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 March 31, 2000 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 .
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Commission file number 0-27590
INDEPENDENT FINANCIAL NETWORK, INC.
(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 .
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(Address of Principal Executive Offices) (Zip Code)
(541) 267-5356
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(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 May 10, 2000
----- --------------------------
Common Stock, $5.00 par value 4,914,977
<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.
INDEPENDENT FINANCIAL NETWORK & SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
ASSETS Mar.31,1200 Dec.31, 1999
- ------ ----------- ------------
Cash and cash equivalents:
Cash and due from banks $11,839 $13,632
Federal funds sold 3,397 3,060
----- -----
Total cash and cash equivalents 15,236 16,692
Investment securities available for sale 90,298 87,904
Loans, net 190,320 181,385
Mortgage loans held for sale, at cost which
approximates market 3,056 3,925
Net investment in direct financing leases 3,196 2,725
Mortgage servicing rights 2,727 2,717
Premises and equipment, net 14,261 13,785
Federal Home Loan Bank stock, at cost 2,216 2,181
Federal Reserve Bank stock, at cost 759 756
Other assets 5,079 4,531
------- -------
Total assets $327,148 $316,601
======== ========
LIABILITIES, MINORITY INTEREST AND SHAREHOLDERS' EQUITY
- -------------------------------------------------------
Liabilities:
Deposits:
Demand $50,294 $43,610
NOW accounts 38,565 36,996
Money market accounts 54,218 50,841
Savings accounts 22,333 22,450
Time deposit 117,043 110,072
------- -------
Total deposits 282,453 263,969
Securities sold under agreements to repurchase 8,979 13,501
Short term borrowings 100 417
Federal Home Loan Bank borrowings -- 4,000
Other borrowings 1,200 800
Other liabilities 2,407 1,890
------- -------
Total liabilities 295,139 284,577
------- -------
Minority interest in subsidiaries 3,171 3,306
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 4,914,942 shares in 2000
(4,914,872 shares in 1999) 24,575 24,575
Surplus 4,779 4,778
Retained earnings 671 413
Accumulated other comprehensive loss (1,187) (1,048)
------- -------
Total shareholders' equity 28,838 28,718
------- -------
Total liabilities, minority interest and shareholders'
equity $327,148 $316,601
======== ========
See accompanying notes to condensed consolidated financial statements.
<PAGE>
INDEPENDENT FINANCIAL NETWORK & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED-DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Three months ended
March 31,
---------
2000 1999
Interest income:
Interest on loans $4,447 $3,372
Income on direct financing leases 65 63
Interest and dividends on securities:
Taxable 1,134 918
Exempt from Federal income tax 178 192
Dividend income on Federal Home Loan Bank stock 35 39
Dividend income on Federal Reserve Bank stock 11 10
Interest on Federal funds sold 55 150
-- ---
Total interest income 5,925 4,744
----- -----
Interest expense:
Deposits
NOW 152 119
Money market 517 377
Savings 131 122
Time 1,488 1,143
Securities sold under agreements to repurchase 130 92
Short term borrowings 6 3
Federal Home Loan Bank borrowings 8 --
Other borrowings 21 --
-- --
Total interest expense 2,453 1,856
----- -----
Net interest income 3,472 2,888
Provision for loan losses 146 104
--- ---
Net interest income after provision for loan losses 3,326 2,784
----- -----
Other income:
Service charges on deposit accounts 342 312
Gain on sale/call of investments available for sale, net -- 184
Loan servicing fees 90 77
Sold real estate loan fees 351 631
Other 241 196
--- ---
Total other income 1,024 1,400
----- -----
Other expense:
Salaries and employee benefits 2,277 1,971
Occupancy of bank premises 276 207
Furniture and equipment 449 227
Professional fees 271 175
FDIC assessment 13 7
Supplies 113 135
Other 580 560
--- ---
Total other expense 3,979 3,282
----- -----
Income before provision for income taxes 371 902
Provision for income taxes 116 302
--- ---
Net income before minority interest 255 600
Net loss attributable to minority interest 5 5
- -
Net income $260 $605
==== ====
Net income per share - Basic $0.05 $0.12
===== =====
Net income per share - Diluted $0.05 $0.12
===== =====
See accompanying notes to condensed consolidated financial statements.
<PAGE>
INDEPENDENT FINANCIAL NETWORK & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED-DOLLARS IN THOUSANDS)
Three months ended
March 31,
---------
2000 1999
Net Income $260 $605
Other comprehensive income, net of income tax:
Unrealized loss on investment securities
(Net of tax of $79 and $207 for the three months ended
March 31, 2000 and 1999, respectively) (140) (325)
----- -----
Comprehensive income $120 $280
==== ====
See accompanying notes to condensed consolidated financial statements.
<PAGE>
INDEPENDENT FINANCIAL NETWORK & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED-DOLLARS IN THOUSANDS)
Three months ended March 31,
2000 1999
---- ----
Cash flows from operating activities:
Net income $260 $605
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 261 265
Deferred tax benefit (13) (47)
Provision for loan losses 146 104
Origination of mortgage loans held for sale (12,666) (30,230)
Proceeds from mortgage loans sold 13,535 31,896
Net gain on call/sale of investment securities
available for sale -- (184)
Increase in mortgage servicing rights (10) (245)
Federal Home Loan Bank stock dividend (35) (38)
Increase in other assets (548) (850)
Increase (decrease) in other liabilities 609 (1,282)
Net loss attributable to minority interest (5) (5)
------- --------
Net cash provided by (used in) operating activities 1,534 (11)
------- --------
Cash flows from investing activities:
Purchase of investment securities available for sale (8,134) (16,428)
Proceeds from sale of securities available for sale 7 17,470
Proceeds from maturities and call of investment
securities available for sale 5,419 8,029
Net loan originations (6,254) (635)
Purchase of participations (2,827) (2,564)
Additions to premises and equipment (643) (715)
Purchase of Federal Home Loan Bank stock -- (18)
Purchase of Federal Reserve Bank stock (3) --
Originations of direct financing leases (796) (94)
Gross payments on direct financing leases 325 329
Minority Interest in subsidiaries (130) --
----- --
Net cash (used in) provided by investing activities (13,036) 5,374
------- -----
Cash flows from financing activities:
Net increase in deposits 18,484 6,639
Decrease in securities sold with agreements to
repurchase (4,522) (2,815)
Decrease of Federal Home Loan Bank borrowings (4,000) --
Increase in other borrowings 400 800
Proceeds from issuance of common stock 1 71
Payment of dividends -- (892)
(Decrease) increase in short term borrowings (317) 86
------- ------
Net cash provided by financing activities 10,046 3,889
------ ------
Net (decrease) increase in cash and cash equivalents (1,456) 9,252
Cash and cash equivalents at beginning of period 16,692 18,353
------ ------
Cash and cash equivalents at end of period $15,236 $27,605
======= =======
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $1,907 $1,839
Income taxes $7 $22
Supplemental disclosures of investing activities:
Unrealized loss on investment
securities available for sale, net of tax $(140) (325)
Supplemental disclosures of financing activities:
Stock dividend $1,934 --
See accompanying notes to condensed consolidated financial statements.
<PAGE>
INDEPENDENT FINANCIAL NETWORK & SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) Basis of Financial Statement Presentation
-----------------------------------------
The interim condensed consolidated financial statements include the accounts of
Independent Financial Network (IFN, or the Company) (formerly Security Bank
Holding 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 include
all adjustments, consisting of normal recurring 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, 1999 was derived from audited financial
statements, but does not include all disclosures contained in the Company's 1999
Annual Report to Shareholders. The interim condensed consolidated financial
statements should be read in conjunction with the December 31, 1999 consolidated
financial statements, including the notes thereto, included in the Company's
1999 Annual Report to Shareholders. Certain amounts for 1999 have been
reclassified to conform with the 2000 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) Stock Dividend
--------------
On January 25, 2000, the Company declared a 5% stock dividend on the Company's
common stock which was paid on February 25, 2000 to stockholders of record on
February 11, 2000. The dividend was charged to retained earnings in the amount
of $1.2 million, which was based on the fair value of the Company's common
stock. In addition to the 5% stock dividend, the Company increased the number of
stock options and purchase rights under the 1995 Stock Option Plan by 5% and
reduced the exercise prices accordingly. All references to weighted average
shares outstanding, per share amounts, stock purchase rights, option shares, and
exercise prices included in the accompanying consolidated financial statements
and notes reflect the 5% stock dividend and its retroactive effect.
(3) 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. 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 ended March 31,
----------------------------
2000 1999
---- ----
Weighted average shares - basic 4,914,921 4,907,458
Potential dilution of stock options *2,860 **30,071
----- ------
Weighted average shares - diluted 4,917,781 4,937,529
========= =========
*Options to purchase 133,953 shares of common stock at $7.37-$12.02 per share
were outstanding during the first quarter of 2000 but were not included in the
computation of diluted EPS because the options' exercise price was greater than
the average market price of the common shares.
** Options to purchase 63,397 shares of common stock at $7.94-$12.02 per share
were outstanding during the first quarter of 1999 but were not included in the
computation of diluted EPS because the options' exercise price was greater than
the average market price of the common shares.
<PAGE>
INDEPENDENT FINANCIAL NETWORK & SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(4) Other Borrowings
----------------
At March 31, 2000 the Company had $1,200,000 in borrowings from a third party
bank, through a $2.5 million revolving line of credit (renewed annually) with
interest based on the prime rate (the prime rate was 9.00% at March 31, 2000).
(5) 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 March 31, 2000.
<TABLE>
<CAPTION>
Commercial Mortgage Intersegment
Banking Banking Administration Eliminations Consolidated
------- ------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Interest Income $5,991 $-- $-- $(66) $5,925
Interest Expense 2,498 -- 21 (66) 2,453
----- -- -- ---- -----
Net interest income
before provision 3,493 -- (21) -- 3,472
Provision for loan loss 146 -- -- -- 146
--- -- -- -- ---
Net interest income 3,347 -- (21) -- 3,326
Non-interest income 733 234 1,218 (1,161) 1,024
Other non-interest expense 3,100 256 1,138 (515) 3,979
----- --- ----- ----- -----
Income before taxes and
minority interest 980 (22) 59 (646) 371
Income taxes 340 (8) (216) -- 116
--- --- ----- -- ---
Income before minority
interest 641 (14) 275 (646) 255
Loss attributable to
minority interest -- -- -- 5 5
-- -- -- - -
Net income $641 $(14) $275 $(641) $260
==== ===== ==== ====== ====
</TABLE>
The following table presents summary income and balances for reportable segments
and reconciles segments to the Company's consolidated totals for the quarter
ended March 31, 1999.
<TABLE>
<CAPTION>
Commercial Mortgage Intersegment
Banking Banking Administration Eliminations Consolidated
------- ------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Interest Income $4,747 $-- $12 $(15) $4,744
Interest Expense 1,871 -- -- (15) 1,856
----- -- -- ---- -----
Net interest income
before provision 2,876 -- 12 -- 2,888
Provision for loan loss 104 -- -- -- 104
--- -- -- -- ---
Net interest income 2,773 -- 12 -- 2,784
Non-interest income 769 700 1,053 (1,123) 1,400
Other non-interest expense 2,238 513 787 (256) 3,282
----- --- --- ----- -----
Income before taxes and
minority interest 1,303 187 278 (866) 902
Income taxes 442 65 (205) -- 302
--- -- ----- -- ---
Income before minority
interest 861 122 483 (866) 600
Loss attributable to
minority interest -- -- -- 5 5
-- -- -- - -
Net income $861 $122 $483 $(861) $605
==== ==== ==== ====== ====
</TABLE>
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
For the Quarter ended March 31, 2000 and 1999
GENERAL. Net income decreased to $260,000 for the three months ended March 31,
2000 from $605,000 for the same period in 1999. A significant portion of the
decrease in earnings from the year earlier period resulted from a slow-down in
mortgage operations, as overall market interest rates have increased
significantly from early 1999. In addition, the Company recognized $184,000 in
securities gains in the first quarter of 1999, which did not recur in the first
quarter of 2000. Additionally, due to the Company's overall growth strategy,
large increases were experienced in other expense (see following discussion on
other expense). The new investment in Oregon State, which commenced operations
in April 1999, reduced net income for the quarter ended March 31, 2000. The
Company is also expanding with new branches in Waldport, Oregon and Roseburg,
Oregon.
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 $584,000 or
20% for the three months ended March 31, 2000 over the same period in 1999. Of
the increase of $584,000, an increase in volume accounted for an increase of
$543,000, and increase in rate accounted for an increase of $9,000, and an
increase in days accounted for an increase of $32,000. Average interest earning
assets increased $43.5 million, while average interest bearing liabilities
increased $46.7 million. The increase in average interest earning assets and
interest bearing liabilities resulted from the overall growth strategy of the
Company, primarily in loans and deposits.
The average net interest spread increased from 4.61% to 4.72%, mainly due to
higher asset yields. Average rates paid increased 30 basis points to 3.46% in
the first quarter of 2000 from 3.16% in the first quarter of 1999, primarily
from an increase in time certificates of deposit, which carry a higher interest
cost than other deposits. In addition, average earning asset yields increased 42
basis points from 7.76% to 8.18%, resulting from an increase in market interest
rates for loans and investment securities. The Company's net interest margin for
the first quarter of 2000 was 4.79%, an increase of 6 basis points from 4.73%
for the first quarter of 1999.
PROVISION FOR LOAN LOSSES. The loan loss provision during the three-month period
ended March 31, 2000, was $146,000 and $104,000 for the same period in 1999. The
increase is primarily due to increases in the balance of loans at March 31, 2000
as compared to March 31, 1999. At March 31, 2000 the consolidated loan loss
ratio was 1.39% of total loans, compared to 1.39% at December 31, 1999.
Net charge-offs during the three month periods were $12,000 and $29,000 for 2000
and 1999, respectively. Management believes the loan loss provision maintains
the allowance for loan losses at an appropriate level. The allowance for loan
losses was $2,780,000 at March 31, 2000, as compared to $2,645,000 at December
31, 1999.
Non-performing assets (defined as loans on non-accrual status, 90 days or more
past due, and other real estate owned) were $817,000 and $1,325,000 at March 31,
2000 and December 31, 1999, respectively. Management believes the loans are
adequately secured and that no significant losses will be incurred.
<PAGE>
OTHER INCOME. Other income decreased $376,000 to $1,024,000 for the three months
ended March 31, 2000 as compared to $1,400,000 for the same period in 1999. The
decrease in other income is due primarily to lower sold real estate loan fees,
resulting from an increase in overall mortgage interest rates over the same
period a year ago. In addition, the Company recognized $184,000 in securities
gains in the first quarter of 1999 that did not recur in the first quarter of
2000.
OTHER EXPENSE. Other expense increased 21% to $3,979,000 for the three months
ended March 31, 2000 compared to $3,282,000 for the same period in 1999.
Salaries and employee benefits, the largest non-interest expense, increased
$306,000 or 16%. 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 of
the new banks. Furniture and fixture expense increased $222,000, resulting from
the completion of the new Coos Bay branch building of Security Bank and the main
branch building of McKenzie State Bank. Additional increases were experienced in
all areas resulting from the Company's overall growth strategy.
- --------------------------------------------------------------------------------
FINANCIAL CONDITION
Total assets have increased 3% to $327.1 million at March 31, 2000 compared to
$316.6 million at December 31, 1999.
Net loans and leases increased in the period from $184 million at December 31,
1999 to $194 million at March 31, 2000. The increase is due to the growth
strategy of the Company and the addition of the new banks.
The increase in premises and equipment at March 31, 2000 results from expansion
activities underway by the Company. Additions represent costs incurred at Oregon
State Bank and for the construction of the new Winston/Green branch of Security
Bank in Winston, Oregon.
Deposit growth has continued for the first quarter of 2000, increasing $18.5
million, or 7% to $282.5 million at March 31, 2000, compared to $264.0 million
at December 31, 1999. The growth in 2000 has been predominantly spread between
demand accounts, money market accounts, and time certificates of deposit.
Securities sold under agreements to repurchase decreased $4.5 million to $9.0
million at March 31, 2000, compared to $13.5 million at December 31, 1999,
resulting mainly due to timing differences with the commercial repurchase
agreement customers deposit levels.
Other borrowings increased to $1,200,000 at March 31, 2000. The increase is due
to borrowings from a third party bank for general operating purposes of IFN.
Federal Home Loan Bank borrowings decreased to $0 at March 31, 2000, as the
Company did not extend the advance secured prior to year-end 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 four unsecured lines of credit totaling $30.5 million for the
purchase of funds on an overnight basis. The Company is also a member of the
Federal Home Loan Bank, which provides a secured line of credit in the amount of
$38.4 million, and other funding opportunities for liquidity and asset/liability
matching. In addition, IFN has a $2.5 million line of credit, secured by the
equity of Security Bank. As of March 31, 2000 no funds were borrowed under the
Company's unsecured lines of credit, no funds were borrowed from the Federal
Home Loan Bank, and $1.2 million was outstanding on the secured line of credit.
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.
<PAGE>
CAPITAL RESOURCES
Beginning in 1990, federal regulators required the calculation of Risk-based
Capital. This is an analysis that weighs 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 March 31, 2000, the Company's estimated regulatory capital ratios were as
follows: Total Risk-based Capital Ratio of 15.47%, Tier 1 Capital Ratio of
14.28% and Leverage Capital Ratio of 10.35%. This was compared to 15.59%, 14.43%
and 10.32% for total Risk-based Capital Ratio, Tier 1 Capital Ratio and Leverage
Capital Ratio, respectively, at December 31, 1999. 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.
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).
<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 1999 and for the quarter ended March 31, 2000 were these limitations
exceeded. Management has assessed these limits and believes that there has been
no material change since December 31, 1999.
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.
None.
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: May 10, 2000.
INDEPENDENT FINANCIAL NETWORK, INC.
By: /s/ Charles D. Brummel
--------------------------------
Charles D. Brummel
Chairman and Chief Executive Officer
<TABLE> <S> <C>
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<LEGEND>
The Consolidated balance sheets and consolidated statements of operations of the
company's form 10-Q for the year to date
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<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
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<ALLOWANCE> 2,780
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0
0
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