UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [No Fee Required]
For the quarterly period ended June 30, 1999 or
[ ] 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
(Exact name of issuer as specified in its charter)
Oregon 93-0800253
(State or other jurisdiction of (I.R.S. 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)
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
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
Class Outstanding at July 30, 1999
Common Stock, $5.00 par value 4,458,333
<PAGE>
==============================================================================
Form 10-Q Table of Contents
Part I
Item 1. Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Part II
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
SECURITY BANK HOLDING COMPANY & SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
ASSETS June 30, 1999 Dec. 31, 1998
- ------ ------------- -------------
(Unaudited)
Cash and cash equivalents:
Cash and due from banks $9,530 $10,686
Federal funds sold 7,916 7,667
----- -----
Total cash and cash equivalents 17,446 18,353
Investment securities available for sale 81,765 87,575
Loans, net 164,700 140,123
Mortgage loans held for sale, at cost which
approximates market 6,340 5,920
Net investment in direct financing leases 2,828 2,813
Purchased mortgage servicing rights 2,448 2,086
Premises and equipment, net 12,605 10,518
Federal Home Loan Bank stock, at cost 2,100 2,007
Federal Reserve Bank stock, at cost 797 649
Other assets 4,302 3,595
----- -----
Total assets $295,331 $273,639
======== ========
LIABILITIES, MINORITY INTEREST AND SHAREHOLDERS' EQUITY
- -------------------------------------------------------
Liabilities:
Deposits:
Demand $48,876 $40,539
NOW accounts 33,960 35,777
Money market accounts 46,366 40,883
Savings accounts 22,231 21,341
Time deposit 96,022 88,255
------ ------
Total deposits 247,455 226,795
Securities sold under agreements to repurchase 11,935 10,388
Short term borrowings 491 32
Other borrowings 800 --
Other liabilities 2,948 5,168
----- -----
Total liabilities 263,629 242,383
------- -------
Minority interest in subsidiaries 3,368 2,224
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 4,458,293 shares in 1999
(4,451,196 shares in 1998) 22,291 22,256
Surplus 3,899 3,863
Retained earnings 2,732 2,454
Accumulated other comprehensive (loss) income (588) 459
---- ---
Total shareholders' equity 28,334 29,032
------ ------
Total liabilities, minority interest and
shareholders' equity $295,331 273,639
======== =======
See accompanying notes to condensed consolidated financial statements.
<PAGE>
SECURITY BANK HOLDING COMPANY & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED - DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Quarter Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
Interest income:
Interest on loans $3,704 $3,344 $7,077 $6,638
Income on direct financing leases 60 70 124 140
Interest and dividends on securities:
Taxable 899 1,005 1,819 2,094
Exempt from Federal income tax 184 201 376 387
Dividend income on Federal Home Loan
Bank stock 38 36 74 76
Dividend income on Federal Reserve
Bank stock 12 -- 21 --
Interest on Federal funds sold 116 331 266 569
--- --- --- ---
Total interest income 5,013 4,987 9,757 9,904
----- ----- ----- -----
Interest expense:
Deposits
NOW 124 121 243 235
Money market 388 765 624
Savings 132 126 254 243
Time 1,113 1,187 2,256 2,342
Securities sold under agreements to
repurchase 113 78 205 161
Short term borrowings 6 5 9 11
Federal Home Loan Bank borrowings -- 216 -- 439
Other borrowings 15 -- 15 --
-- -- -- --
Total interest expense 1,891 2,044 3,747 4,055
----- ----- ----- -----
Net interest income before provision
for loan losses 3,122 2,943 6,010 5,849
Provision for loan losses 117 63 221 124
--- -- --- ---
Net interest income 3,005 2,880 5,789 5,725
----- ----- ----- -----
Other income:
Service charges on deposit accounts 315 290 627 571
Gain on sale/call of investments available
for sale, net -- 3 184 5
Loan servicing fees 83 62 160 123
Sold real estate loan fees 578 628 1,210 1,237
Other 330 213 525 392
--- --- --- ---
Total other income 1,306 1,196 2,706 2,328
----- ----- ----- -----
Other expense:
Salaries and employee benefits 2,122 1,690 4,092 3,436
Occupancy of bank premises 259 204 466 395
Furniture and equipment 351 224 578 459
Professional fees 56 183 236 397
FDIC assessment 7 5 15 13
Supplies 164 79 300 169
ESOP compensation -- 168 -- 335
Other 585 497 1,139 1,029
--- --- ----- -----
Total other expense 3,544 3,050 6,826 6,233
----- ----- ----- -----
Income before provision for
income taxes 767 1,026 1,669 1,820
Provision for income taxes 286 365 588 649
--- --- --- ---
Net income before minority interest 481 661 1,081 1,171
Net loss (income) attributable to minority
interest 84 (12) 89 (21)
-- --- -- ---
Net income $565 $649 $1,170 $1,150
==== ==== ====== ======
Net income per share - basic $0.13 $0.16 $0.26 $0.28
===== ===== ===== =====
Net income per share - diluted $0.13 $0.16 $0.26 $0.28
===== ===== ===== =====
5% stock dividend declared July 22, 1999.
See accompanying notes to condensed consolidated financial statements.
<PAGE>
SECURITY BANK HOLDING COMPANY & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED - DOLLARS IN THOUSANDS)
Quarter Ended Six Months Ended
June 30, June 30,
-------- --------
1999 1998 1999 1998
---- ---- ---- ----
Net Income $565 $649 $1,170 $1,150
Other comprehensive income, net of income tax:
Unrealized loss on investment securities
(Net of tax of $437 and $1 for the
quarter ended June 30, 1999 and 1998
and $644 and $10 for the Six months ended
June 30, 1999 and 1998, respectively.) (722) (2) (1,047) (32)
---- -- ------ ---
Comprehensive (loss) income $(157) $647 $123 $1,118
====== ==== ==== ======
See accompanying notes to condensed consolidated financial statements.
<PAGE>
SECURITY BANK HOLDING COMPANY & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED - DOLLARS IN THOUSANDS)
Six months ended June 30,
1999 1998
---- ----
Cash flows provided by operating activities:
Net income $1,170 $1,150
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation 439 352
Net amortization of investment premiums/discounts 254 49
Deferred tax expense (benefit) 277 (798)
Provision for loan losses 221 124
Origination of mortgage loans held for sale (59,831) (58,546)
Proceeds from mortgage loans sold 59,411 58,076
Net gain on call/sale of investment securities
available for sale (184) (5)
Federal Home Loan Bank stock dividend (75) (72)
ESOP related compensation expense -- 454
Increase in mortgage servicing rights (362) (719)
Increase in other assets (707) (31)
(Decrease) increase in other liabilities (1,853) 1,403
Net (income) loss attributable to minority interest (89) 21
--- --
Net cash (used in) provided by
operating activities (1,329) 1,458
Cash flows from investing activities:
Purchase of investment securities available for sale (25,592) (17,302)
Proceeds from sale of securities available for sale 17,471 5,016
Proceeds from maturities and call of investment
securities available for sale 12,170 17,891
Net loan (originations) repayments (19,807) 1,098
Purchase of participations (4,991) --
Additions to premises and equipment (2,526) (1,381)
Purchase of Federal Home Loan Bank stock (18) (21)
Purchase of Federal Reserve Bank stock (148) --
Originations of direct financing leases (807) (483)
Gross payments on direct financing leases 792 451
--- ---
Net cash (used in) provided by
investing activities (23,456) 5,269
Cash flows from financing activities:
Net increase in deposits 20,660 7,068
(Decrease) increase in securities sold with
agreements to repurchase 1,547 (852)
Decrease of Federal Home Loan Bank borrowings -- (2,000)
Increase in other borrowings 800 --
Proceeds from issuance of common stock 71 72
Payment of dividends (892) (812)
Minority interest in subsidiaries 1,233 --
(Decrease) increase in short term borrowings 459 (12)
--- ---
Net cash provided by financing activities 23,878 3,464
Net (decrease) increase in cash and
cash equivalents (907) 10,191
Cash and cash equivalents at beginning of period 18,353 29,252
------ ------
Cash and cash equivalents at end of period $17,446 $39,443
======= =======
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $3,417 $4,026
Income taxes $136 $638
Supplemental disclosures of investing activities:
Unrealized loss on investment
securities available for sale, net of tax $(1,047) (32)
Loans transferred to other real estate owned $-- $--
See accompanying notes to condensed consolidated financial statements.
<PAGE>
SECURITY BANK HOLDING COMPANY & SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) Basis of Financial Statement Presentation
-----------------------------------------
The interim condensed consolidated financial statements include the accounts of
Security Bank Holding Company (the Company), a bank holding company, its
wholly-owned subsidiaries, Security Bank, Pacific State Bank (Pacific State) and
Family Security Bank (Family Security), its majority-owned subsidiaries, Lincoln
Security Bank (Lincoln Security), McKenzie State Bank (McKenzie State), and
Oregon State Bank (Oregon State), and Security Bank's wholly-owned subsidiary,
Alland, Inc.. All significant intercompany accounts and transactions have been
eliminated in consolidation. The interim condensed consolidated financial
statements are not audited, but include all adjustments that the Company
considers necessary for a fair presentation of the results of operations for
such interim periods. In preparing the condensed consolidated financial
statements, management is required to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities as of the date of the balance sheets and income and
expenses for the periods. Actual results could differ from those estimates. The
balance sheet data as of December 31, 1998 was derived from audited financial
statements, but does not include all disclosures contained in the Company's 1998
Annual Report to Shareholders. The interim condensed consolidated financial
statements should be read in conjunction with the December 31, 1998 consolidated
financial statements, including the notes thereto, included in the Company's
1998 Annual Report to Shareholders. Certain amounts for 1998 have been
reclassified to conform with the 1999 presentation. The results of operations
for the interim periods shown in this report are not necessarily indicative of
results for any future interim period or the entire fiscal year.
(2) Earnings Per Share
------------------
Basic and diluted earnings per share are based on the weighted average number of
common shares outstanding during each period, with diluted including the effect
of potentially dilutive common shares. For the quarter and six months ended June
30, 1998 the weighted average number of common shares outstanding did not
include 384,784 and 455,824 shares respectively, held by the Company's ESOP as
these shares had not been allocated to participant accounts, nor had they been
committed to be released. Stock options outstanding for diluted earnings per
share are calculated using the treasury stock method. The following table
presents information relating to the weighted average number of common shares
outstanding for all periods presented for both basic and diluted earnings per
share calculations:
Three months Six months
ended June 30, ended June 30,
-------------- --------------
1999 1998 1999 1998
---- ---- ---- ----
Weighted average shares - basic 4,458,269 4,063,441 4,457,609 4,061,797
Potential dilution of stock options 24,487 33,569 25,127 34,476
------ ------ ------ ------
Weighted average shares - diluted 4,482,756 4,097,010 4,482,736 4,096,273
(3) Other Borrowings
----------------
At June 30, 1999 the Company had $800,000 in borrowings from a third party bank.
The one year, renewable, $1,000,000 Draw Note Line of Credit was secured to
complete the capitalization of Oregon State Bank, which commenced operations on
April 1, 1999. The Draw Note Line of Credit is a variable rate note based on
prime, which was 7.75% at June 30, 1999 and is due March 31, 2000.
<PAGE>
SECURITY BANK HOLDING COMPANY & SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(4) Segment Information
The following table presents summary income and balances for reportable segments
and reconciles segments to the company's consolidated totals for the quarter
ended June 30, 1999.
<TABLE>
<CAPTION>
Commercial Mortgage Intersegment
Banking Banking Administration Eliminations Consolidated
<S> <C> <C> <C> <C> <C>
------- ------- -------------- ------------ ------------
Interest Income $5,032 $-- $-- $(19) $5,013
Interest Expense 1,895 -- 15 (19) 1,891
----- -- -- ---- -----
Net interest income
before provision 3,137 -- (15) -- 3,122
Provision for loan loss 117 -- -- -- 117
--- -- -- -- ---
Net interest income 3,020 -- (15) -- 3,005
Non-interest income 706 662 955 (1,017) 1,306
Other non-interest expense 2,912 532 533 (433) 3,544
----- --- --- ----- -----
Income before taxes and
minority interest 814 130 407 (584) 767
Income taxes 315 49 (78) -- 286
--- -- ---- -- ---
Income before minority interest 499 81 485 (584) 481
Loss attributable to minority interest-- -- -- 84 84
-- -- -- -- --
Net income $499 $81 $485 $(500) $565
==== === ==== ====== ====
</TABLE>
The following table presents summary income and balances for reportable segments
and reconciles segments to the company's consolidated totals for the six months
ended June 30, 1999.
<TABLE>
<CAPTION>
Commercial Mortgage Intersegment
Banking Banking Administration Eliminations Consolidated
------- ------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Interest Income $9,779 $-- $12 $(34) $9,757
Interest Expense 3,766 -- 15 (34) 3,747
----- -- -- ---- -----
Net interest income
before provision 6,013 -- (3) -- 6,010
Provision for loan loss 221 -- -- -- 221
--- -- -- -- ---
Net interest income 5,792 -- (3) -- 5,789
Non-interest income 1,476 1,362 2,008 (2,140) 2,706
Other non-interest expense 5,150 1,046 1,320 (690) 6,826
----- --- ----- ----- -----
Income before taxes and
minority interest 2,118 316 685 (1,450) 1,669
Income taxes 757 114 (283) -- 588
--- -- ----- -- ---
Income before minority interest 1,361 202 968 (1,450) 1,081
Loss attributable to minority interest-- -- -- 89 89
-- -- -- -- --
Net income $1,361 $202 $968 $(1,361) $1,170
====== ==== ====== ======== ======
</TABLE>
<PAGE>
The following table presents summary income and balances for reportable segments
and reconciles segments to the company's consolidated totals for the quarter
ended June 30, 1998.
<TABLE>
<CAPTION>
Commercial Mortgage Intersegment
Banking Banking Administration Eliminations Consolidated
------- ------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Interest Income $4,948 $-- $40 $(1) $4,987
Interest Expense 2,045 -- -- (1) 2,044
----- -- -- --- -----
Net interest income
before provision 2,903 -- 40 -- 2,943
Provision for loan loss 63 -- -- -- 63
-- -- -- -- --
Net interest income 2,840 -- 40 -- 2,880
Non-interest income 639 690 1,076 (1,209) 1,196
Other non-interest expense 2,049 465 829 (293) 3,050
----- --- --- ----- -----
Income before taxes and
minority interest 1,430 225 287 (916) 1,026
Income taxes 502 79 (216) -- 365
--- -- ----- -- ---
Income before minority interest 928 146 503 (916) 661
Loss attributable to minority interest-- -- -- (12) (12)
-- -- -- ---- ----
Net income $928 $146 $503 $(928) $649
==== ==== ==== ====== ====
</TABLE>
The following table presents summary income and balances for reportable segments
and reconciles segments to the company's consolidated totals for the six months
ended June 30, 1998.
<TABLE>
<CAPTION>
Commercial Mortgage Intersegment
Banking Banking Administration Eliminations Consolidated
------- ------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Interest Income $9,858 $-- $47 $(1) $9,904
Interest Expense 4,056 -- -- (1) 4,055
----- -- -- --- -----
Net interest income
before provision 5,802 -- 47 -- 5,849
Provision for loan loss 124 -- -- -- 124
--- -- -- -- ---
Net interest income 5,678 -- 47 -- 5,725
Non-interest income 1,231 1,373 2,062 (2,338) 2,328
Other non-interest expense 4,112 956 1,707 (542) 6,233
----- --- ----- ----- -----
Income before taxes and
minority interest 2,797 417 402 (1,796) 1,820
Income taxes 980 147 (478) -- 649
--- --- ----- -- ---
Income before minority interest 1,817 270 880 (1,796) 1,171
Loss attributable to minority interest-- -- -- (21) (21)
-- -- -- ---- ----
Net income $1,817 $270 $880 $(1,817) $1,150
====== ==== ==== ======== ======
</TABLE>
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
FOR THE QUARTER ENDED JUNE 30, 1999 AND 1998
GENERAL. Net income decreased to $565,000 for the three months ended June 30,
1999 from $649,000 for the same period in 1998, a 13% decrease. The decrease in
net income is attributable to the Company's new investments in McKenzie State
and Oregon State, which commenced operations in November 1998 and April 1999,
respectively.
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 increased $179,000 or
6% for the three months ended June 30, 1999 over the same period in 1998. Of the
increase of $179,000, an increase in volume accounted for an increase of
$197,000 offset by a decrease in asset yield of $18,000. Average interest
earning assets increased $10.5 million, while average costing liabilities
increased $11.4 million. The increase in average interest earning assets and
interest bearing liabilities resulted from increases in loans, deposits, and fed
funds purchased, offset by a decrease in average borrowings from the Federal
Home Loan Bank of $14 million.
The average net interest spread increased from 4.68% to 4.80%, mainly due to the
repayment of all Federal Home Loan Advances in December 1998. Average rates paid
decreased 41 basis points to 3.07% in the second quarter of 1999 from 3.48% in
the second quarter of 1998, primarily from a reduction in deposit cost, and the
repayment of all Federal Home Loan Bank advances. In addition, average earning
asset yields decreased 29 basis points from 8.16% to 7.87%. The low/flat
interest rate yield curve and increased competitive pressures caused variable
rate repricing on assets over the period decreasing asset yields. The Company's
net interest margin for the second quarter of 1999 was 4.90%, an increase of 8
basis points from 4.82% for the second quarter of 1998.
PROVISION FOR LOAN LOSSES. The loan loss provision during the three month period
ended June 30, 1999, was $117,000 and $63,000 for the same period in 1998. The
increase is primarily due to higher reserve levels at June 30, 1999 as compared
to June 30, 1998. The increase in the reserve ratio to 1.5% in December 1998 was
in response to regulatory recommendations, which did not address specific loans
within the Bank's portfolio, but rather recommended the reserve be increased to
more closely match the Company's peer group. The loss reserve ratio for the
Company's peer group ranges from 1.2% to 1.5%. At June 30, 1999 the consolidated
loan loss reserve ratio was 1.39% of total loans, due to the additions of
McKenzie State Bank and Oregon State Bank with loss reserve ratios of .91% and
.37% at June 30, 1999. The underwriting standards and types of loans at McKenzie
State Bank and Oregon State Bank are of the same quality as the other banks and
the loss reserve ratios will be increased to 1.5% over a period of three years,
as management does not anticipate significant losses during the start-up phase.
Net charge-offs during the three month periods were $28,000 and $120,000 for
1999 and 1998, respectively.
<PAGE>
Management believes the loan loss provision maintains the reserve for loan
losses at an appropriate level. The reserve for loan losses was $2,459,000 at
June 30 1999, as compared to $1,389,000 at June 30 1998.
Non-performing assets (defined as loans on non-accrual status, 90 days or more
past due, and other real estate owned) were $851,000 and $886,000 at June 30,
1999 and 1998, respectively. Management believes the loans are adequately
secured and that no significant losses will be incurred.
OTHER INCOME. Other income increased 9% to $1,306,000 for the three months ended
June 30, 1999 as compared to $1,196,000 for the same period in 1998. The
increase in other income is due primarily to increased fee income. Increases
were also experienced in service charge income on deposit accounts due to an
increase in average deposits, and loan servicing fees resulting from increases
in the mortgage servicing portfolio.
OTHER EXPENSE. Other expense (including ESOP Compensation expense as discussed
below) increased 16% to $3,544,000 for the three months ended June 30, 1999
compared to $3,050,000 for the same period in 1998. Salaries and employee
benefits, the largest non-interest expense, increased $432,000 or 25.6%. The
increase in salaries is primarily due to the additions of McKenzie State Bank
and Oregon State Bank, and of staff to support the growth with the new banks.
Additional increases were experienced in fixed assets and other expense
resulting from the Company's overall growth strategy.
ESOP COMPENSATION EXPENSE. The Company sponsors an Employee Stock Ownership Plan
(ESOP), an employee-retirement benefit plan which owns approximately 22% of the
common stock of the Company. In December 1998, the ESOP debt was repaid in full,
thereby releasing all remaining shares for allocation and reducing ESOP
compensation expense to zero for 1999.
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
GENERAL. Net income increased to $1,170,000 for the six months ended June 30,
1999 from $1,150,000 for the same period in 1998, a 1.7% increase. The increase
in net income is mostly attributable to increases in other income due to gains
on the sale of investment securities available for sale and an increase in fee
income, coupled with no ESOP compensation expense in 1999 as the Company
deleveraged the ESOP in December 1998.
NET INTEREST INCOME. Net interest income before the provision for loan losses
increased $161,000 or 2.8% for the six months ended June 30, 1999 over the same
period in 1998. Of the increase of $161,000, an increase in volume accounted for
an increase of $199,000 offset by a decrease in spread of $38,000. Average
interest earning assets increased $7.1 million, while average interest costing
liabilities increased $8.6 million. The increase in average interest earning
assets and interest bearing liabilities resulted from increases in loans,
deposits, and fed funds purchased, offset by a decrease in average borrowings
from the Federal Home Loan Bank of $14 million.
The average net interest spread increased from 4.67% to 4.70%, mainly due to the
repayment of all Federal Home Loan Advances in December 1998. Average rates paid
decreased 38 basis points to 3.11% for the six months ended June 30, 1999 from
3.48% for the same period of 1998, primarily from a reduction in deposit cost,
and the repayment of all Federal Home Loan Bank advances. In addition, average
earning asset yields decreased 34 basis points from 8.16% to 7.82%. The low/flat
interest rate yield curve and increased competitive pressures caused variable
rate repricing on assets over the period decreasing asset yields. The Company's
net interest margin for the six months ended June 30, 1999 was 4.81%, a decrease
of 1 basis point from 4.82% for the same period of 1998.
PROVISION FOR LOAN LOSSES. The loan loss provision during the six-month period
ended June 30, 1999, was $221,000 and $124,000 for the same period in 1998. The
increase is primarily due to higher reserve levels at June 30, 1999 as compared
to June 30, 1998. The increase in the reserve ratio to 1.5% in December 1998 was
in response to regulatory recommendations, which did not address specific loans
within the Bank's portfolio, but rather recommended the reserve be increased to
more closely match the Company's peer group. The loss reserve ratio for the
Company's peer group ranges from 1.2% to 1.5%. Net charge-offs during the six
month periods were $56,000 and $165,000 for 1999 and 1998, respectively.
<PAGE>
Management believes the loan loss provision maintains the reserve for loan
losses at an appropriate level. The reserve for loan losses was $2,459,000 at
June 30, 1999, as compared to $1,389,000 at June 30, 1998.
Non-performing assets (defined as loans on non-accrual status, 90 days or more
past due, and other real estate owned) were $851,000 and $886,000 at June 30,
1999 and 1998, respectively. Management believes the loans are adequately
secured and that no significant losses will be incurred.
OTHER INCOME. Other income increased 16% to $2,706,000 for the six months ended
June 30, 1999 as compared to $2,328,000 for the same period in 1998. The
increase in other income is due to gains on the sale of investment securities
available for sale and an increase in fee income. The Company utilized overnight
borrowings at December 31, 1998 to pay-off longer term Federal Home Loan Bank
advances in December 1998. In January 1999, facing the possibility of a rising
interest rate environment, the Company sold approximately $8 million in
investments available for sale to repay the overnight borrowings.
OTHER EXPENSE. Other expense (including ESOP Compensation expense as discussed
below) increased 9.5% to $6,826,000 for the six months ended June 30, 1999
compared to $6,233,000 for the same period in 1998. Salaries and employee
benefits, the largest non interest expense, increased 19%. The increase in
salaries is primarily due to the addition of McKenzie State Bank and Oregon
State Bank, and of staff to support the growth with the new banks. Additional
increases were experienced in fixed assets and other expense resulting from the
Company's overall growth strategy.
ESOP COMPENSATION EXPENSE. The Company sponsors an Employee Stock Ownership Plan
(ESOP), an employee-retirement benefit plan which owns approximately 22% of the
common stock of the Company. In December 1998, the ESOP debt was repaid in full,
thereby releasing all remaining shares for allocation and reducing ESOP
compensation expense to zero for 1999.
FINANCIAL CONDITION
Total assets have increased 8% to $295.3 million at June 30, 1999 compared to
$273.6 million at December 31, 1998.
Net loans and leases increased in the period from $148.9 million at December 31,
1998 to $173.9 million at June 30, 1999. The increase is due to the growth
strategy of the Company and the addition of the new banks, McKenzie State Bank
and Oregon State Bank. McKenzie State Bank's net loans increased $4.5 million to
$6.1 million at June 30, 1999 compared to $1.6 million at December 31, 1998 and
Oregon State Bank's net loans increased to $4.3 million at June 30, 1999.
The increase in premises and equipment during the second quarter of 1999 results
from expansion activities underway by the Company. Additions represent costs
incurred at McKenzie State Bank, Oregon State Bank, and for the construction of
the new main branch of Security Bank in Coos Bay, Oregon.
Deposit growth has continued for the second quarter of 1999, increasing $20.7
million to $247.5 million at June 30, 1999, compared to $226.8 million at
December 31, 1998. The growth in 1999 has been predominantly in money market and
demand deposits.
Securities sold under agreements to repurchase increased $1.5 million to $11.9
million at June 30, 1999, compared to $10.4 million at December 31, 1998. The
increase is due to an increase in fed funds purchased, used to fund asset
growth, and an increase in commercial repurchase agreements.
Short term borrowings increased $459,000 to $491,000 at June 30, 1999 compared
to $32,000 at December 31, 1999. The increase is due to Treasury, Tax and Loan
receipts which fluctuate seasonally.
Other borrowings increased to $800,000 at June 30, 1999. The increase is due to
borrowings from a third party bank to complete the capitalization of Oregon
State Bank, which commenced operations April 1, 1999.
LIQUIDITY
Liquidity enables the Company to meet the withdrawals of its depositors and the
borrowing needs of its loan customers. The Company maintains its liquidity
position through maintenance of cash resources and a stable core deposit base. A
further source of liquidity is the Company's ability to borrow funds. The
Company maintains three unsecured lines of credit totaling $11.0 million for the
purchase of funds on an overnight basis. The Company is also a member of the
<PAGE>
Federal Home loan Bank which provides a secured line of credit in the amount of
$55.4 million, and other funding opportunities for liquidity and asset/liability
matching. Over the past four years these lines have been used periodically. As
of June 30, 1999 no funds were borrowed under the Company's unsecured lines of
credit and no funds were borrowed 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 past several years. Short-term
deposits have continued to grow and excess investable cash is invested on a
short-term basis into Federal funds sold. The Company's primary source of funds
is consumer deposits and commercial accounts. These funds are not subject to
significant movements as a result of changing interest rates and other economic
factors, and therefore enhance the Company's long term liquidity.
CAPITAL RESOURCES
Beginning in 1990, federal regulators required the calculation of Risk-based
Capital. This is an analysis that weights balance sheet and off-balance sheet
items for their inherent risk. It requires minimum standards for Risk-based
Capital by Capital Tier. Full implementation of this analysis was required in
1992, requiring a minimum total Risk-based Capital ratio of 8.00%, a minimum
Tier 1 Capital Ratio of 4.00% and a minimum Leverage Capital Ratio of 4.00%.
At June 30, 1999, the Company's estimated regulatory capital ratios were as
follows: Total Risk-based Capital Ratio of 16.22%, Tier 1 Capital Ratio of
15.04% and Leverage Capital Ratio of 10.69%. This was compared to 17.15%, 15.94%
and 10.72% for total Risk-based Capital Ratio, Tier 1 Capital Ratio and Leverage
Capital Ratio, respectively, at December 31, 1998. If the Company were fully
leveraged, 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
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.
<PAGE>
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 budgeted
$160,000 for Year 2000 related costs and has expensed $25,000 in Year 2000
related costs at June 30, 1999.
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.
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:
<PAGE>
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 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.
<PAGE>
Item 3. 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 loan
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).
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%
<PAGE>
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 1998 and 1999 were these limitations exceeded. Management has assessed
these limits and believes that there has been no material change since
December 31, 1998.
INFLATION
The primary impact of inflation on the Company's operations is increased asset
yields, deposit costs and operating overhead. Unlike most industrial companies,
virtually all of the assets and liabilities of a financial institution are
monetary in nature. As a result, interest rates generally have a more
significant impact on a financial institution's performance than the effects of
general levels of inflation. Although interest rates do not necessarily move in
the same direction or to the same extent as the prices of goods and services,
increases in inflation generally have resulted in increased interest rates. The
effects of inflation can magnify the growth of assets, and if significant, would
require that equity capital increase at a faster rate than would otherwise be
necessary.
<PAGE>
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS.
None.
Item 2. CHANGES IN SECURITIES.
Not applicable.
Item 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS.
An annual meeting of the shareholders of Security Bank Holding Company was
held on April 14, 1999, in Coos Bay, Oregon. Matters voted upon by the
shareholders were the election of two Directors for three year terms to
expire in the year 2002. A quorum was reached, and the results of the
election are as follows:
# votes for # votes against
----------- ---------------
Charles D. Brummel 3,812,255 4,570
Kenneth C. Messerle 3,814,705 2,120
As a result of the vote, each of the Directors above were elected for a
three year term to expire in the year 2002. There were 18,782 shares
abstained and 4,570 withheld.
Item 5. OTHER INFORMATION.
Not applicable.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
The following exhibit is being filed here with:
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K.
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATED: July 30, 1999.
SECURITY BANK HOLDING COMPANY
By: /s/ Charles D. Brummel
----------------------
Charles D. Brummel
Chairman and Chief Executive Officer
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
The Consolidated balance sheets and consolidated statements of operations of the
company's form 10-Q for the year to date
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 9,530
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 7,916
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 81,765
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 167,159
<ALLOWANCE> 2,459
<TOTAL-ASSETS> 295,331
<DEPOSITS> 247,455
<SHORT-TERM> 13,226
<LIABILITIES-OTHER> 2,948
<LONG-TERM> 0
0
0
<COMMON> 22,291
<OTHER-SE> 6,043
<TOTAL-LIABILITIES-AND-EQUITY> 295,331
<INTEREST-LOAN> 7,077
<INTEREST-INVEST> 2,195
<INTEREST-OTHER> 485
<INTEREST-TOTAL> 9,757
<INTEREST-DEPOSIT> 3,518
<INTEREST-EXPENSE> 3,747
<INTEREST-INCOME-NET> 6,010
<LOAN-LOSSES> 221
<SECURITIES-GAINS> 184
<EXPENSE-OTHER> 6,826
<INCOME-PRETAX> 1669
<INCOME-PRE-EXTRAORDINARY> 1170
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1170
<EPS-BASIC> 0.26
<EPS-DILUTED> 0.26
<YIELD-ACTUAL> 4.7
<LOANS-NON> 851
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,294
<CHARGE-OFFS> 89
<RECOVERIES> 32
<ALLOWANCE-CLOSE> 2,459
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
