $259 in 1997 and $324 in 1996
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
The financial statements required by regulation S-B are set forth in the pages
listed below.
PAGE
Independent Auditors' Report 32
Consolidated Balance Sheets, as of December 31, 1997 and 1996 33
Consolidated Statements of Income, for the years ended
December 31, 1997 and 1996 34
Consolidated Statements of Shareholders Equity, for the years
ended December 31, 1997 and 1996 35
Consolidated Statements of Cash Flows, for the years ended
December 31, 1997 and 1996 36
Notes to Consolidated Financial Statements 37-52
<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 as of December 31, 1997 and 1996, 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, 1997 and 1996, 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 23, 1998
<PAGE>
SECURITY BANK HOLDING COMPANY & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1997 AND 1996
Dollars in Thousands, Except Per Share Data
<TABLE>
<CAPTION>
ASSETS 1997 1996
---- ----
<S> <C> <C>
Cash and cash equivalents:
Cash and due from banks .................................................. $10,087 $11,009
Federal funds sold ........................................................ 19,165 1,600
------ ------
Total cash and cash equivalents ......................................... 29,252 12,609
Time deposits _ domestic financial institutions.............................. _ 270
Investment securities available for sale .................................... 86,130 95,837
Loans, net................................................................... 136,035 117,719
Mortgage loans held for sale, at cost which approximates market ............. 2,208 2,184
Net investment in direct financing leases ................................... 3,056 3,002
Premises and equipment, net ................................................. 7,111 5,659
Federal Home Loan Bank stock, at cost ....................................... 1,840 2,344
Other assets................................................................. 4,600 4,591
----- -----
Total assets ............................................................$270,232 $244,215
======== ========
LIABILITIES, MINORITY INTEREST AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Demand .................................................................. $31,550 $26,996
Interest_bearing demand ................................................. 3,728 3,854
NOW accounts ............................................................ 32,869 29,580
Money market accounts ................................................... 37,074 29,326
Savings accounts ........................................................ 20,079 20,875
Time deposit ........................................................... 88,541 83,333
------ ------
Total deposits ...................................................... 213,841 193,964
Securities sold under agreements to repurchase ............................ 7,945 4,562
Short term borrowings ..................................................... 583 578
Federal Home Loan Bank borrowings ........................................ 16,000 17,028
Other liabilities ......................................................... 2,532 1,822
----- -----
Total liabilities ....................................................... 240,901 217,954
Minority interest in subsidiary.............................................. 908 938
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
4,442,097 shares in 1997 (4,426,233 shares in 1996) .................... 22,210 22,131
Surplus .................................................................. 1,596 1,039
Retained earnings ........................................................ 5,629 3,689
Unearned ESOP shares, at cost ............................................ (1,469) (1,728)
Unrealized gain on investment securities available for sale, net of tax ... 457 192
--- ---
Total shareholders' equity .............................................. 28,423 25,323
Commitments and contingent liabilities ......................................
-------- --------
Total liabilities, minority interest and shareholders' equity ...........$270,232 $244,215
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
SECURITY BANK HOLDING COMPANY & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1997 AND 1996
Dollars in Thousands, Except Per Share Data
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Interest income:
Interest on loans .......................................................... $12,948 $11,350
Interest and dividends on securities:
Taxable .................................................................. 5,069 4,728
Exempt from Federal income tax ........................................... 977 962
Interest on time deposits_domestic financial institutions .................. 5 21
Dividend income on Federal Home Loan Bank stock ............................ 202 163
Interest on Federal funds sold ............................................. 598 188
Income on direct financing leases .......................................... 292 340
--- ---
Total interest income .................................................... 20,091 17,752
Interest expense:
Deposits
Interest_bearing demand .................................................. 103 104
NOW ..................................................................... 357 311
Money market ............................................................. 1,150 931
Savings .................................................................. 520 531
Time ..................................................................... 4,484 4,044
Securities sold under agreements to repurchase ............................ 291 190
Short term borrowings ...................................................... 23 22
ESOP debt .................................................................. -- 41
Federal Home Loan Bank borrowings .......................................... 1,409 863
----- -----
Total interest expense ................................................... 8,337 7,037
Net interest income ...................................................... 11,754 10,715
Provision for loan losses .................................................... 263 232
--- ---
Net interest income after provision for loan losses ...................... 11,491 10,483
Other income:
Service charges on deposit accounts ........................................ 1,129 1,101
Gain on sale/call of investments available for sale, net ................... 191 13
Loan servicing fees ........................................................ 249 326
Sold real estate loan fees ................................................. 1,351 1,033
Gain on sale of servicing rights ........................................... -- 380
Other ..................................................................... 949 623
--- ---
Total other income ....................................................... 3,869 3,476
Other expense:
Salaries and employee benefits ............................................. 6,065 5,309
Occupancy of bank premises ................................................. 711 585
Furniture and equipment .................................................... 898 683
Professional fees .......................................................... 847 551
FDIC assessment ............................................................ 23 5
Supplies ................................................................... 349 319
ESOP compensation .......................................................... 716 459
Other ..................................................................... 1,769 1,663
----- -----
Total other expense ...................................................... 11,378 9,574
------ -----
Income before provision for income taxes and minority interest ...... 3,982 4,385
Provision for income taxes ................................................ 1,247 1,353
----- -----
Income before minority interest ...................................... 2,735 3,032
Net loss attributable to minority interest ................................. 30 37
-- --
Net income .......................................................... $2,765 $3,069
====== ======
Net income per share - basic ........................................ $.68 $.84
==== ====
Net income per share - diluted ...................................... $.68 $.83
==== ====
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
SECURITY BANK HOLDING COMPANY & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997 AND 1996
Dollars in Thousands, Except Per Share Data
<TABLE>
<CAPTION>
Unearned Unrealized Total
Common Stock Retained ESOP shares Gain (Loss) Shareholders'
Shares Amount Surplus Earnings at Cost Securities Equity
------ ------ ------- -------- ------- ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, Dec. 31, 1995......................... 4,023,508 $20,117 $-- $1,524 $(1,981) $1,020 $20,680
Net income..................................... -- -- -- 3,069 -- -- 3,069
Dividends...................................... -- -- -- (904) -- -- (904)
Sale of common stock........................... 402,725 2,014 739 -- -- -- 2,753
Release of ESOP shares......................... -- -- 300 -- 253 -- 553
Unrealized loss on securities
available for sale .......................... -- -- -- -- -- (828) (828)
--------- ------- ------ ------ -------- ---- -------
Balance, Dec. 31, 1996......................... 4,426,233 $22,131 $1,039 $3,689 $(1,728) $192 $25,323
Net income..................................... -- -- -- 2,765 -- -- 2,765
Dividends...................................... -- -- -- (825) -- -- (825)
Sale of common stock........................... 15,864 79 (14) -- -- -- 65
Release of ESOP shares......................... -- -- 571 -- 259 -- 830
Unrealized gain on securities
available for sale .......................... -- -- -- -- -- 265 265
---------- -------- ------ ------ -------- ---- -------
Balance, Dec. 31, 1997......................... 4,442,097 $22,210 $1,596 $5,629 $(1,469) $457 $28,423
========= ======= ====== ====== ======== ==== =======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
SECURITY BANK HOLDING COMPANY & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997 AND 1996
Dollars in Thousands, Except Per Share Data
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income................................................................................ $2,765 $3,069
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization ........................................................ 672 574
Provision for loan losses ............................................................ 263 232
Origination of mortgage loans held for sale .......................................... (57,139) (62,634)
Proceeds from mortgage loans sold .................................................... 57,114 63,066
Net (gain) loss on sale of fixed assets .............................................. (164) 10
Net gain on call/sale of investment securities available for sale .................... (191) (13)
Federal Home Loan Bank stock dividend ................................................ (201) (163)
ESOP related compensation expense .................................................... 830 553
Increase in other assets ............................................................. (9) (83)
Increase in other liabilities ........................................................ 593 176
----- -----
Net cash provided by operating activities ........................................ 4,533 4,787
Cash flows from investing activities:
Net decrease in time deposits _ domestic financial institutions ...................... 270 280
Purchase of investment securities available for sale ................................. (44,538) (60,490)
Proceeds from sale of investment securities available for sale ....................... 24,003 17,812
Proceeds from maturities and call of investment securities available for sale ........ 30,864 24,538
Proceeds from maturities of investment securities held to maturity ................... -- 100
Net loan originations ................................................................ (17,540) (13,158)
Purchase of participations ........................................................... (1,039) (501)
Additions to premises and equipment .................................................. (2,223) (2,572)
Purchase of Federal Home Loan Bank stock ............................................. (3,192) (2,065)
Redemption of Federal Home Loan Bank stock ........................................... 3,897 1,541
Proceeds from sales of premises and equipment ........................................ 215 22
Originations of direct financing leases .............................................. (1,076) (678)
Gross payments on direct financing leases ............................................ 1,022 1,217
Minority interest in subsidiary ...................................................... (30) 938
------- --------
Net cash used in investing activities ............................................ (9,367) (33,016)
Cash flows from financing activities:
Net increase in deposits ............................................................. 19,877 21,111
Increase in securities sold with agreements to repurchase ............................ 3,383 1,688
Repayment of ESOP debt ............................................................... _ (644)
(Decrease) increase in Federal Home Loan Bank borrowings ............................. (1,028) 5,528
Proceeds from issuance of common stock ............................................... 65 2,753
Payment of dividends ................................................................. (825) (904)
Other ................................................................................ 5 12
------- ------
Net cash provided by financing activities ........................................ 21,477 29,544
------ ------
Net increase in cash and cash equivalents ........................................ 16,643 1,315
Cash and cash equivalents at beginning of period ....................................... 12,609 11,294
------ ------
Cash and cash equivalents at end of period ............................................. $29,252 $12,609
======= =======
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest ......................................................................... $8,290 $6,850
Income taxes ..................................................................... $1,427 $1,221
Supplemental disclosures of investing activities:
Unrealized gain (loss) on investment
securities available for sale, net of tax ................................... $265 $(828)
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
Security Bank Holding Company & Subsidiaries
Notes to Consolidated Financial Statements
Dollars In Thousands, Except Per Share Data
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Security Bank Holding Company (the Company), a bank holding company, its wholly-
owned subsidiaries, Security Bank (Security Bank) and Pacific State Bank
(Pacific State), 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, Pacific State 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 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 Bank's 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.
Pacific State conducts a general banking business, offering commercial banking
services to small and medium size businesses, professionals and retail customers
in the Reedsport, Lakeside and Gardiner communities of Oregon. As discussed
more fully in note 3, Pacific State was acquired by the Company in November
1997, and now operates as a wholly-owned subsidiary. The acquisition was
accounted for as a pooling of interests. Accordingly, all prior period
financial data have been restated to include the financial results of Pacific
State.
Lincoln Security is a newly organized state chartered bank located in Newport,
Oregon in which the Company holds a majority interest. The Company 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
Company's ownership of Lincoln Security was 68.33% as of December 31, 1997 and
1996.
The Banks are subject to the regulations of certain federal agencies and undergo
periodic examinations by these regulatory authorities.
<PAGE>
Security Bank Holding Company & Subsidiaries
Notes to Consolidated Financial Statements
Dollars In Thousands, Except Per Share Data
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, Douglas 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 other assets of the borrower 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 management's 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.
(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 in noninterest
income. Net unrealized gain or loss on securities available for sale are
included, net of tax, as a component of shareholders' equity.
(E) INCOME RECOGNITION
Interest is accrued on a simple interest basis. The accrual of interest on loans
is discontinued when, in management's 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.
<PAGE>
Security Bank Holding Company & Subsidiaries
Notes to Consolidated Financial Statements
Dollars In Thousands, Except Per Share Data
(F) RESERVE FOR LOAN LOSSES
The reserve for loan losses represents management's recognition of the assumed
risks of extending credit and its evaluation of the quality of the loan
portfolio. The reserve is maintained at a level considered adequate to provide
for potential loan losses based on management's assessment of various factors
affecting the loan portfolio, including a review of problem loans, business
conditions, loss experience and an overall evaluation of the quality of the
portfolio. The reserve is increased by provisions charged to operations and
reduced by loans charged off, net of recoveries. 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 are charged off, or an allowance established by
a charge to income equal to all interest previously accrued and unpaid is
subsequently recognized only to the extent cash payments are received until
delinquent interest is paid in full and, in management's judgement, 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.
(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 Bank's net investment
in the leases. The excess of the investment in the leases over the cost of the
equipment (unearned income) is recognized as income over the term of the lease.
(H) PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are charged to expense over the
estimated useful lives of the assets (building- thirty-one and one half to forty
years; furniture and equipment-five to seven years). Depreciation is computed
principally on the straight-line method for assets acquired prior to 1991 and
subsequent to January 1, 1997, and on accelerated methods for assets acquired
from 1991 through 1996.
(I) OTHER REAL ESTATE
Other real estate, acquired through foreclosure or deed in lieu of foreclosure,
is carried at the lower of cost or estimated fair value, not to exceed estimated
net realizable value. When the property is acquired, any excess of the loan
balance over the estimated net realizable value is charged to the reserve for
loan losses. Subsequent write-downs, if any, are charged to the reserve for
other real estate losses.
<PAGE>
Security Bank Holding Company & Subsidiaries
Notes to Consolidated Financial Statements
Dollars In Thousands, Except Per Share Data
(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, the Company 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, the Company adopted Statement of Financial Accounting Standards
(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. The Company has elected to
continue to apply the provisions of APB Opinion No. 25.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions used for
grants in 1995 and 1997, respectively: dividend yield of 3.5% and 2.6%; expected
volatility of 60% for both years; risk-free interest rates of 6.1% and 5.8%; and
expected lives of five years. The pro forma disclosure provisions of SFAS No.
123 are not material to the Company's Consolidated Statements of Income.
(L) CAPITALIZED MORTGAGE LOAN SERVICING RIGHTS
The Company adopted Statement of Financial Accounting Standards No. 125, (SFAS
No. 125) _ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND
EXTINGUISHMENTS OF LIABILITIES,_ on January 1, 1997. SFAS No. 125 requires that
corporations that acquire mortgage servicing rights through either the purchase
or origination of mortgage loans and sells or securitizes 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 Company's financial position or results of operations.
<PAGE>
Security Bank Holding Company & Subsidiaries
Notes to Consolidated Financial Statements
Dollars In Thousands, Except Per Share Data
(M) NET INCOME PER SHARE
In February 1997, the FASB issued SFAS No. 128 EARNINGS PER SHARE. SFAS No. 128
establishes standards for computing and presenting earnings per share (EPS). It
simplifies the standards in APB No. 15 EARNINGS PER SHARE for computing EPS by
replacing primary EPS with basic EPS and by altering the calculation of diluted
EPS, which replaces fully diluted EPS. SFAS No. 128 is effective for financial
statements issued for periods ending after December 15, 1997, including interim
periods. All prior period EPS figures have been restated to conform to the
provisions of this SFAS.
Basic and diluted net income per share are based on the weighted average number
of common shares outstanding during each year, with diluted including the effect
of potentially dilutive common shares. For the year ended December 31, 1997
and 1996, the weighted average number of common shares outstanding did not
include 384,784 and 455,824 shares respectively, held by the Company'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 for basic net income per share computations were 4,050,237 and
3,669,591 at December 31, 1997 and 1996, respectively. For diluted net income
per share, 45,128 and 30,470 shares were added to weighted average shares
outstanding for 1997 and 1996, respectively, representing potential dilution for
stock options outstanding, calculated using the treasury stock method.
(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, 1996, consolidated
financial statements have been reclassified to conform to classifications on the
December 31, 1997, consolidated financial statements.
<PAGE>
Security Bank Holding Company & Subsidiaries
Notes to Consolidated Financial Statements
Dollars In Thousands, Except Per Share Data
(P) RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the FASB issued SFAS No. 129, DISCLOSURE OF INFORMATION ABOUT
CAPITAL STRUCTURE. SFAS No. 129 establishes standards for disclosing
information about an entity's capital structure, by consolidating previous
disclosure requirements. This SFAS is effective for financial statements for
periods ending after December 15, 1997, and had no impact on the Company's
Consolidated Financial Statements upon adoption.
In June 1997, the FASB issued SFAS No. 130, REPORTING COMPREHENSIVE INCOME.
This SFAS establishes standards for reporting and displaying comprehensive
income and its components in general-purpose financial statements.
Comprehensive net income includes net income and several other items that
current accounting standards require to be recognized outside of net income.
This SFAS is effective for fiscal years beginning after December 15, 1997, and
as such, will be adopted by the Company in 1998.
Also in June 1997, the FASB issued SFAS No. 131, DISCLOSURE ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION. This SFAS requires public enterprises to
report certain information about their operating segments in a complete set of
financial statements to shareholders. It also requires reporting of certain
enterprise-wide information about the Company's products and services, its
activities in different geographic areas, and its reliance on major customers.
The basis for determining the Company's operating segments is the manner in
which management operates the business. This SFAS is effective for financial
statements for periods beginning after December 15, 1997, and as such, will be
adopted by the Company in 1998. The Company does not expect implementation to
have a material impact to the Consolidated Financial Statements.
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, 1997 and 1996, was
approximately $1,444 and $1,238, respectively, and was met by holding cash and
maintaining an average reserve balance with the Federal Reserve Bank.
<PAGE>
Security Bank Holding Company & Subsidiaries
Notes to Consolidated Financial Statements
Dollars In Thousands, Except Per Share Data
3. ACQUISITION
In June 1997, Security Bank Holding Company (SBHC) and Pacific State Bank (PSB)
announced a definitive agreement to merge in a stock-for-stock exchange. The
transaction, accounted for as a pooling of interests, was consummated on
November 22, 1997, in an exchange of 3.10 shares of Security Bank Holding
Company common stock for each share of Pacific State Bank common stock. There
were 1,261,313 shares of Security Bank Holding Company common stock issued for
406,875 shares of Pacific State Bank common stock. At December 31, 1996, Pacific
State Bank had total assets of $52,791.
Combined Condensed Consolidated Statements of Income, which are based upon the
unaudited financial statements of SBHC and PSB for the Nine months ended
September 30, 1997 and the audited financial statements of SBHC and PSB for the
Fiscal year ended December 31, 1996, were as follows:
<TABLE>
<CAPTION>
Nine months ended Fiscal year ended
September 30, 1997 December 31, 1996
(UNAUDITED)
SBHC PSB COMBINED SBHC PSB COMBINED
---- --- -------- ---- --- --------
<S> <C> <C> <C> <C> <C> <C>
Interest income $11,783$3,093$14,876$13,545$4,207$17,752
Interest expense 5,097 1,090 6,187 5,603 1,434 7,037
----- ----- ----- ----- ----- -----
Net interest income before provision 6,686 2,003 8,689 7,942 2,773 10,715
Provision for loan loss 190 21 211 208 24 232
--- -- --- --- -- ---
Net interest income 6,496 1,982 8,478 7,734 2,749 10,483
Other income 2,597 340 2,937 3,241 235 3,476
Merger related expense 124 72 196 - - -
All other expense 7,076 1,000 8,076 8,198 1,376 9,574
----- ----- ----- ----- ----- -----
Net income before minority interest
and provision for tax 1,893 1,250 3,143 2,777 1,608 4,385
Provision for income tax 580 423 1,003 759 594 1,353
--- --- ----- --- --- -----
Net income before minority interest 1,313 827 2,140 2,018 1,014 3,032
Loss attributable to minority interest 16 -- 16 37 -- 37
-- -- -- -- -- --
Net income $1,329 $827 $2,156 $2,055$1,014 $3,069
====== ==== ====== ============ ======
Net income per share - basic $0.50 $2.03 $0.54 $0.85 $2.49 $0.84
===== ===== ===== ===== ===== =====
</TABLE>
The Combined Consolidated Statements of Income are not necessarily indicative of
the results that would have occurred had the acquisition been consummated in the
past or which may be attained in the future. There were no transactions between
Security Bank Holding Company and Pacific State Bank prior to the combination.
<PAGE>
Security Bank Holding Company & Subsidiaries
Notes to Consolidated Financial Statements
Dollars In Thousands, Except Per Share Data
4. INVESTMENT SECURITIES
The amortized costs, estimated market values, unrealized gains and unrealized
losses of investment securities at December 31, 1997 and 1996 are summarized as
follows:
<TABLE>
<CAPTION>
Amortized Estimated Unrealized Unrealized
Cost Market Value Gains Losses
---- ------------ ----- ------
<S> <C> <C> <C> <C>
1997 Available for sale
U.S. Government and Federal Agencies ................ $21,756 $21,743 $41 $54
Mortgage-backed securities .......................... 23,118 23,212 122 28
United States Treasury .............................. 18,568 18,686 124 6
Corporate obligations ............................... 8,230 8,225 4 9
Obligations of state and political subdivisions ..... 13,719 14,264 550 5
------ ------ --- -
Total available for sale ....................... $85,391 $86,130 $841 $102
======= ======= ==== ====
1996 Available for sale:
U.S. Government and Federal Agencies ................ $24,249 $24,149 $30 $130
Mortgage-backed securities .......................... 34,339 34,223 116 232
United States Treasury .............................. 19,443 19,609 178 12
Corporate obligations ............................... 2,745 2,745 7 7
Obligations of state and political subdivisions..... 14,753 15,111 384 26
------ ------ --- --
Total available for sale..................... $95,529 $95,837 $715 $407
======= ======= ==== ====
</TABLE>
Gross realized gains and gross realized losses on sales of securities available
for sale for the years ended December 31, 1997 and 1996 were:
<TABLE>
<CAPTION>
1997 1996
Realized Realized Realized Realized
Gains Losses Gains Losses
----- ------ ----- ------
<S> <C> <C> <C> <C>
U.S. Government and Federal Agencies............. $114 $12 $26 $_
United States Treasury........................... 19 -- 2 10
Corporate obligations............................ -- -- 25 25
U.S. Federal Securities mutual bond funds........ -- -- -- 219
Obligations of state and political subdivisions.. 83 13 214 --
-- -- --- --
$216 $25 $267 $254
==== === ==== ====
</TABLE>
Approximate investment portfolio maturities at December 31, 1997 are as follows:
<TABLE>
<CAPTION>
Estimated
Amortized Market
Cost Value
---- -----
<S> <C> <C>
One year or less........................ $13,602 $13,658
After one year through five years....... 40,512 40,618
After five years through ten years...... 9,646 9,904
After ten years......................... 21,631 21,950
------ ------
Total .............................. $85,391 $86,130
======= =======
</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, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
U.S. Government and Federal Agencies............... $13,824 $9,278
United States Treasury............................. 7,582 6,078
Obligations of state and political subdivisions.... 6,864 3,188
----- -----
$28,270 $18,544
======= =======
</TABLE>
<PAGE>
Security Bank Holding Company & Subsidiaries
Notes to Consolidated Financial Statements
Dollars In Thousands, Except Per Share Data
5. LOANS
Major categories of loans at December 31, 1997 and 1996 included in the
portfolio are as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Commercial-real estate........ $31,420 $26,157
Commercial-lines of credit.... 37,172 34,480
Residential-real estate....... 34,811 29,238
Installment................... 32,735 28,328
Credit cards and other........ 3,701 3,205
----- -----
Total loans .............. 139,839 121,408
Deferred loan fees, net....... (167) (169)
Reserve for loan losses....... (1,429) (1,336)
------- -------
Net loans ................ $138,243 $119,903
======== ========
</TABLE>
Approximate loan portfolio maturities on fixed rate loans and repricing on
variable rate loans at December 31, 1997 are as follows:
<TABLE>
<CAPTION>
Within One to After
One Year Five YearsFive Years Total
-------- --------- ---------- -----
<S> <C> <C> <C> <C>
Commercial-real estate........ $10,612 $10,886 $9,922 $31,420
Commercial-lines of credit.... 26,584 8,722 1,866 37,172
Residential-real estate....... 17,238 2,920 14,653 34,811
Installment................... 2,716 18,596 11,423 32,735
Credit cards and other........ 3,537 111 53 3,701
----- --- -- -----
$60,687 $41,235 $37,917 $139,839
======= ======= ======= ========
</TABLE>
Mortgage loans held for sale are included above as residential real estate-
mortgage loans maturing within one year.
Loans on nonaccrual status were approximately $506 and $516 at December 31, 1997
and 1996, respectively.
Interest income which would have been realized on non-accrual loans if they had
remained current was insignificant.
Renegotiated loans were approximately $647 and $557 at December 31, 1997 and
1996, respectively. These loans were renegotiated to accommodate the borrower.
The Company has no commitments to extend additional credit on loans which are
renegotiated, non-accrual or impaired at December 31, 1997.
At December 31, 1997 and 1996, Security Bank serviced approximately $156,824 and
$179,074 respectively, of loans owned by others.
The Banks lending activities are concentrated along the central to southern
Oregon coast.
<PAGE>
Security Bank Holding Company & Subsidiaries
Notes to Consolidated Financial Statements
Dollars In Thousands, Except Per Share Data
6. RESERVE FOR LOAN LOSSES
Transactions in the reserve for loan losses for the years ended December 31,
1997 and 1996 were as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Balance, beginning of year................. $1,336 $1,257
Provision for loan losses.................. 263 232
Loans charged off.......................... (298) (218)
Recoveries of loans previously charged off. 128 65
--- --
Balance, end of year .................... $1,429 $1,336
====== ======
</TABLE>
The recorded investment in loans for which an impairment has been recognized at
December 31, 1997 and 1996 was $296 and $166, respectively. The related reserve
for loan losses at December 31, 1997 and 1996 was $109 and $39, respectively.
The average recorded investment in impaired loans during 1997 and 1996 was $330
and $175, respectively. Interest income recognized on impaired loans receivable
during 1997 and 1996 was insignificant.
7. DIRECT FINANCING LEASES
Following are the components of the net investment in direct financing leases at
December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Total minimum lease payments receivable......... $3,196 $3,181
Add:
Estimated unguaranteed residual values
of leased equipment ....................... 478 426
Equipment acquired for lease,
under interim rent ........................ -- 25
Less:
Unearned income .............................. 618 630
--- ---
Net investment in direct financing leases .. $3,056 $3,002
====== ======
</TABLE>
Future minimum lease payments to be received on direct financing leases are as
follows:
Year ending December 31:
1998 ................ $1,132
1999 ................ 972
2000 ................ 632
2001 ................ 322
2002 ................ 138
---
Total ...... $3,196
======
<PAGE>
Security Bank Holding Company & Subsidiaries
Notes to Consolidated Financial Statements
Dollars In Thousands, Except Per Share Data
8. PREMISES AND EQUIPMENT
The composition of premises and equipment at December 31, 1997 and 1996 are as
follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Land............................................. $666 $569
Buildings........................................ 6,498 5,290
Furniture and equipment.......................... 4,892 4,383
.............................................. 12,056 10,242
Less accumulated depreciation and amortization... (4,945) (4,583)
------ ------
$7,111 $5,659
====== ======
</TABLE>
9.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, 1997: Overnight..... $7,945 4.68% $7,520 $7,520
December 31, 1996: Overnight..... $4,562 4.33% $3,388 $3,388
</TABLE>
The securities underlying agreements to repurchase entered into by the Banks are
for the same securities originally sold, with a one-day maturity. In all cases,
the creditor maintains control over the securities. Securities sold under
agreements to repurchase averaged approximately $6,374 for the year ended
December 31, 1997 and the maximum amount outstanding at any month end for the
year ended December 31, 1997 was approximately $7,945. Investment securities
are pledged as collateral in an amount equal to the repurchase agreements.
10. TIME DEPOSITS
Time certificates of deposit in excess of $100 aggregated approximately $24,145
and $23,866 at December 31, 1997 and 1996, respectively. Interest expense on
these certificates amounted to approximately $1,382 and $1,471 for the years
ended December 31, 1997 and 1996, respectively.
As of December 31, 1997, remaining time to maturity of time deposits were as
follows:
<TABLE>
<CAPTION>
Time Deposits All other
of $100 or more time deposits
--------------- -------------
<S> <C> <C> <C> <C>
3 months or less..$14,417 59.71% $19,972 31.01%
4 to 6 months..... 2,984 12.36% 14,148 21.97%
7 to 12 months.... 5,579 23.11% 15,120 23.48%
Over 1 year....... 1,165 4.82% 15,156 23.54%
----- ----- ------ ------
Total ..........$24,145 100.00% $64,396 100.00%
======= ======= ======= =======
</TABLE>
<PAGE>
Security Bank Holding Company & Subsidiaries
Notes to Consolidated Financial Statements
Dollars In Thousands, Except Per Share Data
11. EMPLOYEE BENEFIT PLANS
EMPLOYEE SAVINGS PLAN - The Company 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. The Company made no contributions to the 401k plan in either 1997 or
1996.
EMPLOYEE STOCK OWNERSHIP PLAN (ESOP) - The Company 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. The
Company 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, the Company 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, the Company
reports compensation expense equal to the shares being released for allocation
multiplied by the average market price of the Company's common stock during the
year. 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.
During 1993, the Company loaned the ESOP $1,583 to purchase 365,355 shares of
its common stock. The Company paid the note to Bank of America in 1996. However,
the ESOP still owes the Company for this debt. This intercompany loan is not
reflected on the Company's consolidated balance sheets at December 31, 1997 and
1996. The ESOP shares as of December 31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Allocated 522,903 455,713
Shares released for allocation 68,440 67,190
Unreleased shares 384,784 455,824
------- -------
Total ESOP shares 976,127 978,727
======= =======
Fair value of unreleased shares $4,714 $3,988
====== ======
</TABLE>
<PAGE>
Security Bank Holding Company & Subsidiaries
Notes to Consolidated Financial Statements
Dollars In Thousands, Except Per Share Data
STOCK OPTION PLAN _ The Company 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, 1997 and 1996:
<TABLE>
<CAPTION>
Weighted Average
Shares Exercise Price
------ --------------
<S> <C> <C>
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
Granted in 1997............................ 5,000 $13.25
Exercised in 1997.......................... (11,040) $(5.67)
------ ------
Outstanding options at December 31, 1997... 90,560 $6.08
====== =====
Exercisable at December 31, 1997........... 27,600 $5.67
====== =====
Shares available for future
grant at December 31, 1997.............. 174,400
=======
</TABLE>
12. REGULATORY MATTERS
The Company 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
Company's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Company must meet
specific capital guidelines that involve quantitative measures of the Company's
assets, liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Company'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 the Company 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, 1997, that the Company meets
all capital adequacy requirements to which it is subject.
As of December 31, 1997, the most recent notification from the Federal Reserve
Board categorized the Company as well capitalized under the regulatory framework
for prompt corrective action. To be categorized as well capitalized, the Company
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 institution's
category.
<PAGE>
Security Bank Holding Company & Subsidiaries
Notes to Consolidated Financial Statements
Dollars In Thousands, Except Per Share Data
The Company's capital amounts and ratios are presented in the following table.<PAGE>
<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, 1997:
Total Capital
(to Risk Weighted Assets) $29,672 18.33%$12,947 >8% $16,184 >10.0%
Tier 1 Capital
(to Risk Weighted Assets) $28,247 17.45% $6,474 >4% $9,710 > 6.0%
Tier 1 Capital
(to Average Assets) $28,247 10.56%$10,670 >4% $13,374 >5.0%
As of December 31, 1996:
Total Capital
(to Risk Weighted Assets) $26,814 19.06%$11,255 >8% $14,065 >10.0%
Tier 1 Capital
(to Risk Weighted Assets) $25,497 18.13% $5,626 >4% $8,439 >6.0%
Tier 1 Capital
(to Average Assets) $25,497 10.47% $9,739 >4% $12,174 >5.0%
</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, 1997, the most recent
notification from the FDIC categorized the Banks as well capitalized under the
regulatory framework for prompt corrective action.
The Banks, as state-chartered banks, are prohibited from declaring or paying any
dividends in an amount greater than undivided profits. At December 31, 1997 and
1996, undivided profits of approximately $7,576 and $4,828, respectively, were
available for the payment of dividends to the Company with prior regulatory
approval.
13. 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:
1998 ...................... $148
1999 ...................... 92
2000 ...................... 92
2001 ...................... 92
2002 ...................... 92
Thereafter ................ 409
---
$925
Rental expense for all operating leases was approximately $132 and $117 for the
years ended December 31, 1997 and 1996, respectively.
At December 31, 1997, the Banks have $50,368 of unused lines of credit.
<PAGE>
Security Bank Holding Company & Subsidiaries
Notes to Consolidated Financial Statements
Dollars In Thousands, Except Per Share Data
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, 1997 and 1996, these commitments and obligations were as
follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Loans at fixed rates.......... $1,510 $7,762
Loans at variable rates....... 14,183 3,015
------ -----
$15,693 $10,777
======= =======
</TABLE>
The Company is, from time to time, a defendant in legal proceedings arising in
the normal course of business. In the opinion of management the disposition of
pending litigation will not have a material effect on the Company's financial
position.
14. PROVISION FOR INCOME TAXES
The provision for income taxes for the years ended December 31, 1997 and 1996
consists of the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Current....................... $1,036 $1,407
Deferred...................... 211 (54)
--- ---
$1,247 $1,353
====== ======
</TABLE>
The provision for income taxes results in effective tax rates which are
different from the Federal income tax statutory rate. The nature of the
differences for the years ended December 31, 1997 and 1996 are as follows.
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Computed expected Federal tax at statutory
rate of 34%............................. $1,354 $1,492
State taxes, net of Federal effect......... 101 188
Tax exempt interest........................ (318) (321)
Change in valuation allowance.............. (184) (35)
ESOP fair value adjustment and dividends... 155 70
Other, net................................. 139 (41)
--- ----
$1,247 $1,353
====== ======
</TABLE>
<PAGE>
Security Bank Holding Company & Subsidiaries
Notes to Consolidated Financial Statements
Dollars In Thousands, Except Per Share Data
The tax effects of temporary differences which give rise to significant portions
of deferred tax assets and deferred tax liabilities at December 31, 1997 and
1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
Deferred tax assets: ---- ----
<S> <C> <C>
Loans receivable,
due to allowance for possible loan losses.....$326 $331
Other liabilities,
due to deferred compensation reserve ..........292 256
Deferred loan fees ............................. 44 51
Net operating loss carryforward ................ 46 29
Other ..........................................172 230
--- ---
Total gross deferred tax assets ...........880 897
Less valuation allowance.......................... -- (184)
---- ----
Net deferred tax assets ...................$880 $713
Deferred tax liabilities:
Investment securities,
due to reserve for unrealized gains ...........$282 $115
Investment securities,
due to accretion of discount .................. 88 93
Premises and equipment,
due to difference in depreciation .............632 535
Other ..........................................354 68
--- --
Total gross deferred tax liabilities ......1,356 811
----- ---
Net deferred tax liability ...............$(476) $(98)
====== =====
</TABLE>
The valuation allowance for deferred tax assets as of January 1, 1996 was $237.
The net change in the total valuation allowance for the years ended December 31,
1997 and 1996 was a decrease of $184 and $53, respectively. Of the net change
in the valuation allowance for 1996, $18 was credited to equity in 1996.
The Company has determined that no valuation allowance is necessary as it is
more likely than not that the deferred tax asset of $880 will be principally
realized through carryback to taxable income in prior years, future reversals of
existing taxable temporary differences, and future taxable income. Management
believes that future taxable income will be sufficient to realize the benefits
of temporary differences that cannot be realized through carryback to prior
years or through the reversal of future temporary taxable differences.
<PAGE>
Security Bank Holding Company & Subsidiaries
Notes to Consolidated Financial Statements
Dollars In Thousands, Except Per Share Data
15. TRANSACTIONS WITH RELATED PARTIES
Some of the directors, executive officers and principal shareholders of the
Company, 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 the Company for the years ended December 31, 1997
and 1996 is as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Balance, beginning of year.... $3,349 $3,891
Additions..................... 2,726 1,723
Repayments.................... (2,238) (2,265)
----- -----
Balance, end of year.......... $3,837 $3,349
====== ======
</TABLE>
At December 31, 1997, deposits from related parties were $3,388.
16. FEDERAL HOME LOAN BANK BORROWINGS
At December 31, 1997, Security Bank had outstanding advances from the Federal
Home Loan Bank (FHLB) of $16,000 with a weighted average rate of 6.13% and a
weighted average maturity of 723 days. These advances were collateralized by
certain investment securities, certain residential first mortgage loans,
deposits with the FHLB, and FHLB stock totaling approximately $16,000 at
December 31, 1997. The FHLB requires the Banks to maintain a level of investment
of FHLB stock.
<PAGE>
Security Bank Holding Company & Subsidiaries
Notes to Consolidated Financial Statements
Dollars In Thousands, Except Per Share Data
17. 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 the Company's financial instruments
are as follows:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
Carrying Amount Fair Value Carrying Amount Fair Value
--------------- ---------- --------------- ----------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents ....................... $29,252 $29,252 $12,609 $12,609
Investment securities ........................... 86,130 86,130 95,837 95,837
Loans, net ...................................... 134,898 138,647 117,059 117,199
Purchased mortgage servicing rights ............. 1,137 1,317 660 660
Mortgage loans held for sale .................... 2,208 2,208 2,184 2,184
Federal Home Loan Bank stock .................... 1,840 1,840 2,344 2,344
Financial liabilities:
Deposits ........................................ 213,841 213,718 193,964 189,956
Securities sold under agreements to repurchase .. 7,945 7,945 4,562 4,562
Short term borrowings ........................... 583 583 578 578
Federal Home Loan Bank borrowings ............... 16,000 15,097 17,028 17,046
Off balance sheet financial instruments:
Loan commitments ................................ 15,597 15,597 10,387 10,387
Letters of credit ............................... 96 96 390 390
</TABLE>
<PAGE>
Security Bank Holding Company & Subsidiaries
Notes to Consolidated Financial Statements
Dollars In Thousands, Except Per Share Data
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 servicing rights is estimated by
discounting future cash flows using current rates at which similar loans
would be made, and a constant prepayment rate of 6%. 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 13 to
the consolidated financial statements.
Pacific State Bank's loan and deposit data at December 31, 1996 are not stated
at fair market value in the table above, they are stated at the carrying amount.
Management believes there is no material difference. The Company did not hold
any derivative financial instruments in its investment portfolio at or during
the year ended December 31, 1997, with the exception of collateralized mortgage
obligations.
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
INFORMATION REGARDING DIRECTORS AND NOMINEES
The following table shows as to each nominee for Director and for those
Directors whose terms have not yet expired, the identified information as of
March 2, 1998.
<TABLE>
<CAPTION>
Year Elected or
Appointed as Year Term
Name Age Position Director Expires
- ------------------ --- -------- -------- -------
<S> <C> <C> <C> <C>
Charles D. Brummel 58 Director/President/CEO 1974 1999
William A. Lansing 51 Director 1991 1998
Kenneth P. Messerle 57 Director 1992 1999
Ronald C. LaFranchi 45 Director 1997 1998
Glenn A. Thomas 56 Director 1995 1998
R.T. Green 59 Director 1997 1998
Robert Fullhart 66 Director 1997 1998
</TABLE>
EXPERIENCE OF DIRECTORS AND EXECUTIVE OFFICERS
The business experience of each of the directors and executive officers for at
least the past five years has been as follows:
CHARLES D. BRUMMEL currently serves as Chairman of the Board, and serves as
Director, President and Chief Executive Officer of the Company. 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 currently serves as a
member of the Board of Directors of Security Bank and Lincoln Security Bank.
Mr. Brummel is also a director of BancInsure.
WILLIAM A. LANSING is President of Menasha Corporation Forest Products
Group, in North Bend, Oregon, where he has been employed since 1970.
Lansing serves on the Growth and Nominating Committees and is Chairman of
the Compensation & Benefits Committee.
<PAGE>
KENNETH C. MESSERLE recently sold his share in the family business of
Messerle & Sons, Inc., a cattle and timber corporation, in Coos County, and
formed a cattle brokerage business. In 1996, he was elected to the State
Legislature for District 48. He serves on Security Bank's Loan Committee
and the Company's Growth Committee and is Chairman of the Audit/Exam
Committees of both the Company and Security Bank. Mr. Messerle also serves
on the Board of Directors of Lincoln Security Bank.
RONALD C. LAFRANCHI is the owner of Ron's Oil Co., 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.
GLENN A. THOMAS is the owner of Thomas & Son Beverage, Inc., and its
subsidiaries, Thomas & Son Trucking and Thomas & Son Transportation Systems,
in Coos Bay, Oregon. He has been the Oregon Director for the Rocky Mountain
Wholesalers Association, a director and officer of Oregon Beer & Wine
Distributors Association, and a director of National Beer Wholesalers. He
serves on Security Bank's Loan Committee, and the Company's Compensation &
Benefits, Audit/Exam and Growth Committees.
R.T GREEN is President and Chief Executive Officer of Pacific State Bank, a
subsidiary of the Company acquired in 1997. He has been CEO of Pacific
State Bank 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.
ROBERT FULLHART has been a Director of Pacific State Bank since 1989,
joining Security Bank Holding Company's Board in 1997 as a result of the
acquisition of Pacific State Bank. He is the owner of Fullhart Insurance
Agency, which has five offices in Oregon.
During the year ended December 31, 1997 the Board of Directors held 12 regularly
scheduled meetings. All directors attended at least 75 percent of the board
meetings and committee meetings during the year.
Charles D. Brummel is Chief Executive Officer and President of the Company.
Michael J. Delvin is Executive Vice President and Chief Financial Officer of the
Company. Antoinette M. Poole is Executive Vice President and Loan Administrator
of the Company, and is also an executive officer of Security Bank. Executive
Officers serve at the discretion of the Board of Directors.
The following sets forth certain information about the executive officers of the
Company, other than Chuck Brummel:
MICHAEL J. DELVIN, age 49 employed by the Company since 1992, is Executive
Vice President and Chief Financial Officer of the Company. Delvin was
previously employed by First Interstate Bank. He serves as Chair for Oregon
Bankers Association Services, Inc, a for profit subsidiary of the OBA.
ANTOINETTE M. POOLE, age 51 serves as the Company's Executive Vice President
and Loan Administrator. She has been employed by Security Bank since 1976,
and is a trustee of the Company's Employee Stock Ownership Plan. <PAGE>
<PAGE>
COMMITTEES
The Company's Board of Directors has established a Compensation Committee
comprised of William A. Lansing, Glenn A. Thomas and Charles D. Brummel. The
Compensation Committee determines the salary of the Chief Executive Officer and
the bonuses and stock option grants to Chief Executive Officer and other
executive officers of the Company.
The Board of Directors has a standing Audit Committee consisting of Kenneth P.
Messerle, Ronald C. LaFranchi and Robert Fullhart. The Audit Committee is
responsible for overseeing regulatory compliance matters, and reviewing periodic
examinations by state and federal regulators of the Company and the subsidiary
banks.
The Board of Directors appointed a Nominating Committee, consisting of Glenn A.
Thomas, Ronald C. LaFranchi, William A. Lansing, and Charles D. Brummel, to
recommend nominees for election of directors at the annual meeting of
shareholders. Shareholders who wish to make recommendations to the Nominating
Committee for directors to be nominated for election at the 1999 annual meeting
of shareholders may do so in writing addressed to the Secretary of the
Corporation at the address indicated on the cover page of this Form 10-KSB no
later than November 5, 1998.
COMPENSATION
Pursuant to the Board of Directors Compensation Plan for 1997 (the Plan),
directors of the Company each received $400 in compensation for each meeting of
the Board of Directors attended in 1997, and $100 for each committee meeting
attended. Payment was made in the form of cash or Company stock. Directors
also receive shares of Company stock as additional incentive compensation based
upon the performance of the Company. Directors received an aggregate of 566
shares of Company stock in the form of incentive compensation for the year ended
December 31, 1997.
The Plan is in the process of being amended to provide payment in the amount of
$1,000 per month. Directors have the option of electing the form of payment,
which can be either in cash or Company stock.
COMPLIANCE WITH SECTION 16 FILING REQUIREMENTS
Section 16 of the Securities Exchange Act of 1934, as amended, ("Section 16")
requires that all executive officers and directors of the Company and all
persons who beneficially own more than 10 percent of the Company's Common Stock
file an initial report of their ownership of the Company's securities on Form 3
and report changes in their ownership of the Company's securities on Form 4 or
Form 5. These filings must be made with the Securities and Exchange Commission
and the National Association of Securities Dealers with a copy sent to the
Company.
Based solely upon the Company's review of the copies of the filings which it
received with respect to the fiscal year ended December 31, 1997, the Company
believes that all reporting persons made all filings required by Section 16 on a
timely basis, with the exception of R.T. Green and Robert Fullhart, who became
Directors of the Company upon consummation of the Pacific State Bank merger.
These Directors have subsequently filed the required reports.
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth compensation earned for the fiscal year ended
December 31, 1997 by each executive officer of the Company receiving over
$100,000 of total compensation during such year:
<TABLE>
<CAPTION>
Other Total
Name and Principal Position Salary Bonus Compensation(1) Compensation
- --------------------------- ------ ----- --------------- ------------
<S> <C> <C> <C> <C>
Charles D. Brummel
President/Chief Executive Officer
Director $130,016 $68,684 $4,787 $203,487
Michael J. Delvin
Executive Vice President $84,923 $39,248 $ -- $124,171
</TABLE>
- ----------------------------
(1)Consisting of Company provided auto.
Incentive Cash Bonus Plan. The Board of Directors of the Company 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. The two named officers received 64% and 36%
of this total respectively during the course of the year.
Phantom Stock Deferred Compensation Plan. As of January 1, 1996, Security Bank
established a deferred compensation plan for a select group of key employees to
provide for unfunded, non-qualified deferred compensation to assist in
attracting and retaining such key employees and to encourage such employees to
devote their best efforts to the business of the Bank. An eligible employee is
permitted to defer up to 20% of that employee's base salary and 100% of any cash
bonus, and is required to defer not less than 2% of base salary and 20% of any
cash bonus. Deferred compensation is credited to the participant's account in
the form of Phantom Stock Units, the number of units being determined by
dividing the amount of the compensation deferred by the base price established
annually by the Board of Directors for that Plan Year's deferrals. The base
price of each unit is the average of the bid and ask prices of the Company's
common stock for the last ten trading days of the preceding calendar year.
Distributions to a participating employee are made in cash only and are made
within 60 days after the earlier of the employee's death, disability,
termination of employment, change of control of the Bank or the attainment of
the age specified in the Plan agreement between the employee and the Bank. Upon
distribution, the deferred compensation amount is valued by multiplying the
cumulative number of Phantom Stock Units by the average of the bid and ask
prices of Company common stock on the date of distribution. Currently, Mr.
Brummel is the only participant in the plan.
<PAGE>
Severance Agreement. In addition to Mr. Brummel's regular compensation, the
Company has agreed to pay him additional compensation should his employment with
the Company be terminated under certain conditions. The severance agreement is
effective only if Mr. Brummel's employment is involuntarily terminated in
connection with the merger or sale of the Company, or if he elects to terminate
his employment within one year of a merger or sale. In the event of such a
termination, the Company has agreed to pay Mr. Brummel a sum equal to twelve
times his monthly base salary in effect at the time of the merger or sale. The
base salary includes monthly gross salary but does not include bonuses or other
compensation, plus any deferred or unpaid portion of his annual bonus. If the
severance agreement had been triggered as of December 31, 1997, Mr. Brummel
would have been entitled to a payment of $149,616.
Stock Option Plan. The Company adopted a combined incentive and non-qualified
stock option plan (the "Plan") effective May 1, 1995, and approved by the
shareholders at the annual shareholders meeting on March 20, 1996. Pursuant to
the Plan, options may be granted at the discretion of the Board of Directors or
such committee as it may designate, to key employees, including employees who
are directors of the Company.
The purpose of the plan is to advance the interests of the Company and its
shareholders by enabling the Company to attract and retain the services of
people with training, experience and ability and to provide additional incentive
to key employees and directors of the Company by giving them an opportunity to
participate in the ownership of the Company.
The Plan reserves 276,000 shares of the Company's unissued common stock for
possible grants to employees. The purchase price of shares issuable upon
exercise of options is not less than 100% of the fair market value per optioned
share at the time of the grant. Each option granted under the plan is
exercisable for up to ten years following the date of grant. Options become
exercisable as to 20% of the shares one year after the date of grant, with an
additional 20% becoming exercisable each year thereafter.
As of December 31, 1997, options to purchase 101,600 shares, adjusted for stock
dividends and splits, have been granted pursuant to the Plan. There were 5,000
options granted to employees in 1997. Michael J. Delvin exercised 11,040
options in 1997, leaving his outstanding unexercised options at 16,560. The
following table sets forth information regarding options held by named executive
officers as of March 2, 1998:
<TABLE>
<CAPTION>
Number of Percentage of Exercise
Name Shares Total Options Price Expiration Date
- ------- ------ ------------- ----- ---------------
<S> <C> <C> <C> <C>
Charles D. Brummel 69,000 76.2% $5.67 April 30, 2005
Michael J. Delvin 16,560 18.3% $5.67 April 30, 2005
</TABLE>
<PAGE>
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 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.
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.
<PAGE>
As of December 31, 1997, the total ESOP indebtedness, all of which is owed to
SBHC, equaled $1,858,000, and the ESOP trust held a total of 976,127 shares of
SBHC's common stock, or 22.0% of the total number of shares outstanding. Of
those shares, 591,343 (13.3% of total outstanding) have been allocated to
participant accounts. The remaining 384,784 shares (8.7% 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.
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.
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of March 2, 1998, the shares of common stock
beneficially owned by all of the directors, nominees for election as directors,
and executive officers of the Company. As of that date there were 4,445,486
shares of the Company'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> <C>
Charles D. Brummel (Director/Officer)(2) 77,020 (2) 1.73%
Michael J. Delvin (Officer) (3) 9,960 (3) *
William A. Lansing (Director) (4) 20,784 (4) *
Kenneth C. Messerle (Director) (5) 4,697 (5) *
Antoinette M. Poole (Officer) (6) 19,902 (6) *
Glenn A. Thomas (Director) (7) 6,155 (7) *
Ronald C. LaFranchi (Director) (8) 710,354 (8) 15.98%
R.T. Green (Director) (9) 2,063 (9) *
Robert Fullhart (Director) (10) 8,016 (10) *
All Directors and Executive Officers
as a Group (9 persons) 858,951 (2-10) 19.32%
</TABLE>
- -----------------
* Less than 1.0%
(1)The business address of all directors and officers is 170 S. Second St.,
Coos Bay, Oregon 97420.
(2)Charles D. Brummel's holdings include 3,025 shares held jointly with his
spouse in his spouse's trust and 46,395 shares in the ESOP (364 of which
are allocated to Mr. Brummel's spouse). Also includes 27,600 shares
covered by stock options exercisable in 60 days.
(3)Michael J. Delvin holds 9,955 shares in the ESOP.
(4)William A. Lansing holds 20,784 shares jointly with his spouse.
(5)Kenneth C. Messerle's holdings include 4,619 shares held jointly with his
spouse and 78 shares held jointly with his grandchildren.
(6)Antoinette M. Poole includes 239 shares held directly and 19,663 shares in
the ESOP.
(7)Glenn A. Thomas holds 5,905 shares jointly with his spouse.
(8)Includes 12,000 shares held in a custodial capacity for the benefit of
minor children.
(9)R.T. Green holds 2,063 shares jointly with his spouse.
(10)Robert Fullhart holds 8,016 shares jointly with his spouse.
As of March 2, 1998, the only other person than those named above known to own
more than 5% of the Company's Common Stock is the ESOP, which owned 976,127
shares, or 21.96% of the total shares outstanding. That number includes 384,784
shares held of record by the ESOP which are not allocated to employees and are
pledged to secure repayment of indebtedness to the Company. Trustees of the
ESOP are appointed by the Board of Directors and currently consists of Martin
Stone, attorney, Coquille, Oregon, Tim Salisbury, Chief Financial Officer of Bay
Area Hospital, and Antoinette M. Poole, Executive Vice President and Loan
Administrator of the Company.
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Some of the directors and officers of the Company and of the Bank, and members
of their immediate families and firms and corporations with which they are
associated, have had transactions with the Company, including borrowings and
investments in time deposits. All such loans and investments 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 December 31, 1997, the aggregate outstanding amount
of all loans to officers and directors was approximately $3,837,000, which
represented approximately 13.5% of the Company's consolidated shareholders'
equity at that date. In addition, the Company had deposits from Directors and
Officers totaling $3,338,000 as of December 31, 1997.
No director or principal officer of the Company has a direct family relationship
with another director or executive officer of the Company or the Bank.
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
The following exhibits are being filed with this Form 10-KSB or incorporated
herein by reference. This list constitutes the Exhibit Index:
Exhibit
3(i) Articles of Incorporation of Security Bank Holding Company *
3(ii) Bylaws of Security Bank Holding Company *
4.0 Specimen Common Stock Certificate *
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
Company's registration statement on form S-8 (file No. 333-28095),
declared effective by 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 *
23.0 Consents of KPMG Peat Marwick LLP
27.0 Financial Data Schedule
* Incorporated by reference to the Company's registration statement on
Form SB-1 (File No. 33-80795) declared effective by the Securities
and Exchange Commission on September 12, 1996.
Reports on Form 8-K:
During the fourth quarter of 1997, the Company filed a report on Form 8-K, dated
November 26,1997, announcing the completion of the previously announced
acquisition of Pacific State Bank.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SECURITY BANK HOLDING COMPANY
By: /s/ CHARLES D. BRUMMEL
Charles D. Brummel, President and
Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities indicated on
March 17, 1998:
/s/Michael J. Delvin
Michael J. Delvin, Executive Vice President and Chief Financial Officer
/s/Ronald L. Farnsworth
Ronald L. Farnsworth, Assistant Vice President and Controller
/s/William A. Lansing /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 C. LaFranchi /s/R.T. Green
Ronald C. LaFranchi, Director R.T. Green, Director
/s/Robert Fullhart
Robert Fullhart, Director
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS OF THE
COMPANY'S FORM 10-KSB FOR THE YEAR-TO-DATE.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 10,087
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 19165
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 86130
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 138243
<ALLOWANCE> 1429
<TOTAL-ASSETS> 270232
<DEPOSITS> 213841
<SHORT-TERM> 8528
<LIABILITIES-OTHER> 2532
<LONG-TERM> 16000
0
0
<COMMON> 22210
<OTHER-SE> 6213
<TOTAL-LIABILITIES-AND-EQUITY> 270232
<INTEREST-LOAN> 12948
<INTEREST-INVEST> 6046
<INTEREST-OTHER> 1097
<INTEREST-TOTAL> 20091
<INTEREST-DEPOSIT> 6614
<INTEREST-EXPENSE> 8337
<INTEREST-INCOME-NET> 11754
<LOAN-LOSSES> 263
<SECURITIES-GAINS> 191
<EXPENSE-OTHER> 11378
<INCOME-PRETAX> 3982
<INCOME-PRE-EXTRAORDINARY> 2765
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2765
<EPS-PRIMARY> .68
<EPS-DILUTED> .68
<YIELD-ACTUAL> 4.83
<LOANS-NON> 506
<LOANS-PAST> 250
<LOANS-TROUBLED> 647
<LOANS-PROBLEM> 296
<ALLOWANCE-OPEN> 1336
<CHARGE-OFFS> 298
<RECOVERIES> 128
<ALLOWANCE-CLOSE> 1429
<ALLOWANCE-DOMESTIC> 1429
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
Consent of Independent Certified Public Accountants
The Board of Directors
Security Bank Holding Company
Coos Bay, Oregon:
We consent to incorporation by reference in the Registration Statement
(No. 333-28087) on Form S-8 of Security Bank Holding Company of our report
dated january 23, 1998, relating to the consolidated balance sheets of
Security Bank Holding Company and Subsidiaries as of December 31, 1997 and
1996, and the related consolidated statements of income, shareholders' equity,
and cash flows for each of the years then ended, which report appears in the
December 31, 1997 annual report on Form 10-KSB of Security Bank Holding Company.
Portland, Oregon
March 18, 1998
Consent of Independent Certified Public Accountants
The Board of Directors
Security Bank Holding Company
Coos Bay, Oregon:
We consent to incorporation by reference in the Registration Statement
(No. 333-28095) on Form S-8 of Security Bank Holding Company of our report
dated january 23, 1998, relating to the consolidated balance sheets of
Security Bank Holding Company and Subsidiaries as of December 31, 1997 and
1996, and the related consolidated statements of income, shareholders' equity,
and cash flows for each of the years then ended, which report appears in the
December 31, 1997 annual report on Form 10-KSB of Security Bank Holding Company.
Portland, Oregon
March 18, 1998
