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 September 30, 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 .
---------------- ---------------------
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 .
----------------------------------- ------------
(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 November 6, 2000
----- -------------------------------
Common Stock, $5.00 par value 5,160,615
<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-IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
ASSETS September 30, 2000 Dec. 31, 1999
------ ------------------ -------------
Cash and cash equivalents:
Cash and due from banks $12,024 $13,632
Federal funds sold 10,671 3,060
------ -----
Total cash and cash equivalents 22,695 16,692
Investment securities available for sale 109,234 87,904
Loans, net 209,863 181,385
Mortgage loans held for sale, at cost which
approximates market 3,451 3,925
Net investment in direct financing leases 3,437 2,725
Purchased mortgage servicing rights 2,994 2,717
Premises and equipment, net 14,545 13,785
Federal Home Loan Bank stock, at cost 2,336 2,181
Federal Reserve Bank stock, at cost 759 756
Other assets 4,950 4,531
----- -----
Total assets $374,264 $316,601
======== ========
LIABILITIES, MINORITY INTEREST AND SHAREHOLDERS' EQUITY
-------------------------------------------------------
Liabilities:
Deposits:
Demand $59,849 $43,610
NOW accounts 42,282 36,996
Money market accounts 61,492 50,841
Savings accounts 21,938 22,450
Time deposit 129,551 110,072
------- -------
Total deposits 315,112 263,969
Securities sold under agreements to repurchase 11,125 13,501
Short term borrowings 299 417
Other borrowings 1,300 800
Federal Home Loan Bank borrowings 10,000 4,000
Other liabilities 3,136 1,890
----- -----
Total liabilities 340,972 284,577
------- -------
Minority interest 2,542 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 5,160,524 shares in 2000
(5,160,234 shares in 1999) 25,804 25,804
Surplus 4,655 4,655
Retained earnings (accumulated deficit) 806 (693)
Accumulated other comprehensive loss (515) (1,048)
---- ------
Total shareholders' equity 30,750 28,718
------ ------
Total liabilities, minority interest and shareholders'
equity $374,264 $316,601
======== ========
See accompanying notes to condensed consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
INDEPENDENT FINANCIAL NETWORK & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED -IN THOUSANDS, EXCEPT PER SHARE DATA)
Quarter Ended Nine Months Ended
September 30, September 30,
------------- ------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest income:
Interest on loans $5,259 $3,997 $14,542 $11,060
Income on direct financing leases 81 60 230 184
Interest and dividends on securities:
Taxable 1,407 1,018 3,830 2,837
Exempt from Federal income tax 176 182 532 558
Dividend income on Federal Home Loan Bank stock 38 38 109 112
Dividend income on Federal Reserve Bank stock 12 12 34 33
Interest on Federal funds sold 146 107 245 367
--- --- --- ---
Total interest income 7,119 5,414 19,522 15,151
----- ----- ------ ------
Interest expense:
Deposits
NOW 175 138 485 381
Money market 613 461 1,697 1,226
Savings 158 145 431 399
Time 1,810 1,203 4,875 3,459
Securities sold under agreements to repurchase 129 118 407 316
Short term borrowings 6 5 18 13
Federal Home Loan Bank borrowings 171 -- 310 --
Other borrowings 32 16 82 32
-- -- -- --
Total interest expense 3,094 2,086 8,305 5,826
----- ----- ----- -----
Net interest income before provision for loan losses 4,025 3,328 11,217 9,325
Provision for loan losses 92 164 356 385
-- --- --- ---
Net interest income 3,933 3,164 10,861 8,940
----- ----- ------ -----
Other income:
Service charges on deposit accounts 337 333 1,074 960
Gain (loss) on sale/call of investments available for
sale, net 4 (1) 4 183
Loan servicing fees 94 84 275 243
Sold real estate loan fees 467 589 1,318 1,798
Other 265 285 842 825
--- --- --- ---
Total other income 1,167 1,290 3,513 4,009
----- ----- ----- -----
Other expense:
Salaries and employee benefits 2,355 2,140 6,923 6,231
Occupancy of bank premises 195 268 752 734
Furniture and equipment 518 380 1,425 959
Professional fees 293 207 897 453
FDIC assessment 15 7 41 25
Supplies 133 145 398 444
Other 609 663 1,816 1,790
--- --- ----- -----
Total other expense 4,118 3,810 12,252 10,636
----- ----- ------ ------
Income before provision for income taxes 982 644 2,122 2,313
Provision for income taxes 210 222 535 810
--- --- --- ---
Net income before minority interest 772 422 1,587 1,503
Net (income) loss attributable to minority interest (60) (3) (88) 86
---- --- ---- --
Net income $712 $419 $1,499 $1,589
==== ==== ====== ======
Net income per share - basic $0.14 $0.08 $0.29 $0.31
===== ===== ===== =====
Net income per share - diluted $0.14 $0.08 $0.29 $0.31
===== ===== ===== =====
See accompanying notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
INDEPENDENT FINANCIAL NETWORK & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED -IN THOUSANDS)
Quarter Ended Nine Months Ended
September 30, September 30,
------------- ------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Income $712 $419 $1,499 $1,589
Other comprehensive income, net of income tax:
Unrealized gain (loss) on investment securities
(Net of tax of $(371) and $16 for the quarter ended
September 30, 2000 and 1999 and $(300) and $660 for the
nine months ended September 30, 2000 and 1999, respectively.) 602 (28) 533 (1,075)
--- ---- --- -------
Comprehensive income $1,314 $391 $2,032 $514
====== ==== ====== ====
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
INDEPENDENT FINANCIAL NETWORK & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED -IN THOUSANDS)
Nine months ended September 30,
2000 1999
---- ----
Cash flows provided by operating activities:
Net income $1,499 $1,589
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation 1,113 776
Net amortization of investment premiums/discounts 187 396
Deferred tax (benefit) expense (187) 267
Provision for loan losses 356 385
Net gain on sale of fixed assets -- (13)
Net gain on call/sale of investment securities
available for sale (4) (183)
Federal Home Loan Bank stock dividend (108) (113)
Changes in balance sheet items:
Net proceeds from mortgage loans sold 474 (762)
Net increase in mortgage servicing rights (277) (574)
Increase in other assets (419) (404)
Increase (decrease) in other liabilities 1,137 (2,481)
Net income (loss) attributable to minority interest 88 (86)
----- ------
Net cash provided by (used in) operating activities 3,859 (1,203)
Cash flows from investing activities:
Purchase of investment securities available for sale (38,698) (37,473)
Proceeds from sale of securities available for sale 1,057 19,648
Proceeds from maturities and call of investment
securities available for sale 16,957 18,376
Net loan originations (21,212) (21,215)
Purchase of participations (7,622) (7,545)
Additions to premises and equipment (1,873) (3,058)
Purchase of Federal Home Loan Bank stock (47) (18)
Purchase of Federal Reserve Bank stock (3) (148)
Redemption of Federal Reserve Bank stock -- 8
Originations of direct financing leases (1,655) (1,112)
Gross payments on direct financing leases 943 1,179
Minority interest in subsidiaries (852) 1,143
----- -----
Net cash used in investing activities (53,005) (30,215)
Cash flows from financing activities:
Net increase in deposits 51,143 33,446
(Decrease) increase in securities sold with
agreements to repurchase (2,376) 1,879
Federal Home Loan Bank borrowings 10,000 --
Payments on Federal Home Loan Bank borrowings (4,000) --
Increase in other borrowings 500 800
Proceeds from issuance of common stock -- 68
Payment of dividends -- (894)
(Decrease) increase in short term borrowings (118) 468
---- ---
Net cash provided by financing activities 55,149 35,767
Net increase in cash and cash equivalents 6,003 4,349
Cash and cash equivalents at beginning of period 16,692 18,353
------ ------
Cash and cash equivalents at end of period $22,695 $22,702
======= =======
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $8,000 $5,668
Income taxes $206 $647
Supplemental disclosures of investing activities:
Unrealized gain (loss) on investment
securities available for sale, net of tax $533 $(1,075)
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). 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 July 18, 2000, the Company declared a 5% stock dividend on the Company's
common stock which was paid on August 16, 2000 to stockholders of record on
August 2, 2000. The dividend was charged to retained earnings in the amount of
$1.1 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. The effect of stock options outstanding
on diluted earnings per share is 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:
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 30,
-------------------------------- -------------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average shares - basic 5,160,368 5,160,091 5,160,417 5,159,705
Potential dilution of stock options *609 **6,170 *1,311 ***15,592
--- ----- ----- ------
Weighted average shares - diluted 5,160,977 5,166,261 5,161,728 5,175,297
========= ========= ========= =========
</TABLE>
*Options to purchase 247,040 shares of common stock at $4.79-$11.45 per share
were outstanding during the nine months ended September 30, 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 85,664 shares of common stock at $7.71 and $11.45 per
share were outstanding during the third quarter 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.
***Options to purchase 146,438 shares of common stock at $7.56-$11.45 per share
were outstanding during 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 September 30, 2000 the Company had $1,300,000 in borrowings from a third
party bank, through a $2.5 million revolving line of credit (renewed annually)
with interest at the prime rate (the prime rate was 9.50% at September 30,
2000).
(5) Minority Interest
-----------------
The Company has purchased additional shares of McKenzie State Bank's stock,
increasing their ownership percentage from 68.14% at December 31, 1999 to 86.57%
at September 30, 2000.
(6) 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 September 30, 2000.
<TABLE>
<CAPTION>
Commercial Mortgage Intersegment
Banking Banking Administration Eliminations Consolidated
------- ------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Interest Income $6,511 $621 $-- $(13) $7,119
Interest Expense 2,651 424 32 (13) 3,094
----- --- -- ---- -----
Net interest income
before provision 3,860 197 (32) -- 4,025
Provision for loan loss 118 (26) -- -- 92
--- ---- -- -- --
Net interest income 3,742 223 (32) -- 3,933
Non-interest income 722 481 1,536 (1,572) 1,167
Other non-interest expense 3,148 514 986 (530) 4,118
----- --- --- ---- -----
Income before taxes and
minority interest 1,316 190 518 (1,042) 982
Income taxes 210
---
Income before minority interest 772
Loss attributable to minority interest (60)
---
Net income $712
====
</TABLE>
<PAGE>
The following table presents summary income and balances for reportable segments
and reconciles segments to the Company's consolidated totals for the nine months
ended September 30, 2000.
<TABLE>
<CAPTION>
Commercial Mortgage Intersegment
Banking Banking Administration Eliminations Consolidated
------- ------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Interest Income $19,048 $621 $-- $(147) $19,522
Interest Expense 7,946 424 82 (147) 8,305
----- --- -- ----- -----
Net interest income
before provision 11,102 197 (82) -- 11,217
Provision for loan loss 382 (26) -- -- 356
--- ---- -- -- ---
Net interest income 10,720 223 (82) -- 10,861
Non-interest income 2,373 1,314 4,010 (4,184) 3,513
Other non-interest expense 9,452 1,297 3,110 (1,607) 12,252
----- ----- ----- ------- ------
Income before taxes and
minority interest 3,641 240 818 (2,577) 2,122
Income taxes 535
---
Income before minority interest 1,587
Loss attributable to minority interest (88)
----
Net income $1,499
======
</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 September 30, 1999.
<TABLE>
<CAPTION>
Commercial Mortgage Intersegment
Banking Banking Administration Eliminations Consolidated
------- ------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Interest Income $5,449 $ -- $-- $(35) $5,414
Interest Expense 2,104 -- 17 (35) 2,086
----- -- -- ---- -----
Net interest income
before provision 3,345 -- (17) -- 3,328
Provision for loan loss 164 -- -- -- 164
--- -- -- -- ---
Net interest income 3,181 -- (17) -- 3,164
Non-interest income 739 644 1,041 (1,134) 1,290
Other non-interest expense 2,897 534 840 (461) 3,810
----- --- --- ----- -----
Income before taxes and
minority interest 1,023 110 184 (673) 644
Income taxes 222
---
Income before minority interest 422
Income attributable to minority interest (3)
---
Net income $419
====
</TABLE>
<PAGE>
The following table presents summary income and balances for reportable segments
and reconciles segments to the Company's consolidated totals for the nine months
ended September 30, 1999.
<TABLE>
<CAPTION>
Commercial Mortgage Intersegment
Banking Banking Administration Eliminations Consolidated
------- ------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Interest Income $15,208 $-- $12 $(69) $15,151
Interest Expense 5,863 -- 32 (69) 5,826
----- -- -- ---- -----
Net interest income
before provision 9,345 -- (20) -- 9,325
Provision for loan loss 385 -- -- -- 385
--- -- -- -- ---
Net interest income 8,960 -- (20) -- 8,940
Non-interest income 2,228 2,006 3,049 (3,274) 4,009
Other non-interest expense 8,047 1,580 2,160 (1,151) 10,636
----- ----- ----- ------- ------
Income before taxes and
minority interest 3,141 426 869 (2,123) 2,313
Income taxes 810
---
Income before minority interest 1,503
Loss attributable to minority interest 86
--
Net income $1,589
======
</TABLE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
FOR THE QUARTER ENDED SEPTEMBER 30, 2000 AND 1999
GENERAL. Net income increased 70% to $712,000 for the three months ended
September 30, 2000 from $419,000 for the same period in 1999. The increase was
primarily due to the growth in assets of the subsidiary banks, including the new
de novo start-ups the Company has invested in over the past two years.
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.
<PAGE>
Net interest income before the provision for loan losses increased $697,000 or
21% for the three months ended September 30, 2000 over the same period in 1999.
Of the increase of $697,000, an increase in volume accounted for an increase of
$544,000, and an increase in rate accounted for an increase of $153,000. Average
interest earning assets increased $55.9 million, while average interest bearing
liabilities increased $59.4 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. In April 2000, the
Company borrowed $10 million from the Federal Home Loan Bank of Seattle at 1
month-LIBOR, and invested the proceeds into two to three year average life debt
securities. This leverage plan has a current spread of 39 basis points, and was
specifically implemented to take advantage of a forecasted decline in market
interest rates over the next 1-2 years.
The average net interest spread increased from 4.73% to 4.81%, due to higher
yields on loans and investments with the overall increase in market rates since
the prior period. Average rates paid increased 68 basis points to 3.77% in the
third quarter of 2000 from 3.09% in the third quarter of 1999, primarily from an
increase in time certificates of deposit, which carry a higher interest cost
than other deposits, and the addition of the FHLB advance. Average earning asset
yields increased 75 basis points from 7.82% to 8.57%, resulting from an increase
in market interest rates for loans and investment securities. The Company's net
interest margin for the third quarter of 2000 was 4.85%, an increase of 4 basis
points from 4.81% for the third quarter of 1999.
PROVISION FOR LOAN LOSSES. The loan loss provision during the three-month period
ended September 30, 2000, was $92,000 and $164,000 for the same period in 1999.
At September 30, 2000, the consolidated loan loss ratio was 1.31% of total
loans, compared to 1.39% at December 31, 1999.
Net charge-offs during the three-month periods were $107,000 and $48,000 for
2000 and 1999, respectively.
Management believes the loan loss provision maintains the allowance for loan
losses at an appropriate level based on anticipated losses inherent in the
portfolio. The allowance for loan losses was $2,870,000 at September 30, 2000,
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 $798,000 and $710,000 at September
30, 2000 and December 31, 1999, respectively. Management believes the loans are
adequately secured and that no significant losses will be incurred.
OTHER INCOME. Other income decreased to $1,167,000 for the three months ended
September 30, 2000 as compared to $1,290,000 for the same period in 1999. The
decrease is due to a decrease in sold real estate loan fees due to lower
activity with the increase in mortgage interest rates. The decrease was offset
by a slight increase in loan servicing fees with an increase in the mortgage
servicing portfolio.
OTHER EXPENSE. Other expense increased to $4,118,000 for the three months ended
September 30, 2000 compared to $3,810,000 for the same period in 1999. Salaries
and employee benefits, the largest non-interest expense, increased $215,000. The
increase in salaries is primarily due to the additions of Waldport, Roseburg and
Winston operations. Furniture and fixture expense increased $138,000, 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 other areas resulting from the Company's overall growth strategy.
PROVISION FOR INCOME TAXES. The provision for income tax for the third quarter
of 2000 includes an adjustment of $108,000 to increase the deferred tax asset of
Oregon State Bank, because expected future taxable income is in excess of the
current graduated tax rate. Approximately 69%, or $75,000, was included in net
income for the quarter, representing IFN's ownership percentage of Oregon State
Bank.
<PAGE>
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
GENERAL. Net income decreased to $1,499,000 for the nine months ended September
30, 2000 from $1,589,000 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 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. Large increases were also experienced in other expense (see
following discussion on other expense), due to the Company's overall growth
strategy. The Company is also expanding with new branches in Waldport, Oregon,
Roseburg, Oregon and Winston, Oregon.
NET INTEREST INCOME. Net interest income before the provision for loan losses
increased $1,892,000 or 20% for the nine months ended September 30, 2000 over
the same period in 1999. Of the increase of $1,892,000, an increase in volume
accounted for an increase of $1,665,000, an increase in rate accounted for an
increase of $193,000, and an increase in days accounted for an increase of
$34,000. Average interest earning assets increased $51.7 million, while average
interest bearing liabilities increased $55.3 million. The increase in average
interest earning assets and interest bearing liabilities resulted from the
overall growth strategy and leverage plan of the Company, primarily in loans and
deposits.
The average net interest spread increased from 4.71% to 4.76%, mainly due to
higher yields on loans and investment securities. Average rates paid increased
51 basis points to 3.62% for the nine months ended September 30, 2000 from 3.11%
for the same period of 1999, primarily from an increase in time certificates of
deposit, which carry a higher interest cost than other deposits. Average earning
asset yields increased 56 basis points from 7.82% to 8.38%, resulting from an
increase in market interest rates for loans and investment securities. The
Company's net interest margin for the nine months ended September 30, 2000 was
4.82%, an increase of 1 basis point from 4.81% for the same period of 1999.
PROVISION FOR LOAN LOSSES. The loan loss provision during the nine-month period
ended September 30, 2000, was $356,000 versus $385,000 for the same period in
1999.
Net charge-offs during the nine-month periods were $132,000 and $104,000 for
2000 and 1999, respectively.
Management believes the loan loss provision maintains the allowance for loan
losses at an appropriate level based on anticipated losses inherent in the
portfolio. The allowance for loan losses was $2,870,000 at September 30, 2000,
as compared to $2,576,000 at September 30, 1999.
Non-performing assets (defined as loans on non-accrual status, 90 days or more
past due, and other real estate owned) were $798,000 and $1,427,000 at September
30, 2000 and 1999, respectively. Management believes the loans are adequately
secured and that no significant losses will be incurred.
OTHER INCOME. Other income decreased 12% to $3,513,000 for the nine months ended
September 30, 2000 as compared to $4,009,000 for the same period in 1999. The
decrease in other income is due to decreases in sold real estate loan fees and
gains on the sale of investment securities. Sold real estate loan fees have
decreased due to lower activity as interest rates have increased. Gains on the
sale of investment securities available for sale have decreased due to the fact
that there have been fewer sales in 2000. These decreases were offset by
increases in service charges on deposit accounts and loan servicing fees.
OTHER EXPENSE. Other expense increased 15% to $12,252,000 for the nine months
ended September 30, 2000 compared to $10,636,000 for the same period in 1999.
Salaries and employee benefits, the largest non-interest expense, increased
$692,000. The increase in salaries is primarily due to the addition of Waldport,
Roseburg and Winston operations, and of staff to support the growth with the new
banks. Additional increases were experienced in most areas resulting from the
Company's overall growth strategy.
PROVISION FOR INCOME TAXES. The provision for income tax for the nine months
ended September 30, 2000 includes an adjustment of $108,000 to increase the
deferred tax asset of Oregon State Bank, because expected future taxable income
is in excess of the current graduated tax rate. Approximately 69%, or $75,000,
was included in net income for the year to date, representing IFN's ownership
percentage of Oregon State Bank.
<PAGE>
FINANCIAL CONDITION
Total assets have increased 18% to $374 million at September 30, 2000 compared
to $317 million at December 31, 1999, resulting from the growth initiatives of
the Company over the last two years.
Investment securities available for sale increased to $109 million at September
30, 2000, compared to $88 million at December 31, 1999. The increase is due to
the leverage plan implemented by the Company in April 2000 and funds available
from an increase in deposits.
Net loans and leases increased in the period from $184 million at December 31,
1999 to $213 million at September 30, 2000. The increase is due to the growth
strategy of the Company and the addition of the new banks.
Purchased mortgage servicing rights have increased 10% to $3 million at
September 30, 2000. The increase is due to mortgage loan sales with servicing
retained since December 31, 1999.
Deposit growth has continued for the third quarter of 2000, increasing $51
million, or 19% to $315 million at September 30, 2000, compared to $264 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 $2 million to $11
million at September 30, 2000, compared to $13 million at December 31, 1999,
resulting mainly due to timing differences with the commercial repurchase
agreement customer activity levels.
Other borrowings increased to $1,300,000 at September 30, 2000. The funds
borrowed were used to purchase a portion of the minority interest in stock of
one of the subsidiary banks.
Federal Home Loan Bank borrowings increased to $10 million at September 30,
2000, compared to $4 million at December 31, 1999. The increase in borrowings
results from the leverage plan implemented by the Company in April 2000, with
the proceeds invested in 2-3 year debt securities.
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
$44.9 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
common stock of Security Bank. As of September 30, 2000 there were no borrowings
under the Company's unsecured lines of credit, $10 million was borrowed from the
Federal Home Loan Bank, and $1.3 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.
CAPITAL RESOURCES
Federal regulators require 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. The requirements are 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 September 30, 2000, the Company's estimated regulatory capital ratios were as
follows: Total Risk-based Capital Ratio of 13.31%, Tier 1 Capital Ratio of
12.25% and Leverage Capital Ratio of 9.29%. 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 was to seek additional
capital from outside sources.
<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).
CALCULTATION 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 produce
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 1999 and for the nine months ended September 30, 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.
RECENTLY ISSUED ACCOUNTING STANDARDS
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 qualifying 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. Due to the issuance of SFAS 137,
Accounting for Derivative Instruments and Hedging Activities-Deferral of the
Effective Date of SFAS No. 133, this SFAS is effective for fiscal years
beginning after June 15, 2000 and as such, will be adopted by the Company in
2001. SFAS No. 138, Accounting for Certain Derivative Instruments and Certain
Hedging Activities, an amendment of FASB Statement No. 133, amends certain
provisions of SFAS No. 133 and is to be applied concurrently with SFAS No. 133.
The Company does not expect implementation to have a material impact on the
Consolidated Financial Statements.
<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: November 6, 2000.
INDEPENDENT FINANCIAL NETWORK, INC.
By: /s/ Charles D. Brummel
-------------------------------------
Charles D. Brummel
Chairman and Chief Executive Officer
