================================================================================
U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-K
(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, 1998
[ ] 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 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-K 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-K or any amendment to this
Form 10-K. [ X ]
Revenue for most recent fiscal year: $19,995,000
Aggregate market value of voting Common Stock held by non-affiliates of
Registrant as of March 5, 1999: $35,383,103
Number of shares of Common Stock, $5.00 par value, outstanding as of
March 5, 1999: 4,458,070
Documents incorporated by reference and parts of Form 10-K into which
incorporated: NONE
<PAGE>
================================================================================
FORM 10-K TABLE OF CONTENTS
Page
PART I
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.Selected Financial Data 15-17
Item 7.Management's Discussion and Analysis or Plan of
Operation 17-41
Item 8.Financial Statements 42-71
Item 9.Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure 72
PART III
Item 10.Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the
Exchange Act 72-74
Item 11.Executive Compensation 75-78
Item 12.Security Ownership of Certain Beneficial Owners and
Management 79
Item 13.Certain Relationships and Related Transactions 80
Item 14.Exhibits and Reports on Form 8-K 81
Signatures 82
<PAGE>
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.
<PAGE>
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, the Company made the following recent
investments:
. In 1996, the Company acquired a 68% controlling interest in Lincoln
Security Bank, a newly organized state-chartered commercial bank located in
Newport, Oregon,
. In 1997, the Company completed the acquisition of Pacific State Bank, a
wholly-owned state-chartered commercial bank located in Reedsport, Oregon,
. In 1998, the Company completed the spin-off of the former Brookings-Harbor
branch of Security Bank into Family Security Bank, a newly organized,
wholly-owned state-chartered commercial bank,
. In 1998, the Company acquired a 66% controlling interest in McKenzie State
Bank, a newly organized stated-chartered commercial bank located in
Springfield, Oregon,
. In 1999, the Company is planning to acquire a majority interest in Oregon
State Bank, a state-chartered commercial bank that is currently in
organization.
Security Bank, Lincoln Security Bank, Pacific State Bank, Family Security Bank,
McKenzie State Bank and Oregon State Bank are collectively referred to herein as
the "Banks".
SBHC has enjoyed growth and performance from its primary markets of Coos, Curry
and Douglas Counties. The population of, and employment in these counties, is
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 has pursued strategic opportunities in markets beyond those which
it has historically served. For example, to diversify credit risks and generate
more loan demand, SBHC has opened mortgage banking offices in Bend and Tigard,
Oregon. The recent investments along the I-5 corridor in Oregon are expected to
further diversify the resources of the Company, and provide for further growth
in larger, more economically diverse communities.
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 of
choice in their respective markets. This marketing strategy has SBHC 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 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.
<PAGE>
Security Bank
- -------------
Security Bank operated as a single office in Myrtle Point, Oregon, from its
founding in 1919 until 1971, when the Coquille branch was opened. The bank's
Bandon Branch was opened in 1974. In 1977, Security Bank's fourth branch was
opened in the Bunker Hill area of Coos Bay, and in 1983, the bank merged with
Citizens Bank of North Bend, acquiring its fifth branch in North Bend. In 1985,
the sixth branch was opened as result of the purchase of the office and
assumption of the deposits of a failed institution in the Brookings-Harbor
community in Curry County. Also in 1985, Security Bank moved its headquarters
to downtown Coos Bay and opened its Coos Bay Mall branch. In 1998, the Company
completed the spin-off of the Brookings-Harbor branch of Security Bank to a
separate, wholly-owned state chartered bank named Family Security Bank. In an
effort to continually provide new services, Security Bank established a Trust
department in 1998.
Security Bank operates in a competitive market which has undergone significant
economic and demographic changes in the past two decades. During the period of
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. The 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 1998 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 has developed
products and services intended to meet the banking needs of people who are age
55 or over.
Lincoln Security Bank
- ---------------------
Lincoln Security is a state-chartered bank organized in 1996. 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, Oregon and Lincoln County, 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
<PAGE>
shares of Class B common stock for the foreseeable future, as
any earnings of the bank are expected to be retained to fund further growth of
the bank.
As a result of the ownership of a majority of Lincoln Security's outstanding
common stock, 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 Lincoln Security's management will continue to look to SBHC 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. Pacific State Bank continues to
operate as a separate subsidiary bank, with a local Board of Directors.
Family Security Bank
- --------------------
Family Security Bank is a state chartered commercial bank incorporated in May,
1998, through the spin-off of the former Brookings-Harbor branch of Security
Bank. This spin-off was 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. Family Security Bank engages in a
general commercial banking business in Curry County and offers commercial
banking services to small and medium size businesses, professionals and retail
customers in their market area.
McKenzie State Bank
- -------------------
McKenzie State Bank is a state-chartered bank organized in 1998. Mckenzie State
was organized by a group of business and professional individuals in
the Lane County area as a locally owned commercial bank serving the needs of
the city of Springfield, Oregon and Lane County, Oregon. The bank commenced
operations on November 16, 1998. McKenzie State engages in a general commercial
banking business in Lane 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 McKenzie State by purchasing 250,000 shares
of McKenzie State's Class B common stock, and 13,560 shares of Class A common
stock, representing approximately 66% of the equity of McKenzie State 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
<PAGE>
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.
There is no five year buy-out agreement at McKenzie State Bank as there is at
Lincoln Security Bank. SBHC does not expect to receive dividends on its shares
of Class A and B common stock for the foreseeable future, as any earnings of the
bank are expected to be retained to fund further growth of the bank.
As a result of the ownership of a majority of McKenzie State's outstanding
common stock, SBHC is able to control any corporate decisions requiring approval
of McKenzie State shareholders. At this time, Mr. Brummel, President and Chief
Executive Officer of SBHC, and Lou Lorenz, a director of Security Bank, are
serving on the Board of Directors of McKenzie State, with the balance of the
Board of Directors being Lane County residents. SBHC believes that, like all of
its affiliate banks, 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 McKenzie State have a majority
of its board members from the local community who are familiar with Lane 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 Lane
County directors are expected to help ensure that McKenzie State 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 McKenzie State's Board of Directors, SBHC expects to continue
to influence major decisions made by the Board. Further, it is anticipated that
McKenzie State's management will continue to look to SBHC for guidance in
managing the administrative affairs of the bank. Nonetheless, McKenzie State
officers oversee day-to-day operations of the bank without significant
involvement of SBHC.
Oregon State Bank
- -----------------
SBHC is currently in the process of organizing Oregon State Bank, a soon to be
state chartered commercial bank located in Corvallis, Oregon. It is anticipated
SBHC will own between 65% and 70% of the outstanding common stock of Oregon
State, and the planned opening date is April 1, 1999. Similar to the other
subsidiary banks, Oregon State will carry-out the Company's vision of community
banking to customers in Linn-Benton County, Oregon. SBHC does not expect to
receive dividends on its investment in Oregon State Bank for the foreseeable
future, as any earnings of the bank are expected to be retained to fund further
growth of the bank.
Security Mortgage:
- ------------------
Security Mortgage is a department of the SBHC which conducts mortgage-banking
activities. Security Mortgage sells residential real estate loans into the
secondary market, and in most cases retains the related servicing rights. The
servicing portfolio grew to $223 million at December 31, 1998, which will
provide ongoing servicing income and a source of new customers in the
foreseeable future. Security Mortgage has contributed between 20% and 25% of
the net earnings of the Company for the last several years.
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
- Diversification into new Geographic Markets
<PAGE>
PERSONALIZED CUSTOMER SERVICE. SBHC's banking subsidiaries pride themselves on
being community banks serving Western Oregon. 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, SBHC 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 the majority of 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 of the Holding Company and the
subsidiary banks.
INNOVATIVE PRODUCTS. SBHC seeks to increase market share through innovative
products oriented to the needs of potential customers. As many of the
subsidiary banks are still in the initial stages of business development, and
therefore are concentrating on basic services, these innovative products are
made available to all subsidiary banks through economies of scale within the
larger organization. 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. SBHC will provide internet banking services starting late 1999 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. The bank's also offer combination
debit/ATM cards, allowing customers worldwide direct debit and 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, SBHC has opened mortgage loan offices in Bend, and
Portland, Oregon in addition to the main office in Coos Bay, 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 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, McKenzie State and Oregon State 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
these investments, 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.
In particular, SBHC has identified Salem, Oregon and Roseburg, Oregon as two new
markets for expansion and further diversification. It is anticipated the
Company will organize new, wholly-owned state-charted commercial banks in these
communities within the next year.
<PAGE>
Economic Conditions and Demographics
- ------------------------------------
SBHC and its subsidiary banks primarily receive deposits and make loans in Coos,
Curry, Lincoln, Douglas, Lane and Linn-Benton 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.
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.
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.
<PAGE>
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. 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"), are members of the Federal Reserve System, and
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 Federal Reserve Bank. 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.
<PAGE>
The Community Reinvestment Act ("CRA") requires that, in connection with
examinations of financial institutions within their jurisdiction, the Federal
Reserve 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. Family Security Bank and
McKenzie State Bank have not yet been rated.
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.
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.
<PAGE>
DIVIDENDS
The principal source of the Company's cash inflow is dividends received from
Security Bank and Pacific State Bank, the two largest subsidiary banks. Lincoln
Security Bank, Family Security Bank and McKenzie State Bank do not currently pay
dividends and are 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 their 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. Under Federal Reserve Bank regulations, the Banks are not
permitted to pay dividends in any consecutive three year period in excess of net
income for the same three year period. 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 Bank, Family Security Bank and McKenzie State Bank, as part of
their organization and membership in the Federal Reserve System, are required to
maintain a minimum leverage ratio for the first three years of operations of 9%,
7% and 8%, respectively.
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, 1998, SBHC and its subsidiaries had a total of 182 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.
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 Property. The North Bend Branch of Security Bank is located at 2330
Broadway, North Bend, Oregon. The building and land are owned by the bank.
<PAGE>
Mortgage Lending Offices. SBHC has mortgage lending offices located at 2106
N.E. 4th St., Bend, Oregon and at 6950 S.W. Hampton St., Suite 100, Tigard,
Oregon. The Bend office is leased under a lease agreement which expires October
31, 1999. 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.
Family Security Bank. Family Security Bank's principal office is located at
16271 Hwy 101 South, Brookings, Oregon. The building and land are leased. The
lease expires in 2004. The bank also leases additional space for mortgage
operations at the same address.
McKenzie State Bank. McKenzie State Bank's principal office is located at 52nd
and Main Place in Springfield, Oregon, currently in temporary quarters. The
land is owned by the Bank, and the temporary office building is leased under a
monthly rental agreement. Construction of a permanent facility is currently
underway at the same location.
Oregon State Bank. Oregon State Bank's principal office is located at 415 NW
3rd Avenue in Corvallis, Oregon, in a temporary facility. The building and land
are leased by the bank. The bank has entered into a lease agreement for land
and building at another location in Corvallis, Oregon, where the permanent
office will be located.
Coos Bay Property. Security Bank owns the land located at 700 South Broadway
Street, Coos Bay, Oregon. Construction of a new branch of Security Bank at this
location is currently underway and will replace the Bunker Hill Branch located
at 900 Hwy 101 South, Coos Bay, Oregon.
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
None.
<PAGE>
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". The NASDAQ Stock Market, which began operation in 1971, is the
world's first electronic securities market and the fastest growing stock market
in the U.S. NASDAQ utilizes today's information technologies-computers and
telecommunications-to unite its participants in a screen-based market. It
enables market participants to compete with each other for investor orders in
each NASDAQ security and, through the use of NADSAQ Workstation II and other
automated systems, it facilitates the trading and surveillance of thousands of
securities. This competitive marketplace, along with the many products and
services available to issuers and their shareholders, attracts today's largest
and fastest growing companies to NASDAQ. These include industry leaders in
computers, pharmaceuticals, telecommunications, biotechnology, and financial
services. More domestic and foreign companies list on NASDAQ than on all other
U.S. stock markets combined.
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 quarter 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:
Fiscal 1996: High Low Close Cash dividend per share
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
Fiscal 1998:
First Quarter .. $12.75 $11.00 $11.88 $0.20
Second Quarter . $12.25 $9.63 $10.00 $0.00
Third Quarter .. $10.88 $9.56 $9.75 $0.20
Fourth Quarter . $9.50 $7.41 $8.75 $0.00
As of January 31, 1999, the Common Stock was held of record by approximately 650
shareholders, a number which does not include beneficial owners who hold shares
in "street name".
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data should be read in conjunction with Security Bank
Holding Company's consolidated financial statements and the accompanying notes
presented in this report.
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Interest income $19,995 $20,091 $17,752 $15,933 $13,703
Interest expense 8,435 8,337 7,037 5,793 4,200
----- ----- ----- ----- -----
Net interest income 11,560 11,754 10,715 10,140 9,503
Provision for loan loss 1,107 263 232 226 200
----- --- --- --- ---
Net interest income after provision
for loan losses 10,453 11,491 10,483 9,914 9,303
Noninterest income 4,968 3,869 3,476 2,423 2,120
Noninterest expense 16,980 11,378 9,574 8,367 7,793
------ ------ ----- ----- -----
(Loss) income before income taxes and
minority interest (1,559) 3,982 4,385 3,970 3,630
Provision for income taxes 25 1,247 1,353 1,167 1,208
-- ----- ----- ----- -----
(Loss) income before minority interest (1,584) 2,735 3,032 2,803 2,422
Net (loss) income attributable to minority
interest 35 30 37 -- --
-- -- -- -- --
Net (loss) income $(1,549) $2,765 $3,069 $2,803 $2,422
======== ====== ====== ====== ======
Per share data:
Basic income (loss) per share $(.35) $.68 $.84 $.80 $.78
====== ==== ==== ==== ====
Diluted income (loss) per share $(.35) $.68 $.83 $.80 $.78
====== ==== ==== ==== ====
Cash dividends per share $.40 $.22 $.20 $.14 $.13
Year end book value $6.47 $6.94 $6.84 $5.94 $5.13
Average common equivalent shares
Outstanding 4,487,946 4,095,365 3,700,061 3,484,277 3,102,667
Total assets $273,639 $270,232 $244,215 $211,181 194,721
Total deposits $226,795 $213,841 $193,964 $172,917 $164,497
Total long-term borrowings $ -- $16,000 $17,208 $11,500 $8,786
Net loans $142,209 $136,035 $117,719 $104,291 $101,101
Shareholders' equity $29,032 $28,423 $25,323 $20,680 $15,905
Financial ratios:
Return on average assets -.57% 1.06% 1.35% 1.42% 1.24%
Return on average equity -5.39% 10.40% 13.93% 15.46% 15.23%
Average equity to assets 10.56% 10.20% 9.73% 9.16% 8.17%
Dividend yield 3.27% 2.59% 2.73% 2.73% 2.89%
Efficiency ratio 102.70% 72.80% 67.50% 66.60% 67.00%
Net loans to assets 51.97% 50.34% 48.20% 49.38% 51.92%
Yield on earning assets 7.99% 8.25% 8.34% 8.55% 8.76%
Average rates paid 3.53% 3.61% 3.48% 3.25% 3.10%
Net interest spread 4.46% 4.64% 4.86% 5.30% 5.66%
</TABLE>
<PAGE>
SELECTED FINANCIAL DATA CONTINUED
<TABLE>
<CAPTION>
Year Ended
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net interest margin 4.62% 4.83% 5.03% 5.44% 5.80%
Nonperforming assets to total assets .26% .28% .21% .33% .20%
Allowance for loan loss to total loans 1.50% 1.00% 1.07% 1.14% 1.13%
Allowance for loan loss to nonperforming
assets 319.05% 189.02% 258.91% 277.31% 238.51%
</TABLE>
QUARTERLY FINANCIAL INFORMATION
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Quarter Ended
----------------------------------------------------------------------
March 31, June 30, September 30, December31,
---------- --------- -------------- -----------
<S> <C> <C> <C> <C>
1998
- -----
Interest income $4,917 $4,987 $5,075 $5,017
Interest expense 2,011 2,044 2,090 2,290
------ ------ ------ ------
Net interest income 2,906 2,943 2,985 2,726
Provision for loan loss 61 63 68 915
Noninterest income 1,133 1,196 1,271 1,368
Noninterest expense 3,184 3,050 2,960 7,786
----- ----- ------ ------
(Loss) income before income tax 794 1,026 1,228 (4,607)
Provision for income tax 284 365 373 (997)
---- ----- ----- -------
Net (loss) income before minority
Interest 510 661 855 (3,610)
Net (income) loss attributable to
minority interest (9) (12) (20) 76
---- ---- ---- -------
Net (loss) income $501 $649 $835 $(3,534)
==== ==== ==== ========
Income (loss) per common share (year to date):
Basic $.12 $.28 $.49 $(.35)
Diluted $.12 $.28 $.49 $(.35)
Quarter Ended
---------------------------------------------------------------------
March 31, June 30, September 30, December 31,
--------- -------- ------------- ------------
1997
- -----
Interest income $4,620 $5,046 $5,210 $5,214
Interest expense 1,880 2,114 2,193 2,149
------ ------ ------ ------
Net interest income 2,740 2,932 3,017 3,065
Provision for loan loss 76 105 31 52
Noninterest income 783 885 1,269 932
Noninterest expense 2,565 2,640 3,067 3,106
----- ----- ----- -----
Income before income tax 882 1,072 1,188 839
Provision for income tax 285 357 361 243
--- ---- ----- ----
Net income before minority
Interest 597 715 827 596
Net (income) loss attributable to
minority interest 8 9 -- 13
--- --- --- ---
Net income $605 $724 $827 $609
==== ==== ==== ====
</TABLE>
<PAGE>
QUARTERLY FINANCIAL INFORMATION CONTINUED
<TABLE>
<CAPTION>
Quarter Ended
-------------------------------------------------------------------
March 31, June 30, September 30, December 31,
--------- -------- ------------- ------------
<S> <C> <C> <C> <C>
1997
- -----
Income per common share (year to date):
Basic $.15 $.33 $.54 $.68
Diluted $.15 $.33 $.54 $.68
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
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, 1998 and 1997. The
consolidated entity includes Security Bank Holding Company (the Company, or
SBHC), a bank holding company, its wholly-owned subsidiaries, Security Bank,
Pacific State Bank and Family Security Bank, and its majority owned
subsidiaries, Lincoln Security Bank and McKenzie State 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 depend 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>
<TABLE>
<CAPTION>
Summary Income Statements
(Dollars in thousands) 1998 1997 $ change % change
- ---------------------- ----- ----- -------- --------
<S> <C> <C> <C> <C>
Interest income $19,995 $20,091 $(96) (.48)%
Interest expense 8,435 8,337 98 1.18%
------- ------- ----- ------
Net interest income before provision 11,560 11,754 (194) (1.65)%
Provision for loan loss 1,107 263 844 320.91%
------ ------ ----- -------
Net interest income 10,453 11,491 (1,038) (9.03)%
Non-interest income 4,968 3,869 1,099 28.41%
Merger related expense 10 253 (243) (96.05)%
ESOP compensation expense 3,499 716 2,783 388.69%
Other non-interest expense 13,471 10,409 3,062 29.42%
------ ------ ----- --------
(Loss) income before taxes and minority
interest (1,559) 3,982 (5,541) (139.15)%
Income taxes 25 1,247 (1,222) (98.00)%
------ ----- ------- --------
(Loss) income before minority interest (1,584) 2,735 (4,319) (157.92)%
Loss attributable to minority interest 35 30 5 (16.67)%
------- ----- ------- ---------
Net (loss) income $(1,549) $2,765 $(4,314) (156.02)%
======== ====== ======== =========
Return on average assets -.57% 1.06%
Return on average equity -5.39% 10.40%
Dividend yield 3.27% 2.59%
</TABLE>
GENERAL. The Company reported a net loss of $1,549,000 in 1998, as compared to
net income in 1997 of $2,765,000. The net loss in 1998 resulted from several
major adjustments, including the ESOP deleverage and increasing the loan loss
reserves to 1.5% from 1.0%. In addition, as part of the Company's growth
strategy, the new de-novo McKenzie State Bank opened in November 1998. The
Company recognized a $160,000 loss from McKenzie State Bank in 1998 resulting
from start-up costs. The Company also identified equipment that was non-Year
2000 compliant and or going to be taken out of production early in 1999. This
resulted in accelerating the depreciation of the carrying cost. In addition, the
Company incurred consulting fees in 1998 related to Year 2000, resulting in a
total expense of $160,000 recognized in 1998. Each of these adjustments is
discussed in detail within this report.
NET INTEREST INCOME. Net interest income is the difference between interest
income (principally from loans and investment securities) and interest expense
(principally on customer deposits and borrowings). Changes in net interest
income result from changes in volume, net interest spread, and net interest
margin. Volume refers to the average dollar level of interest earning assets
and interest bearing liabilities. Net interest spread refers to the differences
between the average yield on interest earning assets and the average cost of
interest bearing liabilities. Net interest margin refers to net interest income
divided by average interest earning assets. The Company's profitability, like
that of many financial institutions, is dependent to a large extent upon net
interest income. Since the Company tends to be asset sensitive, as interest
earning assets mature or reprice more quickly than interest bearing liabilities
in a given period, a significant decrease in the market rates of interest could
adversely affect net interest income. In contrast, an increasing interest rate
environment could favorably impact net interest income. Competition and the
economy also impact the Company's net interest income.
Net interest income before the provision for loan losses decreased $194,000 or
1.65% in 1998 as compared to 1997. Of the net decrease of $194,000, an increase
in volume accounted for an increase in
<PAGE>
net interest income of $1,028,000, while
a decrease in spread accounted for a decrease in net interest income of
$1,222,000. Average interest earning assets increased $6.6 million, while
average interest bearing liabilities increased $7.6 million. The increase in
average interest earning assets and interest bearing liabilities resulted from
an increase in deposits, offset by a decrease in borrowings from the Federal
Home Loan Bank of $16 million.
The average net interest spread decreased from 4.64% to 4.46%, mainly due to
decreased average earning asset yields which declined 26 basis points from 8.25%
to 7.99%. The low/flat interest rate yield curve has caused variable rate
repricing on assets over the period decreasing asset yields. In addition,
certain fixed rate loans and investments have refinanced/repriced at the lower
rates over the period. Average rates paid decreased 8 basis points to 3.53% in
1998 from 3.61% for 1997, primarily from a reduction in deposit cost, offset
partially by the early prepayment penalty of Federal Home Loan Bank borrowings.
The Company's net interest margin for 1998 was 4.62%, a decrease of 21 basis
points from 4.83% for 1997. The Company expects to see further declines in its
net interest margin due to continued anticipated refinance activity caused by
the low interest rate environment and continued competition in the markets it
serves.
PROVISION FOR LOAN LOSSES. Management's policy is to maintain an adequate
reserve for loan loss based on historical trends, current economic forecasts,
statistical analysis of the loan portfolio, as well as detailed review of
individual loans and current loan performance. The provision for loan losses
was $1,107,000 and $263,000 for 1998 and 1997, respectively. Net charge-offs
were $242,000 and $170,000 for 1998 and 1997, respectively. The reserve for loan
losses was $2,294,000 at December 31, 1998, as compared to $1,429,000 at
December 31, 1997. The Company's ratio of reserve for loan losses to total loans
was 1.50% at December 31, 1998, compared to 1.00% at December 31, 1997. The
Company increased the reserve for loan losses in the fourth quarter of 1998 to
1.50% to address regulatory recommendations. The loan loss reserve ratio for the
Company's peer group ranges from 1.20% to 1.50%. Regulatory recommendations did
not address specific loans within the Bank's portfolios, but rather recommended
the reserve be increased to more closely match the Company's peer group.
Non-performing assets (defined as loans on non-accrual status, 90 days or more
past due, and other real estate owned) were $719,000 and $756,000 at December
31, 1998 and 1997, respectively. Management believes the loans are adequately
secured and that no significant losses will be incurred.
Management has in place a comprehensive loan approval process and an asset
quality monitoring system. Management continues its efforts to collect accounts
previously charged off and to originate loans of high quality. Management
believes the reserve for loan losses at December 31, 1998 is adequate to absorb
credit losses on specifically identified loans as well as estimated probable
credit losses inherent in the remainder of the portfolio. Further additions to
the reserve for loan losses could become necessary, depending upon the
performance of the Banks' loan portfolios or changes in economic conditions, as
well as growth within the loan portfolio and results of examinations by
regulators.
NON-INTEREST INCOME. Non-interest income increased $1,099,000, or 28%, in 1998
to $4,968,000 as compared to $3,869,000 in 1997. Service charges on deposit
accounts increased $84,000, as overall deposit levels have increased. Gain on
sale of investment securities has decreased from 1997, resulting from non-
recurring gains the Company had on restructuring the investment portfolio in the
third quarter of 1997. Sold real estate loan fees have increased $1,319,000, or
98%, in 1998 as compared to 1997, resulting from expansion of the Company's
mortgage operations and increased refinancing activity with the overall lower
interest rate environment. Other income has decreased $149,000, or 16% from
1997, resulting primarily from a non-recurring gain on sale of a rental building
in 1997 of $180,000.
MERGER RELATED COSTS, comprised of professional fees incurred in connection with
the 1997 acquisition of Pacific State Bank, were $10,000 and $253,000 for 1998
and 1997, respectively.
<PAGE>
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. Shares are released
through dividends on allocated shares, and 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 recorded on the income statement. As shares
are released, they are considered outstanding for the purposes of calculating
earnings per share and book value per share.
Based upon the increase in share price over the past 3 years, the Company has
considered several remedies to contain the expense recorded as the share price
of the Company increased. Options included pursuing a Private Letter Ruling
with the Internal Revenue Service in an effort to extend the related debt
service, which would have reduce the number of shares released each year and
thereby reduce the expense recognized. In December 1998, the Company approved a
second option, which was to deleverage the ESOP. The Company shortened the ESOP
tax year, permitting the repayment of the internal ESOP debt in one fiscal year,
split over two plan years. All unallocated shares were released for allocation.
As a result, the Company recognized $3,499,000 in ESOP compensation expense for
1998, thereby eliminating this expense burden from future years.
OTHER NON-INTEREST EXPENSE. Other non-interest expense (excluding ESOP
compensation expense and merger related expense as discussed previously)
increased 29% to $13,471,000 in 1998 as compared to $10,409,000 in 1997.
Salaries and employee benefits, the largest non-interest expense, increased
$1,288,000, or 21%. Approximately $495,000 of this increase is related to
increased mortgage operations, which resulted in increased sold real estate loan
fee income of $1,319,000. The remaining increase results from the continuing
expansion activities of the Company. Equipment costs and professional fees
increased $505,000, also resulting from the increased operations and expansion
activities of the Company.
Also included in other expense is the write-off of organizational costs. In
prior years, the Company capitalized and amortized these costs over a five year
period. In accordance with the newly issued AICPA Statement of Position (SOP)
98-5, the Company expensed $414,000 in 1998 of start-up costs related to
expansion which would have been capitalized before SOP 98-5. The Company also
wrote off the unamortized balance of start up costs of $80,000, net of tax, as
of the beginning of the year.
In 1998, the Company established an accrual for Year 2000 related costs incurred
in 1998 of $160,000. This accrual was established for consulting costs
associated with on-going Year 2000 efforts and equipment replacement. The
Company has a detailed discussion of Year 2000 issues beginning on page 26 of
this report.
PROVISION FOR INCOME TAXES. The provision for income taxes has decreased
significantly from 1997, resulting from the overall net book loss in 1998. The
tax benefit associated with ESOP compensation expense is calculated on the debt
retired, not the expense recognized. As such, the effective tax rate increased.
Also included in this amount is the tax expense of Lincoln Security Bank and
the tax benefit of McKenzie State Bank, each of which is not included in the
consolidated tax return, as the Company owns less than 80% of them.
<PAGE>
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) 1998 1997
- ---------------------- ----- ----
<S> <C> <C>
Loans outstanding at end of period $153,237 $142,728
-------- --------
Average loans outstanding during the period $143,583 $134,051
-------- --------
Reserve balance, beginning of period $1,429 $1,336
Recoveries:
Commercial 10 43
Real estate -- 1
Installment 15 62
Credit card 13 22
--- ---
38 128
Loans Charged off:
Commercial (13) (69)
Real estate -- (3)
Installment (199) (120)
Credit card (68) (106)
----- -----
(280) (298)
Net loans charged off (242) (170)
Provision charged to operations 1,107 263
------ -----
Reserve balance, end of period $2,294 $1,429
====== ======
Ratio of net loans charged off to average loans outstanding 0.17% 0.13%
====== ======
</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, Douglas, and Lane 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.
<PAGE>
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) 1998 1997
- --------------------- ---- ----
<S> <C> <C>
Loans on non-accrual status $558 $506
Loans past due greater than 90 days, not on non-accrual status 161 250
Other real estate owned, net -- --
---- ----
Total non-performing assets $719 $756
---- ----
Percentage of non-performing assets to total assets .26% .28%
</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.
December 31,
-------------------------------------
Percent of Percent of
(Dollars in thousands) 1998 Total loans 1997 Total loans
- ---------------------- ----- ----------- ---- -----------
Unclassified loans.... $1,544 1.01% $769 0.54%
Letters of credit..... -- 0.00% -- 0.00%
Credit cards.......... 53 0.03% 62 0.04%
Watchlist............. 205 0.14% 226 0.15%
Substandard........... 297 0.19% 293 0.21%
Doubtful ............. 158 0.10% 79 0.06%
Specific-reserve...... 37 0.03% -- 0.00%
------ ------ ------ ------
Total ............. $2,294 1.50% $1,429 1.00%
====== ====== ====== ======
The increase in allocation for unclassified loans at December 31, 1998 as
compared to December 31, 1997 results from the Company increasing the reserve to
more closely match its peer group, and addressing regulatory recommendations.
The loan loss reserve ratio for the Company's peer group range from 1.20% to
1.50%. Regulatory recommendations did not address specific loans within the
Banks' portfolios, but rather recommended the reserve be increased to more
closely match the Company's peer group.
An assessment was made of the Bank's loan customers' ability to address the Year
2000 issues. Based upon this assessment, a special Year 2000 related reserve of
$37,000 was established in 1998.
<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, 1998 1997 (Decrease) % Change
- -----------------------------------------------------------------------------------------------------
(Dollars in thousands)
- ----------------------
<S> <C> <C> <C> <C>
Average interest-earning assets $250,184 $243,590 $6,594 2.70%
Average interest-bearing liabilities $238,770 $231,176 $7,594 3.28%
Average yields earned 7.99% 8.25% -0.26% -3.15%
Average rates paid 3.53% 3.61% 0.08% -2.22%
----- ----- ----- ------
Net interest spread 4.46% 4.64% -0.18% -3.88%
Net interest income to average interest-earning assets 4.62% 4.83% -0.21% -4.35%
</TABLE>
The decrease in net interest margin results from increased competitive pressures
and the lower overall interest rate environment.
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, 1998 over 1997
--------------------------------------
Amount of change attributed to
-------------------------------
(Dollars in thousands) Total
- ---------------------- Increase (Decrease) Volume Rate Days
-------------------- ------ ---- ----
<S> <C> <C> <C> <C>
Interest income:
Loans, net and mortgage loans held for sale $496 $923 $(427) $--
Investment securities - taxable (1,017) (723) (294) --
Investment securities - exempt from
federal income taxes(1) (141) (112) (29) --
Dividend income on Federal Home Loan Bank stock (51) (56) 5 --
Dividend income on Federal Reserve Bank stock 15 15 -- --
Time deposits-domestic financial institutions (5) -- (5) --
Federal funds sold 615 617 (2) --
Net investment in direct financing leases (8) (13) 5 --
---- ---- ----- ---
Total interest income $(96) $651 $(747) $--
---- ---- ----- --
Interest expense:
Interest on deposits:
NOW accounts 134 7 127 --
Money market accounts 64 153 (89) --
Savings accounts (10) (8) (2) --
Time deposits 193 246 (53) --
Securities sold under agreement to repurchase 60 57 3 --
Short term borrowings -- (9) 9 --
Federal Home Loan Bank borrowings (343) (823) 480 --
----- ----- ---- ---
Total interest expense $98 $(377) $475 $--
---- ----- --- --
Net interest income (1) $(194) $1,028 $(1,222) $--
===== ====== ======== ===
</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, 1997 over 1996
--------------------------------------
Amount of change attributed to
------------------------------
(Dollars in thousands)
- ---------------------- Total
Increase (Decrease) 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:
NOW accounts 45 34 12 (1)
Money market accounts 219 199 23 (3)
Savings accounts (11) (9) (1) (11)
Time deposits 440 424 27 (1)
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>
FINANCIAL CONDITION
SUMMARY BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
(Dollars in thousands) 1998 1997 $ change % change
- ---------------------- ---- ---- -------- --------
<S> <C> <C> <C> <C>
Loans, net.................... $150,942 $141,299 $9,643 6.82%
Investments................... 90,231 87,970 2,261 2.57%
Other assets.................. 32,466 40,963 (8,497) (20.74)%
------- ------ ------ --------
Total assets ............... $273,639 $270,232 $3,407 1.26%
======== ======== ====== ====
Deposits ..................... $226,795 $213,841 $12,954 6.06%
Borrowings.................... 10,420 24,528 (14,108) (57.52)%
Other liabilities............. 5,168 2,532 2,636 104.11%
-------- -------- ------- --------
Total liabilities .......... 242,383 240,901 1,482 .62%
Minority interest............. 2,224 908 1,316 144.93%
Shareholders' equity.......... 29,032 28,423 609 2.14%
-------- ------- ------ -------
Total liabilities, minority interest and equity $273,639 $270,232 $3,407 1.26%
======== ======== ====== =====
Equity to asset ratio......... 10.61% 10.52%
Loan to deposit ratio......... 67.57% 66.08%
</TABLE>
As shown in the table above, total loans increased $9.6 million, and total
deposits increased $13 million, resulting from the Company's growth initiatives.
Approximately $4 million of the deposit growth was generated by McKenzie State
Bank, the new de novo majority owned subsidiary of the Company in Springfield,
Oregon. McKenzie State Bank began operations in November 1998.
The low interest rate environment has resulted in increased calls on callable
agency securities, and has accelerated repayments on mortgage backed investment
securities. Due to the flat yield curve, the Company has taken a defensive
posture and retained the majority of these funds in Federal Funds Sold
throughout 1998. In December 1998, the Company utilized the excess cash in
Federal Funds Sold and prepaid approximately $11.5 million in Federal Home Loan
Bank borrowings, which were costing the Company a higher rate than what was
being earned in Federal Funds Sold. The Company incurred a prepayment penalty
in 1998 associated with the early repayment, which will improve the net interest
margin in 1999.
The Company has increased premises and equipment at December 31, 1998, as
compared to December 31, 1997, resulting from the growth initiatives underway.
Approximately $3 million in new premises results from the construction of two
new branches of Security Bank. The Company also purchased land for $375,000 for
the permanent facility of the new de novo McKenzie State Bank.
LIQUIDITY
Liquidity enables the Company to meet the withdrawals of its depositors and the
borrowing needs of its loan customers. The Company's primary sources of funds
are customer deposits, maturities of investment securities, sales of "Available
for Sale" securities, loan sales, loan repayments, net income, advances from
the Federal Home Loan Bank of Seattle, and the use of the Federal Funds markets.
The Company maintains three unsecured lines of credit totaling $12 million for
the purchase of funds on an overnight basis. As discussed previously, the
Company is also a member of the Federal Home Loan Bank of Seattle, which
provides a secured line of credit in the amount of $38.4 million, and other
funding opportunities for liquidity and asset/liability matching. Over the last
four years, these lines have been used periodically. As of December 31, 1998,
$2.1 million were borrowed under the Company's unsecured lines of credit and
there were no borrowings from the Federal Home Loan Bank. Interest rates
charged on the lines are determined by market factors. The Company's liquidity
has been stable and adequate over the
<PAGE>
past several years. Short-term deposits
have continued to grow and excess investible cash is invested on a short-term
basis into Federal Funds Sold. The Company's primary source of funds are
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, 1998, the Company had a Risk-based Capital Ratio of 15.56% and
Tier 1 Capital Ratio of 14.71%. This was compared to 17.40% and 16.56% for
total Risk-Based Capital and Tier 1 Capital, respectively, at December 31, 1997.
The Company currently exceeds the regulatory capital minimum requirements. 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.
YEAR 2000 ISSUES
- ----------------
INTRODUCTION.The Year 2000 creates challenges with respect to the automated
systems used by financial institutions and other companies. Many software
programs are not able to recognize the year 2000, since most programs and
systems were designed to store calendar years in the 1900's by assuming the
"19" and storing only the last two digits of the year. For example, these
automated systems would recognize a year stored as "00" as the year "1900",
rather than as the year "2000". If these automated systems are not
appropriately re-coded, updated or replaced before the year 2000, they will
likely confuse data, crash or fail in some manner. In addition, many software
programs and automated systems will fail to recognize the year 2000 as a leap
year. The problem is not limited to computer systems. Year 2000 issues will
potentially affect every system that has an embedded microchip, such as
automated teller machines, elevators and vaults.
The year 2000 challenge is especially problematic for financial institutions,
since many transactions such as interest accruals and payments are date
sensitive. It also may affect the operations of third parties with whom the
Company does business, including the Company's vendors, suppliers, utility
companies and customers.
THE COMPANY'S STATE OF READINESS.The Company is committed to addressing these
year 2000 challenges in a prompt and responsible manner and has dedicated
resources to do so. Management has completed an assessment of its automated
systems and has implemented a plan to resolve these issues, including purchasing
appropriate computer technology. The Company's year 2000 compliance plan ("Y2K
Plan") has five phases. These phases are (1) project management, (2)
awareness, (3) assessment, (4) testing, and (5) renovation and implementation.
The Company has substantially completed phases one through four, although
appropriate follow-up activities are continuing to occur, and the Company is
currently involved in the renovation and implementation phase of the Y2K Plan.
Project Management. The Company has assigned primary responsibility for year
2000 project management to its Vice President-Data Processing. The Company has
also formed a year 2000 compliance committee, consisting of appropriate
representatives from its critical operational areas including each of the
affiliate banks, to assist the Vice President-Data Processing in implementing
<PAGE>
the Y2K Plan. In addition, the Company provides monthly reports to its Board of
Directors and to the Boards of Directors of each of its subsidiaries in order to
assist them in overseeing the Company's year 2000 readiness.
Awareness. The Company has completed several projects designed to promote
awareness of year 2000 issues throughout our organization and our customer base.
These projects include communication through local seminars in each of the
communities the Company serves, mailing information brochures to deposit and
loan customers, providing training for lending officers and other staff, and
responding to vendor, customer, and shareholder inquiries.
Assessment. Assessment is the process of identifying all mission-critical
applications that could potentially be negatively affected by dates in the year
2000 and beyond. The Company's assessment phase is substantially complete.
Systems examined during this phase included telecommunications systems, account-
processing applications, and other software and hardware used in connection with
customer accounts. The Company's operations, like those of many other
companies, are intertwined with the operations of certain of its business
partners. Accordingly, the Company's operations could be materially affected if
the operations of those companies who provide the Company with mission critical
applications, systems, and services are materially affected. For example, the
Company depends upon vendors who provide equipment, technology, and software to
it in connection with its business operations. Failure of these software
vendors to achieve year 2000 readiness could substantially affect the operations
of the Company. In addition, lawsuits and other financial challenges materially
affecting the financial viability of these vendors could materially affect the
Company. In response to this concern, the Company has identified and contacted
those vendors who provide our mission-critical applications. The Company has
assessed their year 2000 compliance efforts and will continue to monitor their
progress as the year 2000 approaches.
Testing. Updating and testing of the Company's mission-critical automated
systems has been completed. All mission-critical systems were successfully
tested to verify that dates in the year 2000 are being appropriately recognized
and processed. Testing of renovations and new systems will continue throughout
1999.
Renovation and Implementation. This phase involves obtaining and implementing
renovated software applications provided by our vendors. As these applications
are received and implemented, the Company will test them for year 2000
compliance. This phase also involves upgrading and replacing automated systems
where appropriate and will continue throughout 1999. Although this phase will
be substantially complete before the end of 1999, additional follow-up
activities may take place in the year 2000 and beyond.
ESTIMATED COSTS TO ADDRESS THE COMPANY'S YEAR 2000 ISSUES. The total financial
effect of these year 2000 challenges on the Company cannot be predicted with
certainty at this time. In fact, in spite of all efforts being made to rectify
these problems, the success of these efforts cannot be predicted until the year
2000 actually arrives. The Company will upgrade or replace certain automated
systems before the year 2000; however some of these systems would have been
replaced before the year 2000 without regard to year 2000 compliance issues, due
to technology updates and Company expansion. In 1998, the Company established an
accrual for Year 2000 related costs incurred in 1998 of $160,000. This accrual
was established for consulting costs associated with on-going Year 2000 efforts
and equipment replacement.
Management does not believe that expenses related to meeting the Company's year
2000 challenges will have a material effect on the operations or financial
performance of the Company. However, factors beyond the control of management,
such as the effects on vendors of our mission-critical software and systems, the
effects of year 2000 issues on the economy, and the development of the risks
identified below under "The Risks of the Company's Year 2000 Issues," among
other things, could have a material effect on the operations or financial
performance of the Company.
<PAGE>
THE RISKS OF THE COMPANY'S YEAR 2000 ISSUES. The year 2000 presents certain
risks to the Company and its operations. Some of these risks are present
because the Company purchases technology applications from other parties who
face year 2000 challenges. Other of these risks are inherent in the business of
banking or are risks faced by many companies with stock traded on a national
stock exchange. Although it is impossible to identify every possible risk that
the Company may face moving into the new millennium, Management has to date
identified the following potential risks:
1. Commercial banks, such as the Company, may experience a contraction in
their deposit base, if a significant amount of deposited funds are
withdrawn by customers prior to the year 2000, and interest rates may
increase in the latter part of 1999. This potential deposit contraction
could make it necessary for the Company to change its sources of funding
and could materially impact future earnings. The Company has incorporated
a contingency plan for addressing this situation, should it occur, into its
asset and liability management policies. This plan includes maintaining
the ability to borrow funds in an amount at least equal to 50% of the
Company's allowed borrowing from the Federal Home Loan Bank of Seattle.
Significant demand for funds by other banks could reduce the amount of
funds available for the Company to borrow. If insufficient funds are
available from a Federal Home Loan Bank or other correspondents, the
Company may also sell investment securities or other liquid assets to meet
liquidity needs. Despite these efforts, a significant deposit contraction
could materially impact the Company's earnings or future operations,
particularly if funds availability at the Federal Home Loan Bank is
impaired.
2. The Company lends significant amounts to businesses in its' market
area. If these businesses are adversely affected by year 2000 issues,
their ability to repay loans could be impaired. This increased credit risk
could affect the Company's financial performance. During the assessment
phase of the Company's Y2K Plan, significant borrowers were identified.
Management is currently monitoring the year 2000 compliance efforts of
these credit customers.
3. The Company's operations, like those of many other companies, can be
affected by the year 2000 triggered failures of other companies upon whom
the Company depends for the functioning of its automated systems.
Accordingly, the Company's operations could be materially affected, if the
operations of those companies who provide the Company with mission critical
applications, systems, and services are materially affected. As described
previously, the Company has identified its mission-critical vendors and is
monitoring their year 2000 compliance progress.
4. All companies with stock traded on a national stock exchange,
including the Company, could experience a drop in stock price as investors
change their investment portfolios or sell stock prior to the new
millennium. At this time, it is impossible to predict whether or not this
will in fact be the case with respect to the stock of the Company or any
other company.
5. The Company's ability to operate effectively in the year 2000 could be
affected by communications abilities and access to utilities, such as
electricity, water, telephone, and others, to the extent access is
interrupted due to the effects of year 2000 issues on these and other
utilities.
THE COMPANY'S CONTINGENCY PLANS. The Company has developed contingency plans
related to year 2000 issues. These plans range from obtaining mission-critical
system back-up capabilities to funds management contingencies.
FORWARD LOOKING STATEMENTS. The previous discussion, entitled "Year 2000
Issues," includes certain "forward looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995 ("PSLRA"). This
statement is included for the express purpose of availing the Company of the
protections of the safe harbor provisions of the PSLRA. Management's ability to
predict results or effects of issues related to the year 2000 is inherently
uncertain, and is subject to factors that may cause actual results to
<PAGE>
differ
materially from those projected. Factors that could affect the actual results
include the possibility that protection procedures, contingency plans, and
remediation efforts will not operate as intended, and the Company's failure to
timely or completely identify all software or hardware applications requiring
remediation, unexpected costs, and the uncertainty associated with the impact of
year 2000 issues on the banking industry and on the Company's customers,
vendors, and others with whom it does business. Readers are cautioned not to
place undue reliance on these forward looking statements.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- ----------------------------------------------------------
OVERVIEW.Interest rate, credit, and operations risks are the most significant
risks impacting the Company's performance. Other types of market risk, such as
foreign currency exchange rate risk and commodity price risk do not arise in the
normal course of the Company's business activities. The Company relies on loan
reviews, prudent loan underwriting standards and an adequate reserve for loans
loss to mitigate credit risk.
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.
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, 1998 and 1997:
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized Estimated
(Dollars in thousands) Cost Gains Losses Market Value
- ---------------------- -------- ---------- ----------- -------------
<S> <C> <C> <C> <C>
1998 Available for sale
U.S. Government and federal agencies.......... $17,879 $88 $41 $17,926
Mortgage-backed securities.................... 14,784 180 20 14,944
United States Treasury........................ 15,067 81 25 15,123
Corporate obligations ........................ 20,073 27 146 19,954
Obligations of state and political subdivisions 19,015 648 35 19,628
-------- ------ ---- -------
Total available for sale $86,818 $1,024 $267 $87,575
======= ====== ==== =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
1997 Available for sale
<S> <C> <C> <C> <C>
U.S. Government and federal agencies.......... $21,756 $41 $54 $21,743
Mortgage-backed securities.................... 23,118 122 28 23,212
United States Treasury........................ 18,568 124 6 18,686
Corporate obligations......................... 8,230 4 9 8,225
Obligations of state and political subdivisions 13,719 550 5 14,264
-------- ---- ---- -------
Total available for sale $85,391 $841 $102 $86,130
======== ===== ==== =======
</TABLE>
The following is a summary of the contractual maturities and weighted average
yields of investment securities classified as available for sale at December 31,
1998:
<TABLE>
<CAPTION>
Amortized Estimated Weighted
(Dollars in thousands) Cost Market Value Average Yield
- ---------------------- --------- ----------- --------------
<S> <C> <C> <C>
U.S. Government federal agencies
One year or less .......................$1,903 $1,910 5.863%
After one year through five years ......14,396 14,437 5.834%
After five years through ten years ..... 1,580 1,579 6.824%
----- ----- ------
Total .............................17,879 17,926 5.924%
----- ------ ------
Mortgage-backed securities
One year or less ....................... 2,484 2,482 5.832%
After one year through five years ..... 8,218 8,328 6.527%
After five years through ten years ..... 2,617 2,646 6.353%
After ten years ........................ 1,465 1,488 6.680%
----- ------ ------
Total .............................14,784 14,944 6.395%
----- ------ ------
United States Treasury
One year or less ......................10,561 10,614 6.200%
After one year through five years ...... 4,506 4,509 4.961%
----- ------ ------
Total .............................15,067 15,123 5.829%
------ ------ ------
Corporate obligations
One year or less ...................... 5,506 5,511 5.959%
After one year through five years ......12,856 12,763 5.640%
After five years through ten years ... 1,711 1,680 5.969%
------ ------ ------
Total ................................20,073 19,954 5.756%
------ ------ ------
Obligations of state and political subdivisions (1)
One year or less ...................... 45 45 5.200%
After one year through five years ...... 2,241 2,287 4.792%
After five years through ten years ..... 7,048 7,359 5.612%
After ten years ........................ 9,681 9,937 5.064%
----- ------ ------
Total .............................19,015 19,628 5.235%
----- ------ ------
Total securities available for sale......$86,818 $87,575 5.798%
====== ======= ======
</TABLE>
(1) Yields on tax-exempt securities have not been stated on a tax-equivalent
basis.
<PAGE>
As of December 31, 1998, the Company had no securities classified as "held to
maturity." Actual maturities may differ for mortgage backed securities due to
ability to prepay.
LOAN PORTFOLIO
Interest earned on the loan portfolio is the primary source of income for the
Company. Net loans and leases represented 55% of total assets as of December
31, 1998. 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:
December 31,
------------
(Dollars in thousands) 1998 1997
- ---------------------- ---- ----
Commercial - real estate ..... $37,511 $31,420
Commercial - lines of credit.. 39,565 37,172
Residential - real estate..... 37,833 34,811
Installment................... 31,848 32,735
Credit cards and other........ 3,888 3,701
------- -------
Total loans .............. 150,645 139,839
Deferred loan fees, net....... (222) (167)
Reserve for loan losses....... (2,294) (1,429)
------- --------
Net loans ................ $148,129 $138,243
======== ========
<PAGE>
At December 31, 1998, the maturities of all loans by category were as follows:
Within One to After
(Dollars in thousands) One Year Five Years Five Years Total
- ---------------------- -------- ---------- ---------- ------
Commercial - real estate ..... $12,041 $11,899 $13,571 $37,511
Commercial - lines of credit.. 26,831 10,200 2,534 39,565
Residential - real estate..... 20,070 1,941 15,822 37,833
Installment................... 3,015 18,703 10,130 31,848
Credit cards & other.......... 3,835 53 -- 3,888
------ ------ ------- --------
Total ..................... $65,792 $42,796 $42,057 $150,645
======= ======= ======= ========
Of loans with maturities of one year or more, $70,257 were fixed-rate loans, and
$14,596 were variable rate loans.
DEPOSIT LIABILITIES
The following table sets forth the average deposit liabilities of, and rates
paid by, the Company for the periods indicated:
Years ended December 31,
------------------------
(Dollars in thousands) 1998 1997
- ---------------------- ---- ----
Deposit Liabilities Amount Rate Amount Rate
------ ---- ------ ----
Demand ............. $37,211 n/a $29,592 n/a
NOW accounts ...... 33,440 1.47% 33,001 1.08%
Money market accounts 36,957 3.56% 32,635 3.84%
Savings accounts ... 20,581 2.48% 20,868 2.49%
Time deposits ...... 89,208 5.24% 84,511 5.31%
------- ----- ------ -----
Total deposits ...$217,397 3.22% $200,607 3.30%
======== ==== ======= ====
As of December 31, 1998, the Company's time deposit maturities were as follows:
Time Deposits of All Other
(Dollars in thousands) $100 or more (1) Time Deposits (2)
- ---------------------- ---------------- ----------------
Remaining Time to Maturity:
3 months or less .......... $8,786 41.41% $24,091 35.93%
4 to 6 months ............. 5,740 27.06% 14,733 21.98%
7 to 12 months ............ 5,630 26.54% 15,716 23.44%
Over 1 year ............... 1,058 4.99% 12,501 18.65%
------- ------ ------- -------
Total .................... $21,214 100.00% $67,041 100.00%
======= ====== ======= ======
(1) Time deposits of $100 or more represent 9.35% of total deposits as of
December 31, 1998.
(2) All other time deposits represent 29.56% of total deposits as of December
31, 1998.
BORROWINGS
The following table sets forth information regarding the Company's Federal Home
Loan Bank (FHLB) borrowings for the years ended December 31, 1998 and 1997:
(Dollars in thousands) 1998 1997
- ---------------------- ---- ----
FHLB Borrowings:
Amount outstanding at year $ -- $16,000
Average outstanding for the year $13,423 $23,794
Maximum outstanding at any month end $14,000 $32,780
Weighted average rate for the year 7.94% 5.92%
Weighted average rate at year end --% 6.13%
Weighted average maturity at year end (days) -- 723
<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 1998 FISCAL 1997
----------- -----------
Average Average Yield Average Average Yield
(Dollars in thousands) Balance Interest or Rates Balance Interest or Rates
- ---------------------- ------- ------- ------------ ------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Assets
Federal funds sold $22,573 $1,213 5.37% $11,068 $598 5.40%
Time deposits - domestic financial institutions -- -- --% 69 5 7.25%
Investment securities - taxable 66,098 4,052 6.13% 77,902 5,069 6.51%
Investment securities - exempt
from federal income taxes 15,758 836 5.30% 17,877 977 5.47%
Loans, gross and mortgage loans
held for sale, at cost which
approximates market(1)(2) 140,601 13,444 9.56% 130,936 12,948 9.89%
Net investment in direct financing leases 2,982 284 9.53% 3,116 292 9.37%
Federal Home Loan Bank stock, at cost 1,915 151 7.87% 2,622 202 7.70%
Federal Reserve Bank stock, at cost 256 15 5.93% -- -- --%
------- ------ ----- ------- ------ -----
Total interest-earning assets/
interest income $250,184 $19,995 7.99% $243,590 $20,091 8.25%
Cash and due from banks 8,264 7,264
Premises and equipment, net 5,747 5,058
Loan loss reserve (1,433) (1,380)
Investment market value adjustment 800 233
Other assets 8,474 5,917
------ -------
Total assets $272,036 $260,682
======== ========
Liabilities, Minority Interest and Shareholders' Equity
Demand accounts $37,211 $_ _ % $29,592 $_ _ %
NOW accounts 33,440 491 1.47% 33,001 357 1.08%
Money market accounts 36,957 1,317 3.56% 32,635 1,253 3.84%
Savings accounts 20,581 510 2.48% 20,868 520 2.49%
Time deposits 89,208 4,677 5.24% 84,511 4,484 5.31%
Securities sold under agreements to repurchase 7,666 351 4.58% 6,374 291 4.57%
Short-term borrowings 284 23 8.09% 400 23 5.75%
Federal Home Loan Bank borrowings 13,423 1,066 7.94% 23,794 1,409 5.92%
------ ----- ----- ------ -----
Total interest- bearing liabilities/
interest expense $238,770 $8,435 3.53% $231,176 $8,337 3.61%
Other liabilities 3,419 1,997
------- -------
Total liabilities 242,189 233,173
Minority Interest 1,111 924
------ ------
Shareholders' equity 28,736 26,585
Total liabilities, minority interest
and shareholders' equity $272,036 $260,682
======== ========
Net interest income $11,560 $11,754
------- -------
Net interest spread 4.46% 4.64%
----- -----
Net interest income to earning assets 4.62% 4.83%
----- -----
</TABLE>
(1) Average non-accrual loans included in the computation of average loans
were $681 for 1998 and $511 for 1997.
(2) Loan related fees recognized during the period and included in the yield
calculation totaled approximately $147 in 1998 and $259 in 1997.
<PAGE>
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
(Dollars in thousands) 1997 1996 $ change % change
- ---------------------- ---- ---- ----------------
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%
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.
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.
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.
<PAGE>
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.
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.
<PAGE>
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:
Year ended December 31,
(Dollars in thousands) 1997 1996
- ---------------------- ---- ----
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%
===== =====
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.
<PAGE>
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:
December 31,
------------
(Dollars in thousands) 1997 1996
- --------------------- ---- ----
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%
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.
December 31,
------------------------------------
Percent of Percent of
(Dollars in thousands) 1997 Total loans 1996 Total loans
- ---------------------- ---- ----------- ---- -----------
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%
====== ===== ====== =====
<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):
Analysis for the years ended Increase
December 31, 1997 and 1996 1997 1996 (Decrease)% Change
- -------------------------- ---- ---- ---------- -------
(Dollars in thousands)
- ----------------------
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%
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>
ITEM 8. FINANCIAL STATEMENTS
The financial statements required by regulation S-X are set forth in the pages
listed below.
PAGE
Independent Auditors' Report 43
Consolidated Balance Sheets, as of December 31, 1998 and 1997 44
Consolidated Statements of Income, for the years ended
December 31, 1998,1997 and 1996 45
Consolidated Statements of Comprehensive Income, for the years 46
ended December 31, 1998,1997 and 1996
Consolidated Statements of Shareholders Equity, for the years
ended December 31, 1998, 1997 and 1996 47
Consolidated Statements of Cash Flows, for the years ended
December 31, 1998, 1997 and 1996 48
Notes to Consolidated Financial Statements 49-71
<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, 1998 and 1997, and the
related consolidated statements of income, comprehensive income, shareholders'
equity, and cash flows for each of the years in the three year period ended
December 31, 1998. 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, 1998 and 1997, and the
results of their operations and their cash flows for each of the years in the
three year period ended December 31, 1998 in conformity with generally accepted
accounting principles.
KPMG PEAT MARWICK LLP
Portland, Oregon
January 29, 1999
<PAGE>
SECURITY BANK HOLDING COMPANY & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND 1997
Dollars in Thousands, Except Per Share Data
ASSETS 1998 1997
---- ----
Cash and cash equivalents:
Cash and due from banks ................. $10,686 $10,087
Federal funds sold ....................... 7,667 19,165
------- -------
Total cash and cash equivalents ........ 18,353 29,252
Time deposits - domestic financial institutions - -
Investment securities available for sale ... 87,575 86,130
Loans, net.................................. 142,209 136,035
Mortgage loans held for sale, at cost which
approximates market ........................ 5,920 2,208
Net investment in direct financing leases .. 2,813 3,056
Premises and equipment, net ................ 10,518 7,111
Federal Home Loan Bank stock, at cost ...... 2,007 1,840
Federal Reserve Bank stock, at cost......... 649 _
Other assets................................ 3,595 4,600
-------- --------
Total assets ........................... $273,639 $270,232
======== ========
LIABILITIES, MINORITY INTEREST AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Demand ................................. $40,539 $31,550
NOW accounts ........................... 35,777 36,597
Money market accounts .................. 40,883 37,074
Savings accounts ....................... 21,341 20,079
Time deposit .......................... 88,255 88,541
------- -------
...Total deposits ..................... 226,795 213,841
Securities sold under agreements
to repurchase 10,388 7,945
Short term borrowings .................... 32 583
Federal Home Loan Bank borrowings ....... _ 16,000
Other liabilities ........................ 5,168 2,532
------- -------
Total liabilities ...................... 242,383 240,901
Minority interest in subsidiary............. 2,224 908
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 4,451,196 shares in 1998
(4,442,097 shares in 1997) ............ 22,256 22,210
Surplus ................................. 3,863 1,596
Retained earnings ....................... 2,454 5,629
Unearned ESOP shares, at cost ........... _ (1,469)
Accumulated other comprehensive income ... 459 457
----- ------
Total shareholders' equity ............. 29,032 28,423
Commitments and contingent liabilities .....
------- --------
Total liabilities, minority interest
and shareholders' equity ............... $273,639 $270,232
======== ========
See accompanying notes to consolidated financial statements.
<PAGE>
SECURITY BANK HOLDING COMPANY & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
Dollars in Thousands, Except Per Share Data
1998 1997 1996
---- ---- ----
Interest income:
Interest on loans $13,444 $12,948 $11,350
Interest and dividends on securities:
Taxable 4,052 5,069 4,728
Exempt from Federal income tax 836 977 962
Interest on time deposits-domestic financial
institutions -- 5 21
Dividend income on Federal Home Loan
Bank stock 151 202 163
Dividend income on Federal Reserve
Bank stock 15 -- --
Interest on Federal funds sold 1,213 598 188
Income on direct financing leases 284 292 340
------ ------ ------
Total interest income 19,995 20,091 17,752
------ ------ ------
Interest expense:
Deposits
NOW 491 357 311
Money market 1,317 1,253 1,035
Savings 510 520 531
Time 4,677 4,484 4,044
Securities sold under agreements to repurchase 351 291 190
Short term borrowings 23 23 22
ESOP debt -- -- 41
Federal Home Loan Bank borrowings 1,066 1,409 863
----- ----- -----
Total interest expense 8,435 8,337 7,037
----- ----- -----
Net interest income 11,560 11,754 10,715
Provision for loan losses 1,107 263 232
------ ------ ------
Net interest income after provision
for loan losses 10,453 11,491 10,483
Other income:
Service charges on deposit accounts 1,213 1,129 1,101
Gain on sale/call of investments available
for sale, net 22 191 13
Loan servicing fees 263 249 326
Sold real estate loan fees 2,670 1,351 1,033
Gain on sale of servicing rights -- -- 380
Other 800 949 623
----- ----- -----
Total other income 4,968 3,869 3,476
----- ----- -----
Other expense:
Salaries and employee benefits 7,353 6,065 5,309
Occupancy of bank premises 823 711 585
Furniture and equipment 1,107 898 683
Professional fees 1,143 847 551
FDIC assessment 26 23 5
Supplies 409 349 319
ESOP compensation 3,499 716 459
Other 2,620 1,769 1,663
------ ------ -----
Total other expense 16,980 11,378 9,574
------ ------ -----
(Loss) income before provision for income
taxes and minority interest (1,559) 3,982 4,385
Provision for income taxes 25 1,247 1,353
------ ----- -----
(Loss) income before minority interest (1,584) 2,735 3,032
Net loss attributable to minority interest 35 30 37
-------- ------ ------
Net (loss) income $(1,549) $2,765 $3,069
======== ====== ======
Net (loss) income per share - basic $(.35) $.68 $.84
====== ==== ====
Net (loss) income per share - diluted $(.35) $.68 $.83
====== ==== ====
See accompanying notes to consolidated financial statements.
<PAGE>
SECURITY BANK HOLDING COMPANY & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
Dollars in Thousands, Except Per Share Data
1998 1997 1996
---- ---- ----
Net (loss) income $(1,549) $2,765 $3,069
Other comprehensive income, net of income tax:
Unrealized gain (loss) on investment securities 2 265 (828)
------- ------ ------
Comprehensive (loss) income $(1,547) $3,030 $2,241
======= ====== ======
See accompanying notes to consolidated financial statements.
<PAGE>
SECURITY BANK HOLDING COMPANY & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
Dollars in Thousands, Except Per Share Data
<TABLE>
<CAPTION>
Accumulated
Unearned Other Total
Common Stock Retained ESOP shares Comprehensive Shareholders'
Shares Amount Surplus Earnings at Cost Income 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 4,824 24 (21) -- -- -- 3
Stock options exercised 11,040 55 7 -- -- -- 62
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
Net loss -- -- -- (1,549) -- -- (1,549)
Dividends -- -- -- (1,626) -- -- (1,626)
Sale of common stock 3,579 18 (1) -- -- -- 17
Stock options exercised 5,520 28 3 -- -- -- 31
Release of ESOP shares -- -- 2,265 -- 1,469 -- 3,734
Unrealized gain on securities
available for sale -- -- -- -- -- 2 2
--------- ------- ------ ------ --- ---- -------
Balance, Dec. 31, 1998 4,451,196 $22,256 $3,863 $2,454 $-- $459 $29,032
========= ======= ====== ====== === ==== =======
</TABLE>
<PAGE>
See accompanying notes to consolidated financial statements.
SECURITY BANK HOLDING COMPANY & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
Dollars in Thousands, Except Per Share Data
1998 1997 1996
---- ---- ----
Cash flows from operating activities:
Net (loss) income $(1,549) $2,765 $3,069
Adjustments to reconcile net (loss) income
to net cash provided by operating activities
Depreciation and amortization 925 672 574
Provision for loan losses 1,107 263 232
Origination of mortgage loans held for sale (121,856) (57,139) (62,634)
Proceeds from mortgage loans sold 118,144 57,114 63,066
Net (gain) loss on sale of fixed assets 20 (164) 10
Net gain on call/sale of investment securities
available for sale (22) (191) (13)
Federal Home Loan Bank stock dividend (146) (201) (163)
ESOP related compensation expense 3,499 716 553
Increase in other assets 1,005 (9) (83)
Increase in other liabilities 2,636 593 176
----- ----- -----
Net cash provided by operating
activities 3,763 4,419 4,787
----- ----- -----
Cash flows from investing activities:
Net decrease in time deposits _
domestic financial institutions - 270 280
Purchase of investment securities available
for sale (50,686) (44,538) (60,490)
Proceeds from sale of investment securities
available for sale 8,786 24,003 17,812
Proceeds from maturities and call of
investment securities available for sale 40,306 30,864 24,538
Proceeds from maturities of investment
securities held to maturity - - 100
Net loan originations (2,625) (17,540) (13,158)
Purchase of participations (4,656) (1,039) (501)
Additions to premises and equipment (4,164) (2,223) (2,572)
Purchase of Federal Home Loan Bank stock (21) (3,192) (2,065)
Redemption of Federal Home Loan Bank stock - 3,897 1,541
Purchase of Federal Reserve Bank stock (649) - -
Proceeds from sales of premises and equipment - 215 22
Originations of direct financing leases (718) (1,076) (678)
Gross payments on direct financing leases 961 1,022 1,217
Minority interest in subsidiaries 1,316 (30) 938
------- ------ ------
Net cash used in investing activities (12,150) (9,367) (33,016)
------- ------ -------
Cash flows from financing activities:
Net increase in deposits 12,954 19,877 21,111
Increase in securities sold with agreements
to repurchase 2,443 3,383 1,688
Repayment of ESOP debt - - (644)
(Decrease) increase in Federal Home Loan
Bank borrowings (16,000) (1,028) 5,528
Proceeds from issuance of common stock 48 65 2,753
Payment of dividends (1,406) (711) (904)
Other (551) 5 12
------- ------ ------
Net cash (used in) provided by financing
activities (2,512) 21,591 29,544
------- ------ ------
Net (decrease) increase in cash and cash
equivalents (10,899) 16,643 1,315
Cash and cash equivalents at beginning
of period 29,252 12,609 11,294
------- ------- -------
Cash and cash equivalents at end of
period $18,353 $29,252 $12,609
======= ======= =======
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $8,543 $8,290 $6,850
Income taxes $957 $1,427 $1,221
Supplemental disclosures of investing activities:
Unrealized gain (loss) on investment securities
available for sale, net of tax $2 $265 $(828)
See accompanying notes to consolidated financial statements.
<PAGE>
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), Pacific State Bank (Pacific
State) and Family Security Bank (Family Security), its majority-owned
subsidiaries, Lincoln Security Bank (Lincoln Security) and McKenzie State Bank
(McKenzie State), and Security Bank's wholly-owned subsidiary, Alland, Inc.
Security Bank, Pacific State Bank, Family Security, Lincoln Security and
McKenzie State are referred to collectively herein as the Banks. All
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 in Coos
County.
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.
Family Security conducts a general banking business. Its activities include the
usual functions of a commercial bank: commercial, real estate and installment
loans; checking and savings accounts; collection and escrow services and safe
deposit facilities. Family Security's primary market area consists of Curry
County.
Lincoln Security is a 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, 1998, 1997 and 1996.
McKenzie State is a newly organized state chartered bank located in Springfield,
Oregon in which the Company holds a majority interest. The Company facilitated
the organization of McKenzie State by purchasing 65.89% of all outstanding
common shares of McKenzie State's common stock, with the remainder of the
outstanding common stock held by local investors. McKenzie State commenced
operations in November of 1998, and engages in general commercial banking
business. McKenzie State offers commercial banking services to small and medium
size businesses, professionals and retail customers in the their market area.
The Company's ownership of McKenzie State was 65.89% as of December 31, 1998.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dollars in Thousands, Except Per Share Data
The Banks are subject to the regulations of certain federal agencies and undergo
periodic examinations by these regulatory authorities.
C) BASIS OF FINANCIAL STATEMENT PREPARATION
The financial statements have been prepared in conformity with generally
accepted accounting principles. In preparing the financial statements,
management is required to make estimates and judgements that affect the reported
amounts of assets and liabilities and the disclosure of contingent assets and
liabilities as of the date of the balance sheet and 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, Lincoln and Lane 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
credit losses on specifically identified loans as well as estimated probable
losses in the remainder of the portfolio. The reserve for loan losses was
$2,294 at December 31, 1998, as compared to $1,429 and $1,336 at December 31,
1997 and 1996, respectively.
The Company's ratio of reserve for loan losses to total loans was 1.50% at
December 31, 1998, compared to 1.00% and 1.20% at December 31, 1997 and 1996,
respectively. The Company increased the reserve for loan loss in 1998 to 1.50%
to more closely match peer group and address regulatory recommendations. 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 gains or losses on securities available for sale are
included, net of tax, as a component of other comprehensive income.
(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 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>
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 reserve based upon their
judgements about information available to them at the time of their
examinations. Uncollectible interest on loans is charged off, or an allowance is
established by a charge to income equal to all interest previously accrued and
unpaid and 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.
(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
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dollars in Thousands, Except Per Share Data
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 1996, 1997 and 1998, respectively: dividend yield of 3.5%, 2.6% and
3.3%; expected volatility of 60% for all years; risk-free interest rates of
6.1%, 5.8% and 4.5%; and expected lives of five years. The pro forma expense on
stock options was $41, $35 and $35 for 1998, 1997 and 1996, respectively.
(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.
(M) 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.
(N) RECLASSIFICATIONS
Certain amounts previously reported on the December 31, 1997 and 1996,
consolidated financial statements have been reclassified to conform to
classifications in the December 31, 1998, consolidated financial statements.
(o) 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 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 was 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
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dollars in Thousands, Except Per Share Data
for financial statements for periods beginning after December 15, 1997, and as
such, has been adopted by the Company in 1998. The Company has determined that
the reportable segments consist of administration and commercial and mortgage
banking and has provided the required disclosure in footnote 19.
In April 1998, the AICPA issued Statement of Position SOP 98-5, Reporting on the
Cost of Start-up Activities. SOP 98-5 establishes accounting and reporting
standards requiring that all organizational costs must be expensed as incurred.
This SOP is effective for fiscal years beginning after December 15, 1998, but
earlier adoption is available. The Company has historically capitalized and
amortized these costs over five years. In 1998, the Company adopted SOP 98-5,
the cumulative effect of which was not material to the Company's statement of
income.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. The Statement establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. The
Statement requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met.
Special accounting for qualified hedges allows a derivative's gains and losses
to offset related results on the hedged item in the income statement, and
requires that a company must formally document, designate, and assess the
effectiveness of transactions that receive hedge accounting. This SFAS is
effective for fiscal years beginning after June 15, 1999 and as such, will be
adopted by the Company in 2000. 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, 1998 and 1997, was
approximately $1,433 and $1,444, respectively, and was met by holding cash and
maintaining an average reserve balance with the Federal Reserve Bank.
3.1997 ACQUISITION OF PACIFIC STATE BANK
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.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dollars in Thousands, Except Per Share Data
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.
4.INVESTMENT SECURITIES
The amortized costs, estimated market values, unrealized gains and unrealized
losses of investment securities at December 31, 1998 and 1997 are summarized as
follows:
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Market Value
--------- ---------- --------- -------------
1998 Available for sale
- -----------------------
<S> <C> <C> <C> <C>
U.S. Government and Federal Agencies $17,879 $88 $41 $17,926
Mortgage-backed securities 14,784 180 20 14,944
United States Treasury 15,067 81 25 15,123
Corporate obligations 20,073 27 146 19,954
Obligations of state and political
subdivisions 19,015 648 35 19,628
------- ------ ---- -------
Total available for sale $86,818 $1,024 $267 $87,575
======= ====== ==== =======
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dollars in Thousands, Except Per Share Data
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
1997 Available for sale:
U.S. Government and Federal Agencies $21,756 $41 $54 $21,743
Mortgage-backed securities 23,118 122 28 23,212
United States Treasury 18,568 124 6 18,686
Corporate obligations 8,230 4 9 8,225
Obligations of state and political
subdivisions 13,719 550 5 14,264
------- ---- ---- -------
Total available for sale $85,391 $841 $102 $86,130
======= ==== ==== =======
</TABLE>
Gross realized gains and gross realized losses on sales of securities available
for sale for the years ended December 31, 1998, 1997 and 1996 were:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
Realized Realized Realized Realized Realized Realized
Gains Losses Gains Losses Gains Losses
-------- -------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
U.S. Government and
Federal Agencies $13 $2 $114 $12 $26 $-
United States Treasury 4 -- 19 -- 2 10
Corporate obligation 2 -- -- -- 25 25
U.S. Federal Securities
mutual bond funds -- -- -- -- - 219
Obligations of state and
political subdivisions 6 1 83 13 214 -
--- --- ---- --- ---- ----
$25 $3 $216 $25 $267 $254
=== === ==== === ==== ====
</TABLE>
Approximate investment portfolio maturities at December 31, 1998 are as follows:
Estimated
Amortized Market
Cost Value
------------------
One year or less $20,499 $20,562
After one year through five years 42,217 42,324
After five years through ten years. 12,956 13,264
After ten years 11,146 11,425
------- -------
Total $86,818 $87,575
======= =======
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, 1998 and 1997:
1998 1997
---- ----
U.S. Government and Federal Agencies $16,030 $13,824
United States Treasury 10,613 7,582
Obligations of state and political
subdivisions 9,494 6,864
------- -------
$36,137 $28,270
======= =======
The Federal Reserve Bank (FRB) requires the bank to maintain a level of
investment of FRB stock. The required amount was approximately $649 at December
31, 1998.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dollars in Thousands, Except Per Share Data
5.LOANS AND MORTGAGE LOANS HELD FOR SALE
Major categories of loans at December 31, 1998 and 1997 included in the
portfolio are as follows:
1998 1997
---- ----
Commercial-real estate........ $37,511 $31,420
Commercial-lines of credit.... 39,565 37,172
Residential-real estate....... 37,833 34,811
Installment................... 31,848 32,735
Credit cards and other........ 3,888 3,701
------- -------
Total loans .............. 150,645 139,839
Deferred loan fees, net....... (222) (167)
Reserve for loan losses....... (2,294) (1,429)
-------- --------
Net loans ................ $148,129 $138,243
======== ========
Approximate loan portfolio maturities on fixed rate loans and repricing on
variable rate loans at December 31, 1998 are as follows:
Within One to After
One Year Five Years Five Years Total
--------- ---------- ---------- ------
Commercial-real estate........ $12,041 $11,899 $13,571 $37,511
Commercial-lines of credit.... 26,831 10,200 2,534 39,565
Residential-real estate....... 20,070 1,941 15,822 37,833
Installment................... 3,015 18,703 10,130 31,848
Credit cards and other........ 3,835 53 -- 3,888
------- ------- ------- --------
$65,792 $42,796 $42,057 $150,645
======= ======= ======= ========
Mortgage loans held for sale are included above as residential real estate-
mortgage loans maturing within one year.
Loans on nonaccrual status were approximately $558 and $506 at December 31, 1998
and 1997, respectively. Interest income which would have been realized on non-
accrual loans if they had remained current was insignificant.
Renegotiated loans were approximately $309, $647 and $557 at December 31, 1998,
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, 1998.
At December 31, 1998, 1997 and 1996, Security Bank serviced approximately
$223,305, $156,824 and $179,074 respectively, of loans owned by others.
The Banks lending activities are concentrated on the Central and Southwestern
coast of Oregon and in Western Oregon.
<PAGE>
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,
1998, 1997 and 1996 were as follows:
1998 1997 1996
---- ---- ----
Balance, beginning of year 1,429 $1,336 $1,257
Provision for loan losses 1,107 263 232
Loans charged off (280) (298) (218)
Recoveries of loans previously
charged off 38 128 65
------ ------ ------
Balance, end of year $2,294 $1,429 $1,336
====== ====== ======
The recorded investment in loans for which an impairment has been recognized at
December 31, 1998 and 1997 was $580 and $296, respectively. The related reserve
for loan losses at December 31, 1998 and 1997 was $190 and $109, respectively.
The average recorded investment in impaired loans during 1998 and 1997 was $515
and $330, respectively. Interest income recognized on impaired loans receivable
during 1998 and 1997 was insignificant.
7.DIRECT FINANCING LEASES
Following are the components of the net investment in direct financing leases at
December 31, 1998 and 1997:
1998 1997
---- ----
Total minimum lease payments receivable $2,830 $3,196
Add:
Estimated unguaranteed residual values
of leased equipment 534 478
Less:
Unearned income 551 618
------ ------
Net investment in direct financing leases $2,813 $3,056
====== ======
Future minimum lease payments to be received on direct financing leases are as
follows:
Year ending December 31:
1999 ................ $1,234
2000 ................ 907
2001 ................ 546
2002 ................ 141
2003 ................ 2
------
Total ...... $2,830
======
<PAGE>
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, 1998 and 1997 are as
follows:
1998 1997
---- ----
Land........................ $1,715 $666
Buildings................... 8,307 6,498
Furniture and equipment..... 5,724 4,892
------ ------
15,746 12,056
Less accumulated depreciation
and amortization.......... (5,228) (4,945)
------- ------
$10,518 $7,111
======= ======
9.SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Weighted Carrying Market
Average Value of Value of
Repurchase Interest Underlying Underlying
Amount Rate Assets Assets
--------- -------- ---------- ----------
December 31, 1998: Overnight.....$10,388 4.18% $10,388 $10,388
December 31, 1997: Overnight......$7,945 4.68% $7,520 $7,520
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 $7,666 for the year ended
December 31, 1998 and the maximum amount outstanding at any month end for the
year ended December 31, 1998 was approximately $10,388. 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 $21,214
and $24,145 at December 31, 1998 and 1997, respectively. Interest expense on
these certificates amounted to approximately $1,448 and $1,382 for the years
ended December 31, 1998 and 1997, respectively.
As of December 31, 1998, remaining time to maturity of time deposits were as
follows:
Time Deposits All other
of $100 or more time deposits
--------------- --------------
3 months or less..$8,786 41.41% $24,091 35.93%
4 to 6 months..... 5,740 27.06% 14,733 21.98%
7 to 12 months.... 5,630 26.54% 15,716 23.44%
Over 1 year....... 1,058 4.99% 12,501 18.65%
------- ------- ------- -------
Total ..........$21,214 100.00% $67,041 100.00%
====== ======= ======= =======
<PAGE>
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 1998, 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 shares pledged as collateral for debt due to the Company by the ESOP 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.
In 1998, the ESOP debt was repaid in full, thereby releasing all remaining
shares for allocation. The ESOP shares as of December 31, 1998, 1997 and 1996
were as follows:
1998 1997 1996
---- ---- ----
Allocated 579,719 522,903 455,713
Shares released for allocation 384,782 68,440 67,190
Unreleased shares -- 384,782 455,824
------- ------- -------
Total ESOP shares 964,501 976,125 978,727
======= ======= =======
Fair value of unreleased shares $-- $4,714 $3,988
=== ====== ======
EXECUTIVE SUPPLEMENTAL INCOME PLAN- The Company sponsors a Key Executive
Deferred Compensation Plan which is a noncontributory defined benefit plan
covering a select group of key management employees. Benefits under the Plan
are based on years of service, final average pay and covered compensation. At
December 31, 1998, the plan covered nine participants, including five employees,
two former employees with vested rights to future benefits, and two retirees and
beneficiaries receiving benefits.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dollars in Thousands, Except Per Share Data
The Key Executive Deferred Compensation Plan is an unfunded plan providing
supplementary retirement benefits to high-level employees. The activity with
respect to this plan in 1998, 1997 and 1996 is as follows:
Pension Benefits
1998 1997 1996
---- ---- ----
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year $808 $608 $371
Service cost 39 36 32
Interest cost 60 45 34
Amendments 66 -- --
Actuarial gain 159 134 186
Benefits paid (116) (15) (15)
------ ---- ----
Benefit obligation at end of year $1,016 $808 $608
====== ==== ====
CHANGE IN PLAN ASSETS
Fair value of plan assets at January 1 -- -- --
Employer contribution 116 15 15
Plan participants' contributions -- -- --
Benefits paid (116) (15) (15)
----- ---- ----
Fair value of plan assets at end of year -- -- --
RECONCILIATION AT DECEMBER 31,
Funded status (1,016) (808) (608)
Unrecognized net actuarial loss 239 341 231
Unrecognized prior service cost 45 52 58
----- ----- -----
Net amount recognized (732) (415) (319)
TOTAL RECOGNIZED AMOUNTS IN THE BALANCE SHEET
CONSIST OF:
Accrued benefit cost (732) (450) (371)
Total recognized (732) (450) (371)
===== ===== =====
NET PERIODIC BENEFIT COST $123 $99 $73
==== === ===
WEIGHTED-AVERAGE ASSUMPTIONS AS OF
DECEMBER 31,
Discount rate 6.50% 7.50% 7.50%
Expected return on plan assets N/A N/A N/A
Rate of compensation increase 3.50% 4.50% 4.50%
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost 39 35 32
Interest cost 60 46 34
Amortization of prior service cost 7 7 7
Recognized net actuarial loss 17 11 --
---- --- ---
Net periodic benefit cost $123 $99 $73
==== === ===
<PAGE>
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, 1998, 1997 and 1996:
Weighted Average
Shares Exercise Price
------- ---------------
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
=======
Granted in 1998 52,500 $ 8.75
Exercised in 1998 (5,520) $(5.67)
Terminated in 1998 (11,040) $(5.67)
--------
Outstanding options at December 31, 1998 126,500 $ 7.25
======= =======
Exercisable at December 31, 1998 47,400 $ 6.15
======= =======
Shares available for future
grant at December 31, 1998. 132,940
=======
12.EARNINGS PER SHARE
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
384,782 and 455,824 held by the Company's ESOP as these shares had not been
allocated to participant accounts, nor had they been committed to be released.
The following table presents information relating to the weighted average number
of common shares outstanding for all periods presented for both basic and
diluted net income per share calculations.
1998 1997 1996
---- ---- ----
Weighted average shares-basic 4,448,846 4,050,237 3,669,591
Potential dilution of stock options 39,100 45,128 30,470
--------- --------- ---------
Weighted average shares-diluted 4,487,946 4,095,365 3,700,061
========= ========= =========
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dollars in Thousands, Except Per Share Data
13.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, 1998, that the Company meets
all capital adequacy requirements to which it is subject.
As of December 31, 1998, 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.
The Company's capital amounts and ratios are presented in the following table.
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------ ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------- -----
As of December 31, 1998:
Total Capital
(to Risk Weighted Assets)$27,606 15.56% $14,192 >8% $17,740 >10.0%
Tier 1 Capital
(to Risk Weighted Assets)$26,089 14.71% $7,096 >4% $10,644 >6.0%
Tier 1 Capital
(to Average Assets) $26,089 9.64% $10,826 >4% $13,533 >5.0%
As of December 31, 1997:
Total Capital
(to Risk Weighted Assets)$29,843 17.40% $13,724 >8% $17,155 >10.0%
Tier 1 Capital
(to Risk Weighted Assets)$28,414 16.56% $6,862 >4% $10,293 >6.0%
Tier 1 Capital
(to Average Assets) $28,414 10.11% $11,244 >4% $14,055 >5.0%
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
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dollars in Thousands, Except Per Share Data
through the Division of Finance and Corporate Securities ("Oregon Director"),
and to the supervision and regulation of the FDIC. As of December 31, 1998, 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, 1998 and
1997, undivided profits of approximately $4,244 and $7,576, respectively, were
available for the payment of dividends to the Company without prior regulatory
approval.
14.COMMITMENTS AND CONTINGENCIES
The Banks are leasing five 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:
1999 ...................... $160
2000 ...................... 132
2001 ...................... 94
2002 ...................... 93
2003 ...................... 93
Thereafter ................ 365
----
$937
====
Rental expense for all operating leases was approximately $175, $132 and $117
for the years ended December 31, 1998, 1997 and 1996, respectively.
At December 31, 1998, the Banks have $48,200 available under unused lines of
credit.
In the normal course of business, there are various commitments outstanding,
including commitments to extend credit and commercial letters of credit to
ensure performance of certain commercial customer obligations.
At December 31, 1998 and 1997, these commitments and obligations were as
follows:
1998 1997
---- ----
Loans at fixed rates.......... $5,235 $1,510
Loans at variable rates....... 33,577 14,183
------- -------
$38,812 $15,693
======= =======
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.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dollars in Thousands, Except Per Share Data
15.PROVISION FOR INCOME TAXES
The provision for income taxes for the years ended December 31, 1998, 1997 and
1996 consists of the following:
1998 1997 1996
---- ---- ----
Current $760 $1,036 $1,407
Deferred (735) 211 (54)
---- ------ ------
$25 $1,247 $1,353
=== ====== ======
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, 1998, 1997 and 1996 are as
follows.
1998 1997 1996
---- ---- ----
Computed expected Federal tax at statutory
rate of 34% $(530) $1,354 $1,492
State taxes, net of Federal effect 86 101 188
Tax exempt interest (304) (318) (321)
Change in valuation allowance -- (184) (35)
ESOP fair value adjustment and
dividends 793 155 70
Other, net (20) 139 (41)
---- ------ ------
$25 $1,247 $1,353
=== ====== ======
<PAGE>
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, 1998 and
1997 are as follows:
1998 1997
---- ----
Deferred tax assets:
Loans receivable,
due to allowance for possible loan losses $666 $326
Other liabilities,
due to deferred compensation reserve 418 292
Deferred loan fees 38 44
Net operating loss carryforward 42 46
Prepaid ESOP contribution 379 --
Other 267 172
------ ----
Total gross deferred tax assets $1,810 880
Less valuation allowance -- --
------ ----
Net deferred tax assets $1,810 $880
------ ----
Deferred tax liabilities:
1998 1997
---- ----
Investment securities,
due to reserve for unrealized gains $288 $282
FHLB Stock 127 --
Investment securities,
due to accretion of discount 113 88
Leased assets 319 --
Premises and equipment,
due to difference in depreciation 670 632
Other 40 354
----- -----
Total gross deferred tax liabilities 1,557 1,356
----- -----
Net deferred tax asset (liability) $253 $(476)
==== ======
The valuation allowance for deferred tax assets as of January 1, 1997 was $184.
The net change in the total valuation allowance for the years ended December 31,
1998 and 1997 was zero and a decrease of $184, respectively.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dollars in Thousands, Except Per Share Data
The Company has determined that no valuation allowance is necessary at
December 31, 1998 as it is more likely than not that the gross deferred tax
asset of $1,810 will be principally realized through carryback to taxable income
in prior years, future reversals of existing taxable temporary differences, and,
to a lesser extent, future taxable income. Management believes that future
taxable income will be sufficient to realize the benefits of temporary
differences that cannot be realized through carryback to prior years or through
the reversal of future temporary taxable differences.
16.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, 1998,
1997 and 1996 is as follows:
1998 1997 1996
---- ---- ----
Balance, beginning of year $3,837 $3,349 $3,891
Additions 5,935 2,726 1,723
Repayments (3,042) (2,238) (2,265)
------- ------- -------
Balance, end of year $6,730 $3,837 $3,349
====== ====== ======
At December 31, 1998 and 1997 deposits from related parties were $3,489 and
$3,388, respectively.
17.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. All advances were repaid in 1998, with no advances
outstanding as of December 31, 1998. The FHLB requires the Banks to maintain a
level of investment of FHLB stock. The required amount was approximately $810
at December 31, 1998.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dollars in Thousands, Except Per Share Data
18.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, 1998 December 31, 1997
----------------- -----------------
Carrying Amount Fair Value Carrying Amount Fair Value
--------------- ---------- --------------- ----------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $18,353 $18,353 $29,252 $29,252
Investment securities 87,575 87,575 86,130 86,130
Loans, net 142,936 144,085 134,898 138,647
Purchased mortgage servicing rights 2,086 2,117 1,137 1,317
Mortgage loans held for sale 5,920 5,920 2,208 2,208
Federal Home Loan Bank stock 2,007 2,007 1,840 1,840
Federal Reserve Bank stock 649 649 -- --
Financial liabilities:
Deposits 226,795 226,436 213,841 213,718
Securities sold under agreements to
repurchase 10,388 10,388 7,945 7,945
Short term borrowings 32 32 583 583
Federal Home Loan Bank borrowings -- -- 16,000 15,097
Off balance sheet financial instruments:
Loan commitments 38,645 38,645 15,597 15,597
Letters of credit 167 167 96 96
</TABLE>
Financial assets and financial liabilities other than securities are not traded
in active markets. The above estimates of fair value require subjective
judgements and are approximate. Changes in the following methodologies and
assumptions could significantly affect the estimates. These estimates may also
vary significantly from the amounts that could be realized in actual
transactions.
- - Financial Assets - The estimated fair value approximates the book value of
cash equivalents and time deposits. For investment securities, the fair value
is based on quoted market prices. The fair value of loans is estimated by
discounting future cash flows using current rates at which similar loans
would be made. The fair value of mortgage servicing rights 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 5%. The fair value of
mortgage loans held for sale, Federal Home Loan Bank stock and Federal
Reserve 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.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dollars in Thousands, Except Per Share Data
- - Off-Balance Sheet Financial Instruments - Fair value considers the difference
between current levels of interest rates and committed rates. See note 14 to
the consolidated financial statements.
The Company did not hold any derivative financial instruments in its investment
portfolio at or during the year ended December 31, 1998, with the exception of
collateralized mortgage obligations.
19.SEGMENT INFORMATION
The Company has three reportable segments: commercial banking, mortgage banking,
and administration. The commercial banking segment's 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. The mortgage banking segment's activities
include primarily the origination of residential mortgage loans and subsequent
sale in the secondary market. The administration segment's activities include
strategic planning, management of investment portfolio, accounting, human
resource administration, and data processing.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. Management evaluates segment
performance based on segment profit or loss before income taxes and nonrecurring
gains and losses. Transfers between segments are accounted for at market value.
The Company's reportable segments are strategic business units that offer
different products and services. They are managed separately because each
business requires different technology and marketing strategies.
The following table presents summary income and balances for reportable segments
and reconciles segments to the Company's consolidated totals for the year ended
December 31, 1998:
<TABLE>
<CAPTION>
Commercial Mortgage Intersegment
Banking Banking Administration Eliminations Consolidated
-------- ------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Interest income $19,905 $-- $93 $(3) $19,995
Interest expense 8,438 -- -- (3) 8,435
------ --- --- --- -------
Net interest income before provision 11,467 -- 93 -- 11,560
Provision for loan losses 1,107 -- -- -- 1,107
------ --- --- --- ------
Net interest income 10,360 -- 93 -- 10,453
Non-interest income 2,609 2,904 2,163 (2,708) 4,968
ESOP compensation expense 1,884 717 898 -- 3,499
Other non-interest expense 8,556 1,888 4,176 (1,139) 13,481
------ ----- ----- ------- ------
Income (loss) before taxes and
minority interest 2,529 299 (2,818) (1,569) (1,559)
Income taxes 995 111 (1,081) -- 25
------ ---- ------- ------- -------
Income (loss) before minority interest 1,534 188 (1,737) (1,569) (1,584)
Loss attributable to minority interest -- -- -- 35 35
------ ---- -------- -------- --------
Net income (loss) $1,534 $188 $(1,737) $(1,534) $(1,549)
====== ==== ======== ======== ========
Loans, net $150,942 $-- $-- $-- $150,942
Investments, net 90,231 -- -- -- 90,231
Other assets 35,445 237 30,151 (33,367) 32,466
-------- ---- ------- --------- --------
Total assets $276,618 $237 $30,151 $(33,367) $273,639
======== ==== ======= ========= ========
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dollars in Thousands, Except Per Share Data
SEGMENT INFORMATION CONTINUED FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
Commercial Mortgage Intersegment
Banking Banking Administration Eliminations Consolidated
------- -------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Deposits $229,295 $-- $-- $(2,500) $226,795
Borrowings 16,495 -- -- (6,075) 10,420
Other liabilities 3,811 50 1,307 -- 5,168
-------- --- ------ -------- --------
Total liabilities $249,601 $50 $1,307 $(8,575) $242,383
======== === ====== ======== ========
</TABLE>
The following table presents summary income and balances for reportable segments
and reconciles segments to the Company's consolidated totals for the year ended
December 31, 1997:
<TABLE>
<CAPTION>
Commercial Mortgage Intersegment
Banking Banking Administration Eliminations Consolidated
------- ------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Interest income $20,096 $-- $78 $(83) $20,091
Interest expense 8,420 -- -- (83) 8,337
------- --- --- ----- -------
Net interest income before provision 11,676 -- 78 -- 11,754
Provision for loan losses 263 -- -- -- 263
------ --- --- ----- ------
Net interest income 11,413 -- 78 -- 11,491
Non-interest income 2,335 1,584 10 (60) 3,869
ESOP compensation expense 611 105 -- -- 716
Other non-interest expense 8,637 1,394 691 (60) 10,662
------ ----- --- ---- ------
Income (loss) before taxes and
minority interest 4,500 85 (603) -- 3,982
Income taxes 1,396 30 (179) -- 1,247
----- --- ----- --- -----
Income (loss) before minority interest 3,104 55 (424) -- 2,735
Loss attributable to minority interest -- -- -- 30 30
------ --- ------ --- ------
Net income (loss) $3,104 $55 $(424) $30 $2,765
====== === ====== === ======
Loans, net $141,299 $-- $-- $-- $141,299
Investments, net 87,970 -- -- -- 87,970
Other assets 41,783 1,880 25,257 (27,957) 40,963
-------- ------ ------- --------- --------
Total assets $271,052 $1,880 $25,257 $(27,957) $270,232
======== ====== ======= ========= ========
Deposits $216,388 $125 $-- $(2,672) $213,841
Borrowings 24,528 -- -- -- 24,528
Other liabilities 2,091 417 24 -- 2,532
-------- ---- --- -------- --------
Total liabilities $243,007 $542 $24 $(2,672) $240,901
======== ==== === ======== ========
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dollars in Thousands, Except Per Share Data
The following table presents summary income and balances for reportable segments
and reconciles segments to the Company's consolidated totals for the year ended
December 31, 1996:
<TABLE>
<CAPTION>
Commercial Mortgage Intersegment
Banking Banking Administration Eliminations Consolidated
------- ------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Interest income $17,781 $-- $29 $(58) $17,752
Interest expense 7,053 -- 42 (58) 7,037
------- --- ---- ---- -------
Net interest income before provision 10,728 -- (13) -- 10,715
Provision for loan losses 232 -- -- -- 232
------ --- ---- --- ------
Net interest income 10,496 -- (13) -- 10,483
Non-interest income 1,457 2,037 3,144 (3,162) 3,476
ESOP compensation expense 459 -- -- -- 459
Other non-interest expense 8,088 984 62 (19) 9,115
------ ----- ----- ------- ------
Income (loss) before taxes and
minority interest 3,406 1,053 3,069 (3,143) 4,385
Income taxes 1,004 349 -- -- 1,353
----- ----- ----- ------- -----
Income (loss) before minority interest 2,402 704 3,069 (3,143) 3,032
Loss attributable to minority interest -- -- -- 37 37
------ ---- ------ -------- ------
Net income (loss) $2,402 $704 $3,069 $(3,106) $3,069
====== ==== ====== ======== ======
Loans, net $123,003 $-- $-- $-- $123,003
Investments, net 98,451 -- -- -- 98,451
Other assets 16,887 5,570 25,323 (25,019) 22,761
-------- ------ ------- --------- --------
Total assets $238,341 $5,570 $25,323 $(25,019) $244,215
======== ====== ======= ========= ========
Deposits $196,271 $168 $-- $(2,475) $193,964
Borrowings 17,605 -- -- -- 17,605
Other liabilities 6,281 103 -- -- 6,384
-------- ---- --- -------- --------
Total liabilities $220,157 $271 $-- $(2,475) $217,953
======== ==== === ======== ========
</TABLE>
20.PARENT COMPANY ONLY FINANCIAL DATA
The following sets forth the condensed financial information of Security Bank
Holding Company on a stand-alone basis:
Statement of Condition
(Unconsolidated)
1998 1997
---- ----
ASSETS
Cash $1,626 $2,647
Fed funds sold 985 --
------ ------
Total cash and cash equivalents 2,611 2,647
Investment in the subsidiaries 24,832 25,509
Other assets 2,946 291
------- -------
Total Assets $30,389 $28,447
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities $1,357 $24
------ ---
Total Liabilities 1,357 24
------ ---
Stockholders' equity 29,032 28,423
------ ------
Total liabilities and stockholders'
equity $30,389 $28,447
======= =======
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dollars in Thousands, Except Per Share Data
Statement of Income
(Unconsolidated)
1998 1997 1996
---- ---- ----
INCOME
Income from the subsidiaries $1,569 $3,368 $3,143
Other income 3,591 88 29
----- ----- -----
Total Income 5,160 3,456 3,172
EXPENSES
Other expense 7,679 691 103
----- --- ---
Total Expense 7,679 691 103
(Loss) income before income taxes (2,519) 2,765 3,069
Income tax benefit (970) -- --
-------- ------ ------
Net (loss) income $(1,549) $2,765 $3,069
======== ====== ======
Statement of Cash Flows
(Unconsolidated)
1998 1997 1996
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $(1,549) $2,765 $3,069
Adjustments to reconcile net income
to net cash provided by operating
activities:
Provision for deferred income
taxes (970) -- --
Equity in undistributed losses
(earnings) of subsidiaries 4,132 (2,570) 145
Net change in other liabilities 1,333 23 1
Net change in other assets (2,655) -- 59
Other, net 5,371 31 (515)
------ --- -----
Net cash provided by operating
activities 5,662 249 2,759
----- --- -----
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for investments in and
advances to subsidiaries (4,136) (147) (2,104)
Sale or repayment of investments in
and advances to subsidiaries 684 -- --
Other, net (902) -- --
------ ----- -------
Net cash used by investing activities (4,354) (147) (2,104)
------ ----- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long term debt -- -- (655)
Proceeds from issuance of common stock 48 65 2,753
Dividends paid (1,391) (825) (449)
Other, net (1) 830 94
------- --- -----
Net cash (used) provided by
financing activities (1,344) 70 1,743
------- --- -----
Net (decrease) increase in cash and
cash equivalents (36) 172 2,398
---- --- -----
Cash and cash equivalents at beginning
of year 2,647 2,475 77
------ ------ ------
Cash and cash equivalents at end
of year $2,611 $2,647 $2,475
====== ====== ======
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
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
February 12, 1999:
Year
Elected or
Appointed Year Term
Name Age Position as Director Expires
- ---- --- -------- ----------- ----------
Charles D. 59 Chairman/CEO 1974 1999
Brummel
William A. 52 Director 1991 2001
Lansing
Kenneth C. 58 Director 1992 1999
Messerle
Ronald C. 46 Director 1997 2000
LaFranchi
Glenn A. Thomas 57 Director 1995 2001
R.T. Green 60 Director 1997 2000
Robert Fullhart 67 Director 1997 2000
EXPERIENCE OF DIRECTORS
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 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, Pacific State Bank, Lincoln Security Bank,
Family Security Bank and McKenzie State Bank - all affiliate banks of the
Company. 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 Nominating Committee and is Chairman of the Compensation
Committee.
KENNETH C. MESSERLE sold his share in the family business of Messerle &
Sons, Inc., a cattle and timber corporation, in Coos County. In 1996, he
was elected to the State Legislature for District 48. He is Chairman of the
Audit Committee of the Company. Mr. Messerle also serves on the Board of
Directors of Lincoln Security Bank.
<PAGE>
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 several stations located throughout Oregon, as well as a propane
gas division which serves predominately retail customers. He serves on the
Audit and Nominating Committees of the Company.
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 the Company's and Nominating 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 36 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. He serves on the Audit Committee
of the Company.
During the year ended December 31, 1998 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.
COMMITTEES
The Company's Board of Directors has established a Compensation Committee
comprised of William A. Lansing and Glenn A. Thomas. 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 also has established a standing Audit Committee
consisting of Kenneth C. 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 2000 annual meeting
of shareholders may do so in writing addressed to the Secretary of the
Corporation at the address indicated above no later than November 5, 1999.
<PAGE>
COMPENSATION
Directors of the Company each received $1000 in compensation for each meeting of
the Board of Directors attended in 1998. There is no separate compensation for
participation in any of the Committees. Payment was made in the form of cash or
Company stock, at the election of each Director made on an annual basis.
EXECUTIVE OFFICERS
Charles D. Brummel is Chief Executive Officer of the Company. Edgar B. Martin
is President and Chief Operating Officer of the Company. Ronald L. Farnsworth
is Vice President and Chief Financial Officer of the Company. Antoinette M.
Poole is Executive Vice President and Loan Administrator of the Company.
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:
EDGAR B. MARTIN, age 59 joined the Company in December 1998 as President and
Chief Operating Officer. Martin was previously President and Chief
Executive Officer of Commercial Bank of Salem, Oregon, for the past seven
years, and has over 40 years of experience in banking.
RONALD L. FARNSWORTH, age 28, employed by the Company since 1996, is Vice
President and Chief Financial Officer of the Company. Farnsworth was
previously employed by KPMG Peat Marwick LLP in Portland, Oregon, from 1992
to 1996.
ANTOINETTE M. POOLE, age 52 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.
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, 1998, the Company
believes that all reporting persons made all filings required by Section 16 on a
timely basis.
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth compensation earned for the years ended December
31, 1998, 1997 and 1996 by each executive officer of the Company receiving over
$100,000 of total compensation during such year:
Long term
Annual Compensation compensation awards
------------------- -------------------
Number of
Securities
Other Underlying All
Name and Compensation Options other
Position Year Salary(1) Bonus (2) comp (3)
- --------- ---- --------- ----- ------------ ---------- -----
Charles D. 1998 $166,675 $48,855 $25,692 -- $76,603
Brummel 1997 $130,016 $68,684 $12,887 -- $68,943
Chief 1996 $125,573 $62,700 $12,887 -- $62,048
Executive
Officer
(1) Includes amounts contributed by the named executive officer to the 401k
plan.
(2) Consisting of Directors fees paid from the subsidiary banks and company
provided auto and spousal travel.
(3) Consists of accrued earnings related to the Key Executive Deferred
Compensation Plan for the benefit of the named Executive Officer. See
"Other Benefit Plans".
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.
PHANTOM STOCK DEFERRED COMPENSATION PLAN. In 1996, the Company 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 Company. 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 distributed over a period
not to exceed 60 months after the earlier of the employee's death, disability,
termination of employment, change of control of the Company or the attainment of
the age specified in the Plan agreement between the employee and the Company.
Upon distribution, the deferred
<PAGE>
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 and Mr. Martin are the only participants in the plan.
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, 1998, Mr. Brummel
would have been entitled to a payment of $166,675.
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 generally
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, 1998, options to purchase 151,400 shares, adjusted for stock
dividends and splits, have been granted pursuant to the Plan. There were 52,500
options granted to employees in 1998, 5,520 options exercised and 11,040 options
terminated. The following table sets forth information regarding options held
by named executive officers as of February 12, 1999:
Percentage
Number of
of Total Exercise Expiration
Name Shares Options Price Date
- ---- ------ ---------- ----- ----------
Charles D.Brummel 69,000 54.5% $5.67 April 30, 2005
Edgar B. Martin 15,000 11.9% $8.75 December 30, 2003
Ronald L. Farnsworth 5,000 4.0% $8.75 December 30, 2008
Antoinette M. Poole 2,500 2.0% $8.75 December 30, 2008
<PAGE>
The following table sets forth information regarding option holdings for the
year ended December 31, 1998, with respect to the Executive Officer named in the
Executive Compensation summary table:
# of unexercised options Value of unexercised in-the-money
at year end (1) options at year end
--------------- --------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ------------ ------------- ----------- -------------
Charles D. Brummel 41,400 27,600 $127,512 $85,008
(1) The named Executive Officer has yet to exercise any of the options granted
to him. On December 31, 1998, the fair market value of the Company's common
stock (the fair market value) was $8.75. For purposes of the previous
table, stock options with an exercise price less than the fair market value
are considered to have a value equal to the difference between the fair
market value and the exercise price of the stock option multiplied by the
number of shares covered by the stock option.
OTHER BENEFIT PLANS. The Company sponsors a Key Executive Deferred Compensation
Plan (the ESI Plan) which is a noncontributory defined benefit plan covering a
select group of key management employees. The ESI Plan is an unfunded plan
providing supplementary retirement benefits. Benefits under the ESI Plan are
based on years of service, final average pay and covered compensation. At
December 31, 1998, the ESI Plan covered nine participants, including five
employees, two former employees with vested rights to future benefits, and two
retirees and beneficiaries receiving benefits.
COMPENSATION COMMITTEE REPORT
The intention of the Compensation Committee Report is to describe in general
terms the process the Committee undertakes and the matters it considers in
determining the appropriate compensation for the Company's executive officers,
including the executive officers who are named in the enclosed Summary
Compensation Table (the "Named Executives"). The Company, acting through the
Committee, believes that the Compensation of its Named Executives and other key
personnel should reflect and support the goals and strategies that the Company
has established.
COMPENSATION PHILOSOPHY. The Compensation Committee has two principal objectives
in determining executive compensation (1) to attract, reward and retain key
executive officers and (2) to motivate executive officers to perform to the best
of their abilities and to achieve short-term and long-term corporate objectives
that will contribute to the overall goal of enhancing stockholders value.
ELEMENTS OF EXECUTIVE COMPENSATION. The elements of the Company's compensation
of executive officers are: (1) annual cash compensation in the form of base
salary and incentive bonuses, (2) long-term incentive compensation in the form
of stock options granted under the Company's 1995 Incentive Stock Option Plan;
and (3) other compensation and employee benefits generally available to all
employees of the Company. The Committee believes that the Company's goals are
best supported by attracting and retaining well-qualified executive officers and
other personnel through competitive compensation arrangements, with emphasis on
rewards for outstanding contributions to the Company's success, with a special
<PAGE>
emphasis on aligning the interests of executive officers and other personnel
with those of the Company's shareholders.
Stock Performance Graph
The following chart compares the yearly percentage change in the cumulative
shareholder return on the Company's Common Stock during the period beginning
September 13, 1996, when the Company first issued its shares publicly, and
ending December 31, 1998, with (i) the Total Return Index for the NASDAQ Stock
Market (U.S. Companies) as reported by the Center for Research in Securities
Prices and (ii) the Total Return Index for NASDAQ Bank Stocks as reported by the
Center for Research in Securities Prices. This comparison assumes $100.00 was
invested on September 13, 1996, in the Company's Common Stock and the comparison
groups and assumes the reinvestment of all cash dividends prior to any tax
effect.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHICS
9/13/96 12/31/96 12/31/97 12/31/98
------- -------- -------- --------
SBHC 100.00 103.03 151.66 112.36
NASDAQ Composite(CCMP)100.00 108.61 132.11 184.47
NASDAQ Banks (CBNK) 100.00 112.50 184.04 162.37
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of February 12, 1999, 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
4,458,070 shares of the Company's common stock issued and outstanding. All
shares are held directly unless otherwise indicated.
Percent
Number of of
Name(1) Shares Class
------- --------- -------
Charles D. Brummel 101,817 (2) 2.38%
(Director/Officer)(2)
William A. Lansing (Director)(3) 20,784 (3) *
Kenneth C. Messerle (Director)(4) 5,860 (4) *
Glenn A. Thomas (Director)(5) 6,155 (5) *
Ronald C. LaFranchi (Director)(6) 766,304 (6) 17.18%
R.T. Green (Director)(7) 20,825 (7) *
Robert Fullhart (Director)(8) 9,179 (8) *
Edgar B. Martin (Officer)(9) 5,000 (9) *
Antoinette M. Poole (Officer)(10) 26,060 (10) *
Ronald L. Farnsworth (Officer)(11) 4,487 (11) *
All Directors and Executive
Officers 966,471(2-11) 21.68%
as a Group (10 persons) ======= ======
* 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 57,392 shares in the ESOP (1,076 of which
are allocated to Mr. Brummel's spouse). Also includes 41,400 shares covered
by stock options exercisable in 60 days.
(3) William A. Lansing holds 20,784 shares jointly with his spouse.
(4) Kenneth C. Messerle's holdings include 5,782 shares held jointly with his
spouse and 78 shares held jointly with his grandchildren.
(5) Glenn A. Thomas holds 5,905 shares jointly with his spouse and 250 shares
held jointly with his grandchildren.
(6) Includes 12,408 shares held in a custodial capacity for the benefit of minor
children.
(7) R.T. Green holds 2,063 shares jointly with his spouse and 18,762 shares in
the ESOP.
(8) Robert Fullhart holds 9,179 shares jointly with his spouse.
(9) Edgar B. Martin includes 5,000 shares covered by stock options exercisable
in 60 days.
(10)Antoinette M. Poole includes 239 shares held directly and 25,821 shares in
the ESOP.
(11)Ronald L. Farnsworth holds 4,487 shares in the ESOP (1,354 of which are
allocated to Mr. Farnsworth's spouse).
As of February 12, 1999, 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 964,504
shares, or 21.64% of the total shares outstanding. Trustees of the ESOP are
appointed by the Board of Directors and currently consists of Jim Donnelly,
Partner of Yergen & Meyer, North Bend, 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 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Some of the directors and officers of the Company, 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, 1998, the aggregate outstanding amount of all
loans to officers and directors was approximately $6,730,000, which represented
approximately 23.2% of the Company's consolidated shareholders' equity at that
date. In addition, the Company had deposits from Directors and Officers
totaling $3,489,000 as of December 31, 1998.
No director or principal officer of the Company has a direct family relationship
with another director or executive officer of the Company.
<PAGE>
PART IV
ITEM 14. 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:
None.
<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, Chairman 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 16, 1999:
/s/Edgar B. Martin
- ---------------------------------------------------------------
Edgar B. Martin, President and Chief Operating Officer
/s/Ron L. Farnsworth
- ----------------------------------------------------------------
Ron L. Farnsworth, Vice President and Chief Financial Officer
/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 information extracted from the consolidated
balance sheets and consolidated statements of operations of the company's Form
10-K for the year-to-date, and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<CIK> 0000879116
<NAME> SECURITY BANK HOLDING COMPANY
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 10,686
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 7,667
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 87,575
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 150,423
<ALLOWANCE> 2,294
<TOTAL-ASSETS> 273,639
<DEPOSITS> 226,795
<SHORT-TERM> 10,420
<LIABILITIES-OTHER> 5,168
<LONG-TERM> 0
0
0
<COMMON> 22,256
<OTHER-SE> 6,776
<TOTAL-LIABILITIES-AND-EQUITY> 273,639
<INTEREST-LOAN> 13,444
<INTEREST-INVEST> 4,888
<INTEREST-OTHER> 1,663
<INTEREST-TOTAL> 19,995
<INTEREST-DEPOSIT> 6,995
<INTEREST-EXPENSE> 8,435
<INTEREST-INCOME-NET> 11,560
<LOAN-LOSSES> 1,107
<SECURITIES-GAINS> 22
<EXPENSE-OTHER> 16,980
<INCOME-PRETAX> (1,559)
<INCOME-PRE-EXTRAORDINARY> (1,559)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,549)
<EPS-PRIMARY> (.35)
<EPS-DILUTED> (.35)
<YIELD-ACTUAL> 4.25
<LOANS-NON> 558
<LOANS-PAST> 161
<LOANS-TROUBLED> 309
<LOANS-PROBLEM> 174
<ALLOWANCE-OPEN> 1,429
<CHARGE-OFFS> 280
<RECOVERIES> 38
<ALLOWANCE-CLOSE> 2,294
<ALLOWANCE-DOMESTIC> 750
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,544
</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. 333-28095) on Form S-8 of Security Bank Holding Company of our report dated
January 29, 1999, relating to the consolidated balance sheets of Security Bank
Holding Company and Subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of income, comprehensive income, shareholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 1998, which report appears in the December 31, 1998 annual report
on Form 10-K of Security Bank Holding Company.
KPMG Peat Marwick LLP
Portland, Oregon
March 26, 1999
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 29, 1999, relating to the consolidated balance sheets of
Security Bank Holding Company and Subsidiaries as of December 31, 1998 and
1997, and the related consolidated statements of income, comprehensive income,
shareholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1998, which report appears in the
December 31, 1998 annual report on Form 10-K of Security Bank Holding Company.
KPMG PEAT MARWICK LLP
Portland, Oregon
March 26, 1999
