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, 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 August 8, 2000
----- -----------------------------
Common Stock, $5.00 par value 4,915,052
<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 SHARE AND PER SHARE DATA)
ASSETS June 30, 2000 Dec. 31, 1999
------ ------------- -------------
Cash and cash equivalents:
Cash and due from banks $12,004 $13,632
Federal funds sold 5,502 3,060
----- -----
Total cash and cash equivalents 17,506 16,692
Investment securities available for sale 97,372 87,904
Loans, net 201,098 181,385
Mortgage loans held for sale, at cost which
approximates market 4,313 3,925
Net investment in direct financing leases 3,499 2,725
Purchased mortgage servicing rights 2,860 2,717
Premises and equipment, net 14,754 13,785
Federal Home Loan Bank stock, at cost 2,290 2,181
Federal Reserve Bank stock, at cost 759 756
Other assets 5,420 4,531
----- -----
Total assets $349,871 $316,601
======== ========
LIABILITIES, MINORITY INTEREST AND SHAREHOLDERS' EQUITY
-------------------------------------------------------
Liabilities:
Deposits:
Demand $54,007 $43,610
NOW accounts 38,968 36,996
Money market accounts 54,392 50,841
Savings accounts 22,981 22,450
Time deposit 120,728 110,072
------- -------
Total deposits 291,076 263,969
Securities sold under agreements to repurchase 11,970 13,501
Short term borrowings 520 417
Other borrowings 1,600 800
Federal Home Loan Bank borrowings 10,000 4,000
Other liabilities 2,668 1,890
----- -----
Total liabilities 317,834 284,577
------- -------
Minority interest in subsidiaries 2,603 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 5,160,744 shares in 2000
(5,160,624 shares in 1999) 25,804 25,804
Surplus 4,656 4,655
Retained earnings (deficit) 91 (693)
Accumulated other comprehensive loss (1,117) (1,048)
------ ------
Total shareholders' equity 29,434 28,718
------ ------
Total liabilities, minority interest and shareholders'
equity $349,871 $316,601
======== ========
See accompanying notes to condensed consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
INDEPENDENT FINANCIAL NETWORK & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED - DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Quarter Ended Six Months Ended
June 30, June 30,
-------- --------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest on loans $4,835 $3,704 $9,282 $7,077
Income on direct financing leases 85 60 149 124
Interest and dividends on securities:
Taxable 1,289 899 2,423 1,819
Exempt from Federal income tax 177 184 356 376
Dividend income on Federal Home Loan Bank stock 36 38 71 74
Dividend income on Federal Reserve Bank stock 11 12 23 21
Interest on Federal funds sold 45 116 99 266
-- --- -- ---
Total interest income 6,478 5,013 12,403 9,757
----- ----- ------ -----
Interest expense:
Deposits
NOW 158 124 310 243
Money market 567 388 1,084 765
Savings 142 132 273 254
Time 1,577 1,113 3,065 2,256
Securities sold under agreements to repurchase 148 113 279 205
Short term borrowings 6 6 12 9
Federal Home Loan Bank borrowings 131 -- 139 --
Other borrowings 29 15 49 15
-- -- -- --
Total interest expense 2,758 1,891 5,211 3,747
----- ----- ----- -----
Net interest income before provision for loan losses 3,720 3,122 7,192 6,010
Provision for loan losses 118 117 264 221
--- --- --- ---
Net interest income 3,602 3,005 6,928 5,789
----- ----- ----- -----
Other income:
Service charges on deposit accounts 395 315 738 627
Gain on sale/call of investments available for sale, net -- -- -- 184
Loan servicing fees 91 83 181 160
Sold real estate loan fees 501 578 851 1,210
Other 334 330 575 525
--- --- --- ---
Total other income 1,321 1,306 2,345 2,706
----- ----- ----- -----
Other expense:
Salaries and employee benefits 2,292 2,122 4,568 4,092
Occupancy of bank premises 281 259 557 466
Furniture and equipment 458 351 907 578
Professional fees 333 56 604 236
FDIC assessment 13 7 27 15
Supplies 152 164 264 300
Other 625 585 1,206 1,139
--- --- ----- -----
Total other expense 4,154 3,544 8,133 6,826
----- ----- ----- -----
Income before provision for income taxes 769 767 1,140 1,669
Provision for income taxes 210 286 325 588
--- --- --- ---
Net income before minority interest 559 481 815 1,081
Net (income) loss attributable to minority interest (33) 84 (28) 89
--- -- --- --
Net income $526 $565 $787 $1,170
==== ==== ==== ======
Net income per share - basic $0.10 $0.11 $0.15 $0.23
===== ===== ===== =====
Net income per share - diluted $0.10 $0.11 $0.15 $0.23
===== ===== ===== =====
See accompanying notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
INDEPENDENT FINANCIAL NETWORK & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED - DOLLARS IN THOUSANDS)
Quarter Ended Six Months Ended
June 30, June 30,
-------- --------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Income $526 $565 $787 $1,170
Other comprehensive income, net of income tax:
Unrealized gain (loss) on investment securities
(Net of tax of $(8) and $437 for the quarter ended
June 30, 2000 and 1999 and $71 and $644 for the
six months ended June 30, 2000 and 1999, respectively.) 70 (722) (69) (1,047)
--- ---- ---- -----
Comprehensive income (loss) $596 $(157) $718 $123
==== ===== ==== =====
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
INDEPENDENT FINANCIAL NETWORK & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED - DOLLARS IN THOUSANDS)
Six months ended June 30,
2000 1999
---- ----
Cash flows provided by operating activities:
Net income $787 $1,170
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation 703 439
Net amortization of investment premiums/discounts 159 254
Deferred tax expense (benefit) (73) 277
Provision for loan losses 264 221
Origination of mortgage loans held for sale (36,705) (59,831)
Proceeds from mortgage loans sold 36,317 59,411
Net gain on call/sale of investment securities
available for sale -- (184)
Federal Home Loan Bank stock dividend (14) (75)
Increase in mortgage servicing rights (143) (362)
Increase in other assets (889) (707)
Increase (decrease) in other liabilities 919 (1,853)
Net income (loss) attributable to minority interest 28 (89)
-- ---
Net cash provided by (used in) operating activities 1,353 (1,329)
Cash flows from investing activities:
Purchase of investment securities available for sale (21,439) (25,592)
Proceeds from sale of securities available for sale 41 17,471
Proceeds from maturities and call of investment
securities available for sale 11,631 12,170
Net loan originations (16,000) (19,807)
Purchase of participations (3,977) (4,991)
Additions to premises and equipment (1,672) (2,526)
Purchase of Federal Home Loan Bank stock (95) (18)
Purchase of Federal Reserve Bank stock (3) (148)
Originations of direct financing leases (1,434) (807)
Gross payments on direct financing leases 660 792
Minority interest in subsidiaries (731) 1,233
---- -----
Net cash used in investing activities (33,019) (22,223)
Cash flows from financing activities:
Net increase in deposits 27,107 20,660
(Decrease) increase in securities sold with
agreements to repurchase (1,531) 1,547
Federal Home Loan Bank borrowings 10,000 --
Payments on Federal Home Loan Bank borrowings (4,000) --
Increase in other borrowings 800 800
Proceeds from issuance of common stock 1 71
Payment of dividends -- (892)
Increase in short term borrowings 103 459
--- ---
Net cash provided by financing activities 32,480 22,645
Net increase (decrease) in cash and cash equivalents 814 (907)
Cash and cash equivalents at beginning of period 16,692 18,353
------ ------
Cash and cash equivalents at end of period $17,506 $17,446
======= =======
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $5,071 $3,417
Income taxes $75 $136
Supplemental disclosures of investing activities:
Unrealized loss on investment
securities available for sale, net of tax $(69) (1,047)
Supplemental disclosure of financing activities:
Stock dividend $2,333 --
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 July 18, 2000, the Company declared a 5% stock dividend on the Company's
common stock which will be 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 June 30, Six months ended June 30,
--------------------------- -------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average shares - basic 5,160,651 5,160,418 5,160,689 5,159,758
Potential dilution of stock options *-- **28,347 ***198 **29,088
Weighted average shares - diluted 5,160,651 5,188,765 5,160,887 5,188,846
</TABLE>
*Options to purchase 247,040 shares of common stock at $4.79-$11.45 per share
were outstanding during the three months ended June 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 5,788 shares of common stock at $11.45 per share were
outstanding during the three months and six months ended June 30, 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 226,040 shares of common stock at $4.90-$11.45 per share
were outstanding during the six months ended June 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.
<PAGE>
INDEPENDENT FINANCIAL NETWORK & SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(4) Other Borrowings
----------------
At June 30, 2000 the Company had $1,600,000 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 June 30, 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 June 30, 2000.
<TABLE>
<CAPTION>
Commercial Mortgage Intersegment
Banking Banking Administration Eliminations Consolidated
------- ------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Interest Income $6,546 $-- $-- $(68) $6,478
Interest Expense 2,797 -- 29 (68) 2,758
----- -- -- --- -----
Net interest income
before provision 3,749 -- (29) -- 3,720
Provision for loan loss 118 -- -- -- 118
--- ---
Net interest income 3,631 -- (29) -- 3,602
Non-interest income 917 599 1,256 (1,451) 1,321
Other non-interest expense 3,203 527 986 (562) 4,154
----- --- --- ---- -----
Income before taxes and
minority interest 1,345 72 241 (889) 769
Income taxes 210
---
Income before minority
interest 559
Loss attributable to
minority interest (33)
---
Net income $526
====
</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, 2000.
<TABLE>
<CAPTION>
Commercial Mortgage Intersegment
Banking Banking Administration Eliminations Consolidated
------- ------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Interest Income $12,537 $-- $-- $(134) $12,403
Interest Expense 5,295 -- 50 (134) 5,211
----- -- ---- -----
Net interest income
before provision 7,242 -- (50) -- 7,192
Provision for loan loss 264 -- -- -- 264
--- ---
Net interest income 6,978 -- (50) -- 6,928
Non-interest income 1,650 833 2,474 (2,612) 2,345
Other non-interest expense 6,303 783 2,124 (1,077) 8,133
----- --- ----- ------ -----
Income before taxes and
minority interest 2,325 50 300 (1,535) 1,140
Income taxes 325
---
Income before minority
interest 815
Loss attributable to
minority interest (28)
---
Net income $787
====
</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, 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 286
---
Income before minority
interest 481
Loss attributable to
minority interest 84
--
Net income $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 588
---
Income before minority
interest 1,081
Loss attributable to
minority interest 89
--
Net income $1,170
======
</TABLE>
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
FOR THE QUARTER ENDED JUNE 30, 2000 AND 1999
GENERAL. Net income decreased to $526,000 for the three months ended June 30,
2000 from $565,000 for the same period in 1999. A 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. Additionally, due to the Company's overall growth strategy, increases
were experienced in other expense (see following discussion on other expense).
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 $598,000 or
19% for the three months ended June 30, 2000 over the same period in 1999. Of
the increase of $598,000, an increase in volume accounted for an increase of
$578,000, and increase in rate accounted for an increase of $20,000. Average
interest earning assets increased $55.9 million, while average interest bearing
liabilities increased $59.9 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 an expected decline in market
interest rates over the next 1-2 years.
The average net interest spread decreased from 4.80% to 4.75%, mainly due to the
addition of the FHLB advance. Average rates paid increased 55 basis points to
3.62% in the second quarter of 2000 from 3.07% in the second 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 50 basis points from 7.87% to 8.37%, resulting
from an increase in market interest rates for loans and investment securities.
The Company's net interest margin for the second quarter of 2000 was 4.80%, a
decrease of 10 basis points from 4.90% for the second quarter of 1999.
PROVISION FOR LOAN LOSSES. The loan loss provision during the three-month period
ended June 30, 2000, was $118,000 and $117,000 for the same period in 1999. At
June 30, 2000, the consolidated loan loss ratio was 1.36% of total loans,
compared to 1.39% at December 31, 1999.
Net charge-offs during the three-month periods were $13,000 and $28,000 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 $2,885,000 at June 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 $773,000 and $710,000 at June 30,
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 increased to $1,321,000 for the three months ended
June 30, 2000 as compared to $1,306,000 for the same period in 1999. The
increase in other income is due primarily to an increase in service charges on
deposit accounts. Service charges increased due to the increase in deposit
base. The increase in service charge income was offset by a decrease in sold
real estate loan fees due to lower activity with the increase in mortgage
interest rates.
OTHER EXPENSE Other expense increased 17% to $4,154,000 for the three months
ended June 30, 2000 compared to $3,544,000 for the same period in 1999.
Professional fees increased $277,000 due to one time fees incurred and to growth
of operations. Salaries and employee benefits, the largest non-interest
expense, increased $170,000. The increase in salaries is primarily due to the
additions of Waldport and Roseburg operations. Furniture and fixture expense
increased $107,000, 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.
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
GENERAL. Net income decreased to $787,000 for the six months ended June 30,
2000 from $1,170,000 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 n Waldport, Oregon
and Roseburg, Oregon.
NET INTEREST INCOME. Net interest income before the provision for loan losses
increased $1,182,000 or 20% for the six months ended June 30, 2000 over the same
period in 1999. Of the increase of $1,182,000, an increase in volume accounted
for an increase of $1,126,000, an increase in rate accounted for an increase of
$23,000, and an increase in days accounted for an increase of $33,000. Average
interest earning assets increased $49.7 million, while average interest bearing
liabilities increased $53.3 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 4.70% to 4.74%, mainly due to
higher yields on loans and investment securities. Average rates paid increased
43 basis points to 3.54% for the six months ended June 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 46 basis points from 7.82% to 8.28%, resulting
from an increase in market interest rates for loans and investment securities.
The Company's net interest margin for the six months ended June 30, 2000 was
4.80%, a decrease of 1 basis point from 4.81% for the same period of 1999.
PROVISION FOR LOAN LOSSES. The loan loss provision during the six-month period
ended June 30, 2000, was $264,000 versus $221,000 for the same period in 1999.
The increase is primarily due to an increase in loans.
Net charge-offs during the six-month periods were $24,000 and $56,000 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 $2,885,000 at June 30, 2000, as
compared to $2,459,000 at June 30, 1999.
Non-performing assets (defined as loans on non-accrual status, 90 days or more
past due, and other real estate owned) were $773,000 and $851,000 at June 30,
2000 and 1999, respectively. Management believes the loans are adequately
secured and that no significant losses will be incurred.
<PAGE>
OTHER INCOME. Other income decreased 13% to $2,345,000 for the six months ended
June 30, 2000 as compared to $2,706,000 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 no sales in 2000. These decreases were offset by increases
in service charges on deposit accounts and loan servicing fees.
OTHER EXPENSE. Other expense increased 19% to $8,133,000 for the six months
ended June 30, 2000 compared to $6,826,000 for the same period in 1999. Salaries
and employee benefits, the largest non-interest expense, increased $476,000.
The increase in salaries is primarily due to the addition of Waldport and
Roseburg operations, and of staff to support the growth with the new banks.
Additional increases were experienced in all areas resulting from the Company's
overall growth strategy.
--------------------------------------------------------------------------------
FINANCIAL CONDITION
Total assets have increased 11% to $350 million at June 30, 2000 compared to
$317 million at December 31, 1999.
Net loans and leases increased in the period from $184 million at December 31,
1999 to $205 million at June 30, 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 June 30, 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 and the new Waldport branch of Lincoln Security
Bank in Waldport, Oregon.
Deposit growth has continued for the second quarter of 2000, increasing $27
million, or 10% to $291 million at June 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 $12
million at June 30, 2000, compared to $14 million at December 31, 1999,
resulting mainly due to timing differences with the commercial repurchase
agreement customers deposit levels.
Other borrowings increased to $1,600,000 at June 30, 2000. The increase is due
to borrowings from a third party bank for general operating purposes.
Federal Home Loan Bank borrowings increased to $10 million at June 30, 2000,
compared to $4 million at December 31, 1999. The increase in borrowings results
from a leverage plan implemented by the Company in April 2000.
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
$40.5 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 June 30, 2000 $1.9 million was borrowed under
the Company's unsecured lines of credit, $10 million was borrowed from the
Federal Home Loan Bank, and $1.6 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 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, 2000, the Company's estimated regulatory capital ratios were as
follows: Total Risk-based Capital Ratio of 14.28%, Tier 1 Capital Ratio of
13.16% and Leverage Capital Ratio of 9.83%. 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.
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 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%
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 six months ended June 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.
<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 18, 2000, in Coos Bay, Oregon. Matters voted upon by
the shareholders were the election of three Directors for three year
terms to expire in the year 2003 and to change the name of the Company
from Security Bank Holding Company to Independent Financial Network,
Inc. A quorum was reached, and the results of the election and the
name change are as follows:
Election of Directors:
# votes for # votes against
----------- ---------------
Ronald C. LaFranchi 3,809,217 45,342
Gary L. Waggonner 3,852,278 2,281
Robert L. Fullhart 3,821,816 32,743
As a result of the vote, each of the Directors above were elected for a
three year term to expire in the year 2003. There were 23,990 shares
abstained and 7,519 withheld.
Directors whose terms have not expired include Charles D. Brummel,
William A. Lansing, Kenneth C. Messerle, and Glen A. Thomas.
Name Change:
# votes for # votes against
----------- ---------------
3,567,611 313,759
As a result of the vote, the name of the Company was changed to
Independent Financial Network, Inc. There were 4,698 shares abstained
and none 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.
On April 27, 2000 a Form 8-K for other events was filed. The
filing announced that the Company's name had been changed from
Security Bank Holding Company to Independent Financial
Network, Inc. In addition, the ticker symbol on the Nasdaq
National Market was also changed from SBHC to INFN. A copy of
the press release announcing the change was attached as an
exhibit. No financial statements were included.
<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: August 8, 2000.
INDEPENDENT FINANCIAL NETWORK, INC.
By: /s/ Charles D. Brummel
----------------------
Charles D. Brummel
Chairman and Chief Executive Officer
