FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to ______________
Commission File Number: 0-10196
INDEPENDENT BANKSHARES, INC.
(Exact name of registrant as specified in its charter)
Texas 75-1717279
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
547 Chestnut Street
P. O. Box 3296
Abilene, Texas 79604
(Address of principal executive offices) (Zip Code)
(915) 677-5550
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 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
Indicate the number of shares outstanding of each of
the issuer's classes of common stock at September 30, 1995.
Class: Common Stock, par value $0.25 per share
Outstanding at September 30, 1995: 1,038,830 shares
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PART I
FINANCIAL INFORMATION
Item 1. Financial Statements.
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INDEPENDENT BANKSHARES, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1995 AND DECEMBER 31, 1994
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
------------ ------------
<S> <C> <C>
ASSETS
Cash and Cash Equivalents:
Cash and Due from Banks $ 10,895,000 $ 7,564,000
Federal Funds Sold 13,750,000 31,200,000
------------ ------------
Total Cash and Cash Equivalents 24,645,000 38,764,000
------------ ------------
Securities:
Available-for-sale 21,403,000 17,078,000
Held-to-maturity--Market Value of
$37,630,000 for September 30, 1995,
and $15,913,000 for December 31, 1994 37,571,000 16,227,000
------------ ------------
Total Securities 58,974,000 33,305,000
------------ ------------
Loans:
Total Loans 86,382,000 85,518,000
Less:
Unearned Income on Installment Loans 3,823,000 4,212,000
Allowance for Possible Loan Losses 765,000 817,000
------------ ------------
Net Loans 81,794,000 80,489,000
------------ ------------
Premises and Equipment 4,189,000 4,345,000
Real Estate and Other Repossessed Assets 446,000 631,000
Accrued Interest Receivable 1,281,000 945,000
Other Assets 2,736,000 1,381,000
------------ ------------
Total Assets $174,065,000 $159,860,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest-bearing Demand Deposits $ 29,205,000 $ 30,210,000
Interest-bearing Demand Deposits 52,874,000 56,520,000
Interest-bearing Time Deposits 76,335,000 59,454,000
------------ ------------
Total Deposits 158,414,000 146,184,000
Notes Payable 1,074,000 930,000
Accrued Interest Payable 774,000 408,000
Other Liabilities 315,000 1,265,000
------------ ------------
Total Liabilities 160,577,000 148,787,000
------------ ------------
Stockholders' Equity:
Series C Preferred Stock 166,000 167,000
Common Stock 260,000 195,000
Additional Paid-in Capital 9,842,000 8,241,000
Retained Earnings 3,195,000 2,570,000
Unrealized Gain (Loss) on Available-for-
sale Securities 25,000 (100,000)
------------ ------------
Total Stockholders' Equity 13,488,000 11,073,000
------------ ------------
Total Liabilities and
Stockholders' Equity $174,065,000 $159,860,000
============ ============
See Accompanying Notes to Consolidated Financial Statements.
</TABLE>
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INDEPENDENT BANKSHARES, INC.
CONSOLIDATED INCOME STATEMENTS
QUARTERS AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1995 AND 1994
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
Quarter Ended September 30, September 30,
--------------------------- ------------------------
1995 1994 1995 1994
---- ---- ---- ----
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Interest Income:
Interest and Fees on Loans $1,963,000 $1,739,000 $5,795,000 $5,080,000
Interest on Federal Funds Sold 412,000 149,000 1,519,000 368,000
Interest on Securities 674,000 618,000 1,517,000 2,020,000
---------- ---------- ---------- ----------
Total Interest Income 3,049,000 2,506,000 8,831,000 7,468,000
---------- ---------- ---------- ----------
Interest Expense:
Interest on Deposits 1,372,000 852,000 3,775,000 2,421,000
Interest on Notes Payable 29,000 23,000 85,000 66,000
---------- ---------- ---------- ----------
Total Interest Expense 1,401,000 875,000 3,860,000 2,487,000
---------- ---------- ---------- ----------
Net Interest Income 1,648,000 1,631,000 4,971,000 4,981,000
Provision for Loan Losses 69,000 40,000 141,000 92,000
---------- ---------- ---------- ----------
Net Interest Income After Provision
for Loan Losses 1,579,000 1,591,000 4,830,000 4,889,000
---------- ---------- ---------- ----------
Noninterest Income:
Service Charges 269,000 333,000 881,000 902,000
Trust Fees 47,000 43,000 154,000 129,000
Insurance Premiums 12,000 35,000 45,000 48,000
Other Income 43,000 (11,000) 76,000 26,000
---------- ---------- ---------- ----------
Total Noninterest Income 371,000 400,000 1,156,000 1,105,000
---------- ---------- ---------- ----------
Noninterest Expenses:
Salaries and Employee Benefits 717,000 709,000 2,127,000 2,122,000
Equipment Expense 181,000 171,000 533,000 459,000
Net Occupancy Expense 165,000 177,000 492,000 525,000
Legal Fees and Expense 22,000 341,000 302,000 522,000
Stationery, Printing and Supplies
Expense 73,000 54,000 190,000 174,000
FDIC Insurance Expense (7,000) 85,000 151,000 253,000
Accounting Fees and Expense 26,000 33,000 84,000 97,000
Data Processing Expense 29,000 31,000 77,000 201,000
Net Costs Applicable to Real Estate
and Other Repossessed Assets (3,000) (2,000) (12,000) (17,000)
Other Expenses 268,000 273,000 785,000 818,000
---------- ---------- ---------- ----------
Total Noninterest Expenses 1,471,000 1,872,000 4,729,000 5,154,000
---------- ---------- ---------- ----------
Income Before Federal Income Taxes 479,000 119,000 1,257,000 840,000
Federal Income Taxes 162,000 40,000 426,000 284,000
---------- ---------- ---------- ----------
Net Income $ 317,000 $ 79,000 $ 831,000 $ 556,000
========== ========== ========== ==========
Preferred Stock Dividends $ 17,000 $ 17,000 $ 52,000 $ 53,000
========== ========== ========== ==========
Net Income Available to Common
Stockholders $ 300,000 $ 62,000 $ 779,000 $ 503,000
========== ========== ========== ==========
Primary Earnings per Common Share
Available to Common Stockholders $ 0.29 $ 0.06 $ 0.75 $ 0.48
========== ========== ========== ==========
Fully Diluted Earnings Per Common
Share Available to Common
Stockholders $ 0.23 $ 0.06 $ 0.62 $ 0.41
========== ========== ========== ==========
See Accompanying Notes to Consolidated Financial Statements.
</TABLE>
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INDEPENDENT BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1995 and 1994
(Unaudited)
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<CAPTION>
1995 1994
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Cash Flows from Operating Activities:
Net Income $ 831,000 $ 556,000
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Deferred Federal Income Tax Expense 401,000 267,000
Depreciation and Amortization 290,000 297,000
Provision for Loan Losses 141,000 92,000
(Gain) Loss on Sales of Premises and Equipment (3,000) 5,000
Gain on Sales of Real Estate and Other
Repossessed Assets (39,000) (2,000)
Writedown of Real Estate and Other
Repossessed Assets 24,000 0
(Increase) Decrease in Accrued Interest Receivable (336,000) 226,000
(Increase) Decrease in Other Assets 265,000 (134,000)
Increase in Accrued Interest Payable 366,000 51,000
Increase (Decrease) in Other Liabilities (626,000) 235,000
------------ -----------
Net Cash Provided by Operating Activities 1,314,000 1,593,000
------------ -----------
Cash Flows from Investing Activities:
Proceeds from Maturities of
Available-for-sale Securities 11,937,000 21,831,000
Proceeds from Maturities of
Held-to-maturity Securities 5,653,000 18,930,000
Purchases of Available-for-sale Securities (16,000,000) (12,000,000)
Purchases of Held-to-maturity Securities (27,000,000) (10,751,000)
Net Increase in Loans (2,423,000) (8,574,000)
Additions to Premises and Equipment (134,000) (206,000)
Proceeds from Sales of Premises and Equipment 3,000 14,000
Proceeds from Sales of Real Estate and
Other Repossessed Assets 625,000 391,000
------------ -----------
Net Cash Provided by (Used in) Investing
Activities (27,339,000) 9,635,000
------------ -----------
Cash Flows from Financing Activities:
Increase (Decrease) in Deposits 12,230,000 (6,989,000)
Proceeds from Notes Payable 275,000 0
Repayment of Notes Payable (458,000) (236,000)
Net Proceeds from Issuance of Equity Securities 0 1,000
Payment of Cash Dividends (138,000) (99,000)
Payment for Fractional Shares in Stock Dividend (3,000) 0
------------ -----------
Net Cash Provided by (Used in) Financing
Activities 11,906,000 (7,323,000)
------------ -----------
Net Increase (Decrease) in Cash and Cash
Equivalents (14,119,000) 3,905,000
Cash and Cash Equivalents at Beginning of Period 38,764,000 19,268,000
------------ -----------
Cash and Cash Equivalents at End of Period $ 24,645,000 $23,173,000
============ ===========
Cash paid during the nine-month period for:
Interest $ 3,494,000 $ 2,436,000
Federal income taxes 15,000 10,000
Noncash investing activities:
Additions to real estate and other repossessed
assets through foreclosures during the
nine-month period $ 734,000 $ 464,000
See Accompanying Notes to Consolidated Financial Statements.
</TABLE>
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INDEPENDENT BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
For information with regard to significant accounting
policies, reference is made to Notes to Consolidated Financial
Statements included in the Annual Report on Form 10-K for the year
ended December 31, 1994, which was filed with the Securities and
Exchange Commission pursuant to Section 13 or 15(d) of the
Securities and Exchange Act of 1934, as amended.
The accompanying financial statements reflect all adjustments
necessary to present a fair statement of the results for the
interim periods presented, and all adjustments are of a normal
recurring nature.
(2) Quasi-reorganization
In connection with the restructuring of its indebtedness to a
financial institution in Dallas, Texas (the "Dallas Bank"), the
Company effected a quasi-reorganization as of December 31, 1989. A
quasi-reorganization is an elective accounting procedure under
Generally Accepted Accounting Principles ("GAAP") in which assets
and liabilities of the Company were restated to fair value and the
Company's accumulated deficit was reduced to zero. Under GAAP,
utilization of any of the Company's net operating loss
carryforwards subsequent to the quasi-reorganization date will not
be credited to future income. For periods prior to January 1,
1995, the tax effect of the utilization of the Company's net
operating loss carryforwards were credited directly to additional
paid-in capital. For periods subsequent to December 31, 1994, the
tax effect of the utilization of the Company's net operating loss
carryforwards have been and will be credited against the Company's
gross deferred tax asset. The tax effect of utilization of these
net operating losses during the first nine months of 1995 and 1994
totaled $401,000 and $267,000, respectively.
(3) Notes Payable
At September 30, 1995, the Company had two notes payable to a
financial institution in Amarillo, Texas (the "Amarillo Bank").
The Term note (the "Term Note") had an outstanding principal
balance of $526,000 at September 30, 1995. The Term Note has a
maturity of April 15, 1996, and equal principal payments, based on
a seven-year amortization, plus accrued interest, are due quarterly
on January 15, April 15, July 15 and October 15. The second note,
which was used for the acquisition of The Winters State Bank
("Winters State") (the "Acquisition Note"), had an outstanding
principal balance of $200,000 at September 30, 1995. The
Acquisition Note, which had an original principal balance of
$450,000, matured on August 30, 1994. The Company paid the
Amarillo Bank $150,000 to reduce the outstanding principal balance
to $300,000 and the maturity date was extended to August 30, 1997.
Principal payments of $100,000 are due annually, beginning August
30, 1995. Interest payments are due quarterly on February 28, May
30, August 30 and November 30. The notes bear interest at the
Amarillo Bank's floating base rate plus 1% (9.75% at September 30,
1995). The notes are secured by 100% of the stock of First State
Bank, N.A., Abilene, Texas ("First State, N.A., Abilene") and
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First State Bank, N.A., Odessa, Texas ("First State, N.A.,
Odessa"), (collectively, the "Banks"). The loan agreement between
the Company and the Amarillo Bank contains certain covenants that,
among other things, restrict the ability of the Company to incur
additional debt, to create liens on its property, to merge or to
consolidate with any other person or entity, to make certain
investments, to purchase or sell assets or to pay cash dividends on
the common stock without the approval of the Amarillo Bank if the
indebtedness due to the Amarillo Bank is $1,000,000 or greater.
The loan agreement also requires the Company and the Banks to meet
certain financial ratios, all of which were met at September 30,
1995, and December 31, 1994.
In addition, at September 30, 1995, the Company had notes
payable to one current and two former directors of the Company
aggregating $331,000. The notes are payable in three equal annual
installments, plus accrued interest, beginning March 1, 1996. The
notes represent a portion of the final settlement of certain
litigation. See "Note 7: Commitments and Contingent Liabilities."
(4) Federal Income Taxes
In February 1992, the Financial Accounting Standards Board
(the "FASB") issued Statement No. 109, "Accounting for Income
Taxes" ("FAS 109"), which required companies to adopt the liability
method for computing income taxes no later than 1993. In applying
the new method in 1993, the Company established a gross deferred
tax asset of $3,190,000, a portion of which relates to federal tax
net operating loss carryforwards and deductible temporary
differences arising prior to the quasi-reorganization as of
December 31, 1989. FAS 109 requires that consideration be given to
establishing a valuation allowance against such deferred tax
assets. The Company established a valuation allowance of
$2,290,000, resulting in a net deferred tax asset of $900,000. As
a result of the quasi-reorganization, $700,000 of the cumulative
effect of the change in accounting method was credited directly to
additional paid-in capital, and $200,000 was credited to income
during 1993 as a cumulative effect of an accounting change. As a
result of the acquisition of Winters State, the Company increased
its gross deferred tax asset and the related valuation allowance by
$972,000 during 1993. This gross deferred tax asset arose mainly
due to net operating loss carryforwards and other future deductible
temporary differences. During the first nine months of 1994, the
Company reduced its gross deferred tax asset and the related
valuation allowance by $267,000 due to the utilization of a portion
of its net operating loss carryforwards. During the first three
quarters of 1995, the Company reduced its gross deferred tax asset
by $401,000 as a result of the utilization of a portion of its net
operating loss carryforwards. In March and June of 1995, the
Company also reduced the valuation allowance by $1,600,000 and
transferred such amount to additional paid-in capital due to the
Company's belief, based on the Company's recent earnings history,
that it is more likely than not that sufficient pre-tax income will
be generated in the foreseeable future to realize its net deferred
tax asset.
(5) Stockholders' Equity
In the first nine months of 1995 and 1994, the Company paid
$52,000 and $53,000, respectively, in cash dividends on the
Company's Series C Cumulative Convertible Preferred Stock (the
"Series C Preferred Stock"). Beginning in May 1994, the Company
began paying a $0.03 per share quarterly cash dividend on the
Company's Common Stock.
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In addition, the Company declared a 33-1/3% stock dividend
payable on May 31, 1995, to stockholders of record on May 10, 1995.
An additional 259,371 shares of Common Stock were issued as a
result of the stock dividend. The stock dividend was accounted for
by a $65,000 transfer from retained earnings to common stock,
representing the above number of shares at a par value of $0.25 per
share.
(6) Earnings Per Share
Primary earnings per common share is computed by dividing net
income available to common stockholders by the weighted average
number of shares and share equivalents outstanding during the
period. Because the Company's outstanding preferred stock is
cumulative, the dividends allocable to such preferred stock reduces
income available to common stockholders in the earnings per share
calculations. The Series C Preferred Stock issued in December 1990
was determined not to be a common stock equivalent and, therefore,
is not used to calculate primary earnings per common share. In
computing fully diluted earnings per common share for the quarters
and nine-month periods ended September 30, 1995 and 1994, the
conversion of the Series C Preferred Stock was assumed, as the
effect is dilutive. The weighted average common shares outstanding
used in computing primary earnings per common share for the
quarters ended September 30, 1995 and 1994, was 1,048,000 and
1,042,000 shares, respectively. The weighted average common shares
outstanding used in computing fully diluted earnings per common
share for the quarters ended September 30, 1995 and 1994, was
1,352,000 and 1,348,000 shares, respectively. The weighted average
common shares outstanding used in computing primary earnings per
common share for the first nine months of 1995 and 1994, was
1,045,000 and 1,042,000 shares, respectively. The weighted average
common shares outstanding used in computing fully diluted earnings
per common share for the first nine months of 1995 and 1994, was
1,350,000 and 1,348,000 shares, respectively. All of the above
weighted average shares outstanding have been adjusted for the 33-
1/3% stock dividend effective May 31, 1995.
(7) Commitments and Contingent Liabilities
In 1985, a former subsidiary bank of the Company foreclosed on
the stock of Texas Bank & Trust Company, Sweetwater, Texas ("TB&T-
Sweetwater"), which became a repossessed asset of the former
subsidiary. TB&T-Sweetwater subsequently failed, resulting in a
legal action being brought in federal court against the thirteen
TB&T-Sweetwater directors by the Federal Deposit Insurance
Corporation (the "FDIC"). In September 1993, nine former outside
directors of TB&T-Sweetwater (the "Outside Directors") settled with
the FDIC for an aggregate of $60,000.
All former directors of TB&T-Sweetwater requested that the
Company reimburse them for their expenses and settlement costs
incurred by them in their defense of the FDIC litigation. This
request was based upon their interpretation of certain
indemnification provisions contained in the Company's Articles of
Incorporation.
In January 1994, the Company filed a declaratory judgment
action in state district court to petition the court to rule on
certain matters that would have precluded indemnification. Certain
of the directors filed counterclaims against the Company asserting
their right to be
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indemnified. A hearing occurred in July 1994, and the court issued
an order in September 1994, denying the Company's petition and
upholding the directors' counterclaims.
In December 1994, a settlement was entered into between the
FDIC, one Outside Director and the three management directors of
TB&T-Sweetwater, who were also management directors of the Company
(the "Inside Directors"), with the Inside Directors paying the FDIC
a total of $450,000. As a result of the two settlements and
indemnification requests, the Outside Directors claimed
indemnification in the amount of approximately $467,000 and the
Inside Directors claimed indemnification in the amount of
approximately $900,000. In 1994, the Company accrued $900,000 for
the potential reimbursement of the $1,367,000 in claims.
On March 7, 1995, the Company agreed to settle the
indemnification requests of the Inside Directors for $450,000 in
cash and by delivery of three promissory notes in the aggregate
principal amount of $350,000. These notes are payable in three
equal annual installments over three years and bear interest at 6%
per annum. As a result of the below-market interest rate, the
notes were discounted to an aggregate of $323,000. In April and
May 1995, the Company consummated this settlement with the Inside
Directors by paying them an aggregate of $450,000 and delivering
such promissory notes to them. In May and June 1995, the Company
settled with the Outside Directors by paying them an aggregate of
$252,000 in cash.
The Company is involved in various other litigation
proceedings incidental to the ordinary course of business. In the
opinion of management, the ultimate liability, if any, resulting
from such other litigation would not be material in relation to the
Company's financial condition.
(8) Pending Acquisition
First State, N.A., Abilene has entered into an agreement to
acquire Peoples National Bank, Winters, Texas in a cash
transaction. An application for such acquisition was filed with
the Office of the Comptroller of the Currency (the "OCC") on September
29, 1995, and the OCC approved the application on November 6,1995.
Consummation of the acquisition is subject to certain other regulatory
approvals. If all remaining approvals are received, the transaction
would be consummated either on December 31, 1995, or during the first
quarter of 1996. At September 30, 1995, Peoples National Bank had
total assets of $6,687,000, total loans, net of unearned income, of
$3,642,000, total deposits of $5,903,000 and stockholders' equity
of $689,000. First State, N.A., Abilene currently operates an
existing branch facility in Winters. By combining the two
locations in Winters, the Company anticipates that it will be able
to achieve economies of scale in various areas.
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Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
The Company
Independent Bankshares, Inc. (the "Company") is a multi-bank
holding company that owns 100% of Independent Financial Corp.
("Independent Financial") which, in turn, owns 100% of First State
Bank, National Association, Abilene, Texas ("First State, N.A.,
Abilene") and First State Bank, National Association, Odessa, Texas
("First State, N.A., Odessa") (collectively, the "Banks"). First
State, N.A., Abilene has two full-service banking locations in
Abilene, one in Stamford, Texas, and one in Winters, Texas, and
First State, N.A., Odessa has two full-service banking locations in
Odessa. First State, N.A., Abilene, acquired its two branches in
Stamford and Winters when two of the Company's former subsidiary
banks, The First National Bank in Stamford, Stamford, Texas ("First
National"), and The Winters State Bank, Winters, Texas ("Winters
State"), were merged into First State, N.A. Abilene, effective
November 1, 1994.
First State, N.A., Abilene has entered into an agreement to
acquire Peoples National Bank, Winters, Texas in a cash
transaction. An application for such acquisition was filed with
the Office of the Comptroller of the Currency (the "OCC") on September
29, 1995, and the OCC approved the application on November 6,1995.
Consummation of the acquisition is subject to certain other regulatory
approvals. If all remaining approvals are received, the transaction
would be consummated either on December 31, 1995, or during the first
quarter of 1996. At September 30, 1995, Peoples National Bank had
total assets of $6,687,000, total loans, net of unearned income, of
$3,642,000, total deposits of $5,903,000 and stockholders' equity
of $689,000. First State, N.A., Abilene currently operates an
existing branch facility in Winters. By combining the two
locations in Winters, the Company anticipates that it will be able
to achieve economies of scale in various areas.
General
The following discussion and analysis presents the more
significant factors affecting the Company's financial condition at
September 30, 1995, and December 31, 1994, and results of
operations for each of the quarters and nine-month periods ended
September 30, 1995 and 1994. This discussion and analysis should
be read in conjunction with the Consolidated Financial Statements,
notes thereto and other financial information appearing elsewhere
in this quarterly report.
Quasi-reorganization
In connection with the restructuring of its indebtedness to a
financial institution in Dallas, Texas (the "Dallas Bank"), the
Company effected a quasi-reorganization as of December 31, 1989.
A quasi-reorganization is an elective accounting procedure under
Generally Accepted Accounting Principles ("GAAP") in which assets
and liabilities of the Company were restated to fair value and the
Company's accumulated deficit was reduced to zero. Under GAAP,
utilization of any of the Company's net operating loss
carryforwards subsequent to the quasi-reorganization date will not
be credited to future income. For periods prior to January 1, 1995,
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the tax effect of the utilization of the Company's net operating loss
carryforwards were credited directly to additional paid-in capital.
For periods subsequent to December 31, 1994, the tax effect of the
utilization of the Company's net operating loss carryforwards have
been and will be credited against the Company's gross deferred tax
asset. The tax effect of utilization of these net operating losses
during the first nine months of 1995 and 1994 totaled $401,000 and
$267,000, respectively.
Results of Operations
General
Net income for the quarter ended September 30, 1995, amounted
to $317,000 ($0.29 primary earnings per common share) compared to
net income of $79,000 ($0.06 primary earnings per common share) for
the quarter ended September 30, 1994. Net income for the nine-
month period ended September 30, 1995, was $831,000 ($0.75 primary
earnings per common share) compared to net income of $556,000
($0.48 primary earnings per common share) for the nine-month period
ended September 30, 1994. The results of operations for the nine-
month period ended September 30, 1995, included legal and
settlement expenses of $135,000 (net of tax expense of $70,000), or
$0.13 primary earnings per common share, not previously accrued as
a result of the final settlement of certain litigation. The
results of operations for the quarter and nine-month period ended
September 30, 1994, were also negatively impacted by $165,000 (net
of tax expense of $85,000), or $0.16 primary earnings per common
share, as a result of the initial accrual for the above noted
litigation. See "Note 7: Commitments and Contingent Liabilities"
to the Company's Consolidated Financial Statements.
Net Interest Income
Net interest income represents the amount by which interest
income on interest-earning assets, including securities and loans,
exceeds interest paid on interest-bearing liabilities, including
deposits and notes payable. Net interest income is the principal
source of the Company's earnings. Interest rate fluctuations, as
well as changes in the amount and type of interest-earning assets
and interest-bearing liabilities, combine to affect net interest
income.
Net interest income amounted to $1,648,000 for the third
quarter of 1995, an increase of $17,000, or 1.0%, from the third
quarter of 1994. Net interest income for the third quarter of 1994
was $1,631,000. Net interest income for the first nine months of
1995 was $4,971,000, a decrease of $10,000, or 0.2%, from net
interest income of $4,981,000 for the first nine months of 1994.
The decrease for the first three quarters of 1995 was due to a
decrease of $4,651,000 in noninterest-bearing and interest-bearing
demand deposits and an increase of $16,881,000 in interest-bearing
time deposits from December 31, 1994, to September 30, 1995, and a
rising interest rate environment on such time deposits during the
last quarter of 1994 and first quarter of 1995. The net interest
margin on a fully taxable-equivalent basis, was 4.21% and 4.33%
for the third quarter and first nine months of 1995, respectively,
compared to 4.60% and 4.59% for the third quarter and first nine
months of 1994, respectively.
At September 30, 1995, approximately $19,894,000, or 24.1%, of
the Company's total loans, net of unearned income, were tied to
fluctuations in the prime interest rate. This amount
-11-
<PAGE>
represents 45.9% of the Company's loans, excluding loans to individuals
which are almost exclusively fixed rate in nature. Average rates paid
for various types of deposits, particularly certificates of deposit,
increased substantially from September 30, 1994, to September 30, 1995.
For example, the average rate paid by the Company for certificates of
deposit of $100,000 or more increased from 3.99% during the third
quarter of 1994 to 5.75% during the third quarter of 1995. The
average rate paid for certificates of deposit less than $100,000
increased to 5.65% during the third quarter of 1995 from 3.68%
during the third quarter of 1994. Rates on other types of
deposits, such as interest-bearing demand, savings and money market
deposits, rose from an average of 2.23% during the third quarter of
1994 to an average of 2.37% during the third quarter of 1995.
Given the fact that the Company's interest-bearing liabilities are
subject to repricing faster than its interest-earning assets,
a rising interest rate environment normally produces a lower net
interest margin than a falling interest rate environment.
The following table presents the average balance sheets of the
Company for the quarters and nine-month periods ended September 30,
1995 and 1994, and indicates the interest earned or paid on the
major categories of interest-earning assets and interest-bearing
liabilities on a fully taxable-equivalent basis and the average
rates earned or paid on each major category. This analysis details
the contribution of interest-earning assets and the impact of the
cost of funds on overall net interest income.
-12-
<PAGE>
<TABLE>
<CAPTION>
Quarter Ended September 30,
-----------------------------------------------------------
1995 1994
--------------------------- ----------------------------
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
------- -------- ------ ------- -------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Federal funds sold $ 27,847 $ 412 5.92% $ 13,741 $ 149 4.34%
Securities (1) 46,540 675 5.80 52,223 619 4.74
Loans, net of unearned income (2) 82,405 1,963 9.53 75,825 1,739 9.17
-------- ------ ---- -------- ------ ----
Total interest-earning assets 156,792 3,050 7.78 141,789 2,507 7.07
-------- ------ ---- -------- ------ ----
Noninterest-earning assets:
Cash and due from banks 6,658 7,580
Premises and equipment, net 4,227 4,439
Accrued interest receivable and other
assets 4,485 4,512
Allowance for possible loan losses (785) (775)
-------- --------
Total noninterest-earning assets 14,585 15,756
-------- --------
Total assets $171,377 $157,545
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Demand, savings and money market
deposits $ 52,897 $ 313 2.37% $ 59,121 $ 330 2.23%
Time deposits 74,637 1,060 5.68 55,852 522 3.74
-------- ------ ---- -------- ------ ----
Total deposits 127,534 1,373 4.31 114,973 852 2.96
Notes payable 1,168 28 9.59 1,010 23 9.11
-------- ------ ---- -------- ------ ----
Total interest-bearing liabilities 128,702 1,401 4.35 115,983 875 3.02
-------- ------ ---- -------- ------ ----
Noninterest-bearing liabilities:
Demand deposits 28,264 29,099
Accrued interest payable and other
liabilities 1,026 1,048
-------- --------
Total noninterest-bearing
liabilities 29,290 30,147
-------- --------
Total liabilities 157,992 146,130
Stockholders' equity 13,385 11,415
-------- --------
Total liabilities and
stockholders' equity $171,377 $157,545
======== ========
Net interest income $1,649 $1,632
====== ======
Interest rate spread (3) 3.43% 4.05%
==== ====
Net interest margin (4) 4.21% 4.60%
==== ====
<FN>
______________________________
(1) Nontaxable interest income on securities was adjusted to a taxable yield
assuming a tax rate of 34%.
(2) Nonaccrual loans are included in the Average Balance columns, and income
recognized on these loans, if any, is included in the Interest Income/Expense
columns. Interest income on loans includes fees on loans, which are not
material in amount.
(3) The interest rate spread is the difference between the average yield on
interest-earning assets and the average cost of interest-bearing liabilities.
(4) The net interest margin is equal to net interest income, on a fully taxable-
equivalent basis, divided by average interest-earning assets.
</FN>
</TABLE>
-13-
<PAGE>
<TABLE>
<CAPTION>
Nine-month Period Ended September 30,
---------------------------------------------------------------
1995 1994
------------------------------- -----------------------------
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
------- -------- ------ ------- -------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Federal funds sold $ 33,936 $1,519 5.97% $ 13,034 $ 368 3.76%
Securities (1) 36,460 1,520 5.56 58,749 2,024 4.59
Loans, net of unearned income (2) 82,737 5,795 9.34 72,888 5,080 9.29
-------- ------ ----- -------- ------ ----
Total interest-earning assets 153,133 8,834 7.69 144,671 7,472 6.89
-------- ------ ----- -------- ------ ----
Noninterest-earning assets:
Cash and due from banks 7,031 8,231
Premises and equipment, net 4,225 4,475
Accrued interest receivable and
other assets 3,554 4,087
Allowance for possible loan losses (801) (808)
-------- --------
Total noninterest-earning
assets 14,009 15,985
-------- --------
Total assets $167,142 $160,656
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Demand, savings and money market
deposits $ 53,486 $ 944 2.35% $ 60,492 $ 952 2.10%
Time deposits 70,104 2,831 5.38 56,331 1,469 3.48
-------- ------ ----- -------- ------ ----
Total deposits 123,590 3,775 4.07 116,823 2,421 2.76
Notes payable 1,119 85 10.13 1,105 66 7.96
-------- ------ ----- -------- ------ ----
Total interest-bearing
liabilities 124,709 3,860 4.13 117,928 2,487 2.81
-------- ------ ----- -------- ------ ----
Noninterest-bearing liabilities:
Demand deposits 28,866 30,631
Accrued interest payable and
other liabilities 1,337 932
-------- --------
Total noninterest-bearing
liabilities 30,203 31,563
-------- --------
Total liabilities 154,912 149,491
Stockholders' equity 12,230 11,165
-------- --------
Total liabilities and
stockholders' equity $167,142 $160,656
======== ========
Net interest income $4,974 $4,985
====== ======
Interest rate spread (3) 3.56% 4.08%
===== ====
Net interest margin (4) 4.33% 4.59%
===== ====
<FN>
______________________________
(1) Nontaxable interest income on securities was adjusted to a taxable yield
assuming a tax rate of 34%.
(2) Nonaccrual loans are included in the Average Balance columns, and income
recognized on these loans, if any, is included in the Interest Income/Expense
columns. Interest income on loans includes fees on loans, which are not
material in amount.
(3) The interest rate spread is the difference between the average yield on
interest-earning assets and the average cost of interest-bearing liabilities.
(4) The net interest margin is equal to net interest income, on a fully taxable-
equivalent basis, divided by average interest-earning assets.
</FN>
</TABLE>
The following table presents the changes in the components of
net interest income and identifies the part of each change due to
differences in the average volume of interest-earning assets and
interest-bearing liabilities and the part of each change due to the
average rate on those assets and liabilities. The changes in
interest due to both rate and volume in the table have been
allocated to volume or rate change in proportion to the absolute
amounts of the change in each.
-14-
<PAGE>
<TABLE>
<CAPTION>
Quarters Ended Nine-month Periods Ended
September 30, 1995 vs. 1994 September 30, 1995 vs. 1994
--------------------------- ---------------------------
Increase (Decrease) Due To Increase (Decrease) Due To
Changes In: Changes In:
--------------------------- ---------------------------
Volume Rate Total Volume Rate Total
------ ---- ----- ------ ---- -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Federal funds sold $194 $ 69 $263 $ 842 $ 309 $1,151
Securities (1) (72) 128 56 (872) 368 (504)
Loans, net of unearned income (2) 154 70 224 688 27 715
---- ---- ---- ----- ----- ------
Total interest income 276 267 543 658 704 1,362
---- ---- ---- ----- ----- ------
Interest-bearing liabilities:
Deposits:
Demand, savings and
money market deposits (37) 20 (17) (115) 107 (8)
Time deposits 212 326 538 421 941 1,362
---- ---- ---- ----- ----- ------
Total deposits 175 346 521 306 1,048 1,354
Notes payable 4 1 5 1 18 19
---- ---- ---- ----- ----- ------
Total interest expense 179 347 526 307 1,066 1,373
---- ---- ---- ----- ----- ------
Increase (decrease) in net interest
income $ 97 $(80) $ 17 $ 351 $(362) $ (11)
==== ==== ==== ===== ===== ======
<FN>
______________________________
(1) Information with respect to tax-exempt securities is provided on a
fully taxable-equivalent basis assuming a tax rate of 34%.
(2) Nonaccrual loans have been included in average assets for the
purposes of the computations, thereby reducing yields.
</FN>
</TABLE>
Provision for Loan Losses
The amount of the provision for loan losses is based on
periodic (not less than quarterly) evaluations of the loan
portfolio, especially nonperforming and other potential problem
loans. During these evaluations, consideration is given to such
factors as: management's evaluation of specific loans; the level
and composition of nonperforming loans; historical loss experience;
results of examinations by regulatory agencies; an internal asset
review process conducted by the Company that is independent of the
management of each Bank; expectations of future economic conditions
and their impact on particular industries and individual borrowers;
the market value of collateral; the strength of available
guarantees; concentrations of credits; and other judgmental
factors. The provision for loan losses for the quarter and nine-
month period ended September 30, 1995, were $69,000 and $141,000,
respectively, compared to $40,000 and $92,000, respectively, for
the quarter and nine-month period ended September 30, 1994. These
represent increases of $29,000 and $49,000, respectively. The
higher provisions in 1995 are a result of increased repossessions,
and associated charge-offs, related to the Bank's indirect
installment lending program. The economic conditions in the
Company's primary service area are fairly stable. In addition, the
overall quality of the Company's loan portfolio has improved.
-15-
<PAGE>
Noninterest Income
Noninterest income decreased $29,000, or 7.3%, from $400,000
during the third quarter of 1994 to $371,000 during the third
quarter of 1995; however, noninterest income increased $51,000, or
4.6%, from $1,105,000 for the first nine months of 1994 to
$1,156,000 for the first nine months of 1995.
Service charges on deposit accounts and on other types of
services are the major source of noninterest income to the Company.
This source of income decreased from $333,000 during the third
quarter of 1994 to $269,000 during the third quarter of 1995, a
19.2% decrease, and decreased $21,000, or 2.3%, from $902,000 for
the first nine months of 1994 to $881,000 for the first nine months
of 1995, primarily due to a reclassification of income on printed
checks for the year-to-date period of 1995 from service charges to
other income.
Trust fees from the operation of the trust department of First
State, N.A., Odessa increased $4,000, or 9.3%, from $43,000 during
the third quarter of 1994 to $47,000 during the same period in 1995
and increased $25,000, or 19.4%, from $129,000 for the first nine
months of 1994, to $154,000 for the first nine months of 1995
primarily as a result of a one-time $24,000 fee received for
services performed as executor of an estate.
Insurance premiums earned on automobiles financed through the
Company's indirect installment loan program decreased $23,000, or
65.7%, from $35,000 during the third quarter of 1994 to $12,000
during the third quarter of 1995, and decreased from $48,000 for
the first nine months of 1994 to $45,000 for the first nine months
of 1995, a decrease of $3,000, or 6.3%. The decreases,
particularly in the third quarter of 1995, were due to a decrease
in the number of automobiles being financed during 1995, primarily
at First State, N.A., Abilene.
Other income is the sum of several small components of
noninterest income including check printing income and other
sources of miscellaneous income. Other income increased $54,000
during the third quarter of 1995 when compared to the third quarter
of 1994, and increased $50,000, or 192.3%, from $26,000 for the
first nine months of 1994 to $76,000 for the corresponding period
in 1995. The increases, particularly in the third quarter of 1995,
were primarily due to the reclassification during the third quarter
of 1995 of income on printed checks from service charges to other
income and a reclassification during the third quarter of 1994 of
safe deposit rental income from other income to service charges to
more correctly reflect such sources of income.
Noninterest Expenses
Noninterest expenses decreased $401,000, or 21.4%, from
$1,872,000 during the third quarter of 1994 to $1,471,000 during
the third quarter of 1995, and decreased $425,000, or 8.2%, from
$5,154,000 during the first nine months of 1994 to $4,729,000
during the first nine months of 1995. Noninterest expenses for the
quarter and nine-month period ended September 30, 1995, were lower
than normal due to the various reasons specified below.
Salaries and employee benefits rose $8,000, or 1.1%, from
$709,000 for the third quarter of 1994 to $717,000 for the
corresponding period of 1995, and increased $5,000, or 0.2%, from
-16-
<PAGE>
$2,122,000 for the nine-month period ended September 30, 1994, to
$2,127,000 for the corresponding period of 1995. Despite overall
salary increases effective January 1, 1995, salaries and benefits
have been stable due to the economies of scale achieved from the
branching of First National and Winters State into First State,
N.A., Abilene during the fourth quarter of 1994.
Equipment expense increased from $171,000 for the third
quarter of 1994 to $181,000 for the corresponding period in 1995,
representing an increase of $10,000, or 5.8%. These expenses also
increased $74,000, or 16.1%, from $459,000 for the first nine
months of 1994 to $533,000 for the first nine months of 1995.
These increases are a result of the conversion of the Banks to an
in-house data processing system between November 1993 and March
1994 and the lease and maintenance expense associated with the new
system. Data processing was being provided to the Company and the
Banks by an unaffiliated service bureau under contracts that
expired during April and May 1994. In addition, Winters State
performed its own data processing prior to conversion to the new
system in February 1995. Data processing expense decreased $2,000,
or 6.5%, from $31,000 for the third quarter of 1994 to $29,000 for
the third quarter of 1995 and decreased $124,000, or 61.7%, from
$201,000 for the first nine months of 1994 to $77,000 for the
corresponding period in 1995.
Net occupancy expense decreased $12,000, or 6.8%, from
$177,000 for the third quarter of 1994 to $165,000 for the same
period in 1995, and decreased $33,000, or 6.3%, from $525,000 for
the first nine months of 1994 to $492,000 for the first nine months
of 1995. The decreases are due primarily to lower amounts of
depreciation expense as a result of certain fixed assets whose
estimated useful lives have expired.
Legal fees and expense decreased $319,000, or 93.5%, from
$341,000 during the third quarter of 1994 to $22,000 during the
third quarter of 1995, and decreased $220,000, or 42.1%, from
$522,000 during the first nine months of 1994 to $302,000 for the
corresponding period of 1995. The decreases were due to
litigation-related expenses incurred during the third quarter of
1994 which were partially offset by litigation-related expenses
incurred during the first quarter of 1995. See "General" above.
Federal Deposit Insurance Corporation (the "FDIC") insurance
expense decreased from $85,000 during the third quarter of 1994 to
a negative $7,000 during the same period of 1995, and decreased
$102,000, or 40.3%, from $253,000 for the first nine months of 1994
to $151,000 for the corresponding period in 1995. The decreases
were due to the reduction by the FDIC of deposit insurance rates
for banks. The rate that the Banks pay was reduced from $0.23 per
$100 of deposits to $0.04 per $100 of deposits. This reduction was
effective June 1, 1995. As a result, the amount of deposit
insurance refund for the month of June 1995 was greater than the
Banks' combined deposit insurance expense for the third quarter of 1995
based on the new rates; therefore, a negative $7,000 expense was
recorded for the third quarter of 1995.
Stationery, printing and supplies expense increased $19,000
during the third quarter of 1995 when compared to the corresponding
period of 1994, and increased $16,000, or 9.2%, from $174,000 for
the first nine months of 1994 to $190,000 for the first nine months
of 1995, primarily due to the increase in paper costs. Accounting
fees and expense decreased $7,000, or 21.2%, from $33,000 during
the third quarter of 1994 to $26,000 during the third quarter of
-17-
<PAGE>
1995, and decreased $13,000, or 13.4%, from $97,000 during the
first nine months of 1994 to $84,000 during the same period of
1995. The Company has realized reductions in accounting fees as a
result of the change in its independent public accountants, which
was made during 1994.
Net costs applicable to real estate and other repossessed
assets consists of expenses associated with holding and maintaining
repossessed assets, the net gain or loss on the sales of such
assets, the write-down of the carrying value of the assets and any
rental income that is credited as a reduction in expense. These
expenses decreased from a negative $2,000 in expense for the third
quarter of 1994 to a negative $3,000 in expense for the
corresponding period of 1995, but increased $5,000 from a negative
$17,000 in expense during the first nine months of 1994 to a
negative $12,000 in expense for the first nine months of 1995 as a
result of less gains on sales and income received on various
repossessed assets. The amount of real estate and other
repossessed assets has continued to decline over the past few
years.
Other noninterest expense includes, among many other items,
postage, advertising, insurance, directors' fees, dues and
subscriptions, regulatory examinations, travel and entertainment
and due from bank account charges. These expenses decreased
$5,000, or 1.8%, from $273,000 during the third quarter of 1994 to
$268,000 during the third quarter of 1995, and decreased $33,000,
or 4.0%, from $818,000 for the first nine months of 1994 to
$785,000 for the first nine months of 1995. Savings realized as a
result of the merger of First National and Winters State into First
State, N.A., Abilene was the primary reason for the decreases.
Federal Income Taxes
The Company effected a quasi-reorganization as of December 31,
1989. As a result of this transaction, the Company's net operating
loss carryforwards existing at December 31, 1989, utilized
subsequent to the quasi-reorganization date will not be credited to
future income. For periods prior to January 1, 1995, the tax
effect of the utilization of the Company's net operating loss
carryforwards were credited directly to additional paid-in capital.
For periods subsequent to December 31, 1994, the tax effect of the
utilization of the Company's net operating loss carryforwards have
been and will be credited against the Company's gross deferred tax
asset. The Company accrued $426,000 and $284,000 in federal income
taxes in the first nine months of 1995 and 1994, respectively, and
all of these amounts except for $25,000 in 1995 and $17,000 in 1994
were transferred from federal income taxes payable to reduce the
Company's deferred tax asset in 1995 and to increase additional
paid-in capital in 1994. See "Quasi-reorganization" above.
Impact of Inflation
The effects of inflation on the local economy and on the
Company's operating results have been relatively modest for the
past several years. Because substantially all of the Company's
assets and liabilities are monetary in nature, such as cash,
securities, loans and deposits, their values are less sensitive to
the effects of inflation than to changing interest rates, which do
not necessarily change in accordance with inflation rates. The
Company tries to control the impact of interest rate fluctuations
by managing the relationship between its interest
-18-
<PAGE>
rate-sensitive assets and liabilities. See "Analysis of Financial
Condition - Interest Rate Sensitivity" below.
Analysis of Financial Condition
Assets
Total assets increased $14,205,000, or 8.9%, from $159,860,000
at December 31, 1994, to $174,065,000 at September 30, 1995,
primarily due to the growth in deposits at the Banks during the
first nine months of 1995.
Cash and Cash Equivalents
The amount of cash and cash equivalents decreased $14,119,000,
or 36.4%, from $38,764,000 at December 31, 1994, to $24,645,000 at
September 30, 1995, due to a significant amount of funds that had
been invested in federal funds sold being invested in securities
during the third quarter of 1995.
Securities
Securities increased $25,669,000, or 77.1%, from $33,305,000
at December 31, 1994, to $58,974,000 at September 30, 1995. The
increase in 1995 is due to the fact that a significant amount of
securities were purchased during the third quarter of 1995.
The board of directors of each Bank reviews all securities
transactions monthly and the securities portfolio periodically.
The Company's current investment policy provides for the purchase
of U.S. Treasury securities and federal agency securities having
maturities of five years or less and for the purchase of state,
county and municipal agencies' securities with maximum maturities
of 10 years. The Company's policy is to maintain a securities
portfolio with staggered maturities to meet its overall liquidity
needs. Municipal securities must be rated A or better. Certain
school district issues, however, are acceptable with a Baa rating.
Securities totalling $21,403,000 are classified as available-for-
sale and are carried at fair value at September 30, 1995.
Securities totalling $37,571,000 are classified as held-to-maturity
and are carried at amortized cost. The decision to sell securities
classified as available-for-sale is based upon management's
assessment of changes in economic or financial market conditions.
Certain of the Company's securities are pledged to secure
public and trust fund deposits and for other purposes required or
permitted by law. At September 30, 1995, the book value of U.S.
Treasury and other U.S. Government agency securities so pledged
amounted to $3,360,000, or 5.7% of the total securities portfolio.
-19-
<PAGE>
The following table summarizes the amounts and the
distribution of the Company's securities held at the dates
indicated.
<TABLE>
<CAPTION>
September 30, 1995 December 31, 1994
------------------ -----------------
Amount % Amount %
------ - ------ -
(In thousands)
<S> <C> <C> <C> <C>
Carrying value:
U.S. Treasury securities $39,221 66.5% $31,441 94.4%
Obligations of other U.S.
Government agencies and
corporations 19,310 32.7 1,331 4.0
Obligations of states and
political subdivisions 0 -- 90 0.3
Other securities 443 0.8 443 1.3
------- ----- ------- -----
Total carrying value of
securities $58,974 100.0% $33,305 100.0%
======= ===== ======= =====
Total market value of
securities $59,033 $32,991
======= =======
</TABLE>
The market value of securities classified as held-to-maturity
is usually different from the reported carrying value of such
securities due to interest rate fluctuations that cause market
valuations to change.
-20-
<PAGE>
The following table provides the maturity distribution and
weighted average interest rates of the Company's total securities
portfolio at September 30, 1995. The yield has been computed by
relating the forward income stream on the securities, plus or minus
the anticipated amortization of premiums or accretion of discounts,
to the carrying value of the securities. The book value of
securities classified as held-to-maturity is their cost, adjusted
for previous amortization or accretion.
<TABLE>
<CAPTION>
Estimated Weighted
Type and Maturity Grouping Principal Carrying Fair Average
at September 30, 1995 Amount Value Value Yield
- -------------------------- --------- -------- --------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
U.S. Treasury securities:
Within one year $18,250 $18,254 $18,233 5.26%
After one but within five years 21,000 20,967 21,016 5.91
------- ------- ------- ----
Total U.S. Treasury securities 39,250 39,221 39,249 5.61
------- ------- ------- ----
Obligations of other U.S. Government
agencies and corporations:
Within one year 1,125 1,127 1,130 8.24
After one but within five years 18,154 18,183 18,211 6.67
------- ------- ------- ----
Total obligations of other U.S.
Government agencies and
corporations 19,279 19,310 19,341 6.78
------- ------- ------- ----
Other securities:
Within one year 0 0 0 0.00
After one but within five years 443 443 443 3.59
------- ------- ------- ----
Total other securities 443 443 443 3.59
------- ------- ------- ----
Total securities $58,972 $58,974 $59,033 5.97%
======= ======= ======= ====
</TABLE>
Loan Portfolio
Total loans, net of unearned income, increased $1,253,000, or
1.5%, from $81,306,000 at December 31, 1994, to $82,559,000 at
September 30, 1995. The increase during the first nine months of
1995 was primarily a result of increases in the Banks' commercial
and industrial loans.
The Banks primarily make installment loans to individuals and
commercial loans to small to medium-sized businesses and
professionals. The Banks offer a variety of commercial lending
products including revolving lines of credit, letters of credit,
real estate loans, working capital loans and loans to finance
accounts receivable, inventory and equipment. Typically, the
Banks' commercial loans have floating rates of interest, are for
varying terms (generally not exceeding five years), are personally
guaranteed by the borrower and are secured by real estate, accounts
receivable, inventory or other business assets.
Due to diminished loan demand in most areas, during the second
quarter of 1992, First State, N.A., Odessa instituted an
installment loan program whereby it began to purchase automobile
loans from automobile dealerships in the Abilene and
Odessa/Midland, Texas areas. Under this program, a dealership will
agree to make a loan to a prospective customer to finance
-21-
<PAGE>
the purchase of a new or used automobile. The different financial
institutions that have a pre-established relationship with the
particular dealership review the transaction, including the credit
history of the prospective borrower, and decide if they would agree
to purchase the loan from the dealership and, if so, at what rate
of interest. The dealership selects the financial institution to
which it decides to sell the loan. The financial institution
purchasing the loan has a direct loan to the borrower secured by
the automobile, and the dealership realizes a profit based on the
difference between the interest rate quoted to the buyer by the
dealership and the interest rate at which the loan is purchased by
the financial institution. During the second quarter of 1993,
First State, N.A., Abilene began a similar indirect installment
loan program. At September 30, 1995, the Company had approximately
$32,013,000, net of unearned income, of this type of loan
outstanding.
The following table presents the Company's loan balances at
the dates indicated separated by loan types.
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
------------- ------------
(In thousands)
<S> <C> <C>
Loans to individuals $43,005 $43,113
Real estate loans 22,482 22,760
Commercial and industrial loans 18,248 16,702
Other loans 2,647 2,943
------- -------
Total loans 86,382 85,518
Less unearned income 3,823 4,212
------- -------
Loans, net of unearned income $82,559 $81,306
======= =======
</TABLE>
Loan concentrations are considered to exist when there are
material amounts loaned to a multiple number of borrowers engaged
in similar activities that would cause them to be similarly
impacted by economic or other conditions. The Company had no
concentrations of loans at September 30, 1995, except for those
described in the above table. The Banks had no loans outstanding
to foreign countries or borrowers headquartered in foreign
countries at September 30, 1995.
Management of each Bank may renew loans at maturity when
requested by a customer whose financial strength appears to support
such renewal or when such renewal appears to be in the Company's
best interest. The Company requires payment of accrued interest in
such instances and may adjust the rate of interest, require a
principal reduction or modify other terms of the loan at the time
of renewal.
The following table presents the distribution of the maturity
of the Company's loans and the interest rate sensitivity of those
loans, excluding loans to individuals, at September 30, 1995. The
table also presents the portion of loans that have fixed interest
rates or interest rates that fluctuate over the life of the loans
in accordance with changes in the money market environment as
represented by the prime rate.
-22-
<PAGE>
<TABLE>
<CAPTION>
One to Over Total
One Year Five Five Carrying
and Less Years Years Value
-------- ------ ----- --------
(In thousands)
<S> <C> <C> <C> <C>
Real estate loans $ 2,021 $15,231 $5,230 $22,482
Commercial and industrial loans 9,610 6,620 2,018 18,248
Other loans 1,513 552 582 2,647
------- ------- ------ -------
Total loans $13,144 $22,403 $7,830 $43,377
======= ======= ====== =======
With fixed interest rates $ 5,378 $15,053 $3,052 $23,483
With variable interest rates 7,766 7,350 4,778 19,894
------- ------- ------ -------
Total loans $13,144 $22,403 $7,830 $43,377
======= ======= ====== =======
</TABLE>
Allowance for Possible Loan Losses
Implicit in the Company's lending activities is the fact that
loan losses will be experienced and that the risk of loss will vary
with the type of loan being made and the creditworthiness of the
borrower over the term of the loan. To reflect the currently
perceived risk of loss associated with the Company's loan
portfolio, additions are made to the Company's allowance for
possible loan losses (the "allowance"). The allowance is created
by direct charges against income (the "provision" for loan losses),
and the allowance is available to absorb possible loan losses. See
"Results of Operations - Provision for Loan Losses" above.
The amount of the allowance equals the cumulative total of the
loan loss provisions made from time to time, reduced by loan
charge-offs, and increased by recoveries of loans previously
charged off. The Company's allowance was $765,000, or 0.93% of
loans, net of unearned income, at September 30, 1995, compared to
$817,000, or 1.00% of loans, net of unearned income, at December
31, 1994.
Credit and loan decisions are made by management and the board
of directors of each Bank in conformity with loan policies
established by the board of directors of the Company. It is the
practice of the Company to charge off any loan or portion of a loan
when it is determined by management to be uncollectible due to the
borrower's failure to meet repayment terms, the borrower's
deteriorating or deteriorated financial condition, the depreciation
of the underlying collateral, when the loan is classified as a loss
by regulatory examiners or for other reasons. The Company charged
off $127,000 and $275,000 in loans during the third quarter and
first nine months of 1995, respectively. Recoveries during the
third quarter and first nine months of 1995 were $17,000 and
$82,000, respectively.
The following table presents the provisions for loan losses,
loans charged off and recoveries on loans previously charged off,
the amount of the allowance, the average loans outstanding and
certain pertinent ratios for the quarters and nine month periods
ended September 30, 1995 and 1994.
-23-
<PAGE>
<TABLE>
<CAPTION>
Nine-month
Quarter Ended Period Ended
September 30, September 30,
------------------ ------------------
1995 1994 1995 1994
---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Analysis of allowance for
possible loan losses:
Balance, beginning of period $ 803 $ 788 $ 817 $ 896
Provision for loan losses 69 40 141 92
------- ------- ------- -------
872 828 958 988
------- ------- ------- -------
Loans charged off:
Loans to individuals 98 42 221 101
Real estate loans 19 0 47 95
Commercial and industrial loans 7 3 7 30
Other loans 0 56 0 77
------- ------- ------- -------
Total charge-offs 124 101 275 303
------- ------- ------- -------
Recoveries of loans previously
charged off:
Loans to individuals 10 22 33 36
Real estate loans 1 0 1 0
Commercial and industrial loans 2 16 39 38
Other loans 4 4 9 10
------- ------- ------- -------
Total recoveries 17 42 82 84
------- ------- ------- -------
Net loans charged off 107 59 193 219
------- ------- ------- -------
Balance, end of period $ 765 $ 769 $ 765 $ 769
======= ======= ======= =======
Average loans outstanding,
net of unearned income $82,405 $75,825 $82,737 $72,888
======= ======= ======= =======
Ratio of net loan charge-offs
to average loans outstanding,
net of unearned income (annualized) 0.52% 0.31% 0.31% 0.40%
Ratio of allowance for possible
loan losses to total loans,
net of unearned income, at
end of period 0.93% 0.99% 0.93% 0.99%
</TABLE>
In the latter half of the 1980's, there was a downward trend in
the market value of collateral securing real estate loans,
agricultural loans, loans secured by the stock of financial
institutions and other commercial and industrial loans. Foreclosures
on defaulted loans resulted in the Company acquiring real estate and
other repossessed assets. Foreclosures have continued to occur, and
the amount of real estate and other repossessed assets being carried
on the Company's books, although decreasing, is still significant.
Accordingly, the Company incurs other expenses, specifically net
costs applicable to real estate and other repossessed assets, in
maintaining, insuring and selling such assets. The Company attempts
to convert nonperforming loans into interest-earning assets, although
usually at a lower dollar amount than the face value of such loans,
either through liquidation of the collateral securing the loan or
through intensified collection efforts.
As the economy has recovered and stabilized, there has been a
reduction in total loan losses and in the amount of the provision
necessary to maintain an adequate balance in the allowance. This
reflects not only the loan loss trend, but management's assessment of
the continued reduction of credit risks associated with the loan
portfolio.
-24-
<PAGE>
The amount of the allowance is established by management based
upon estimated risks inherent in the existing loan portfolio.
Management reviews the loan portfolio on a continuing basis to
evaluate potential problem loans. This review encompasses
management's estimate of current economic conditions and the
potential impact on various industries, prior loan loss experience
and the financial condition of individual borrowers. Loans that have
been specifically identified as problem or nonperforming loans are
reviewed on at least a quarterly basis, and management critically
evaluates the prospect of ultimate losses arising from such loans,
based on the borrower's financial condition and the value of
available collateral. When a risk can be specifically quantified for
a loan, that amount is specifically allocated in the allowance. In
addition, the Company allocates the allowance based upon the
historical loan loss experience of the different types of loans.
Despite such allocation, both allocated and unallocated portions of
the allowance are available for charge-offs for all loans.
On January 1, 1995, the Company adopted Statement of Financial
Accounting Standards No. 114, "Accounting by Creditors for Impairment
of a Loan" ("FAS 114"). In accordance with FAS 114, any change in
the present value of such loans will be recognized as an adjustment
to the Company's allowance for possible loan losses.
-25-
<PAGE>
The following table shows the allocations in the allowance and
the respective percentages of each loan category to total loans at
September 30, 1995, and December 31, 1994.
<TABLE>
<CAPTION>
September 30, 1995 December 31, 1994
------------------------ ------------------------
Amount Percent of Amount Percent of
of Loans by of Loans by
Allowance Category Allowance Category
Allocated to Loans, Allocated to Loans,
to Net of Un- to Net of Un-
Category earned Income Category earned Income
--------- ------------- --------- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Loans to individuals $148 47.5% $207 47.8%
Real estate loans 194 27.2 165 28.0
Commercial and industrial loans 116 22.1 122 20.5
Other loans 66 3.2 68 3.7
---- ----- ---- -----
Total allocated 524 100.0% 562 100.0%
===== =====
Unallocated 241 255
---- ----
Total allowance for possible loan losses $765 $817
==== ====
</TABLE>
Loan Review Process
The Company follows a loan review program to evaluate the credit
risk in its loan portfolio. Through the loan review process, the
Banks maintain an internally classified loan list that, along with
the list of nonperforming assets discussed below, helps management
assess the overall quality of the loan portfolio and the adequacy of
the allowance. Loans classified as "substandard" are those loans
with clear and defined weaknesses, such as highly leveraged
positions, unfavorable financial ratios, uncertain repayment sources
or poor financial condition, that may jeopardize recoverability of
the loan. Loans classified as "doubtful" are those loans that have
characteristics similar to substandard loans but also have an
increased risk that a loss may occur or at least a portion of the
loan may require a charge-off if liquidated at present. Although
loans classified as substandard do not duplicate loans classified as
doubtful, both substandard and doubtful loans may include some loans
that are past due at least 90 days, are on nonaccrual status or have
been restructured. Loans classified as "loss" are those loans that
are in the process of being charged off. At September 30, 1995,
substandard loans totaled $1,866,000, of which $187,000 were loans
designated as nonaccrual or 90 days past due. There were no loans
classified as doubtful or loss at September 30, 1995.
In addition to the internally classified and nonperforming
loans, each Bank also has a "watch list" of loans that further
assists each Bank in monitoring its loan portfolio. A loan is
included on the watch list if it demonstrates one or more
deficiencies requiring attention in the near term or if the loan's
ratios have weakened to a point where more frequent monitoring is
warranted. These loans do not have all the characteristics of a
classified loan (substandard or doubtful), but do have weakened
elements as compared with those of a satisfactory credit. The Banks
review these loans in assessing the adequacy of the allowance.
Substantially all of the loans on the watch list at September 30,
1995, are current and paying in accordance with loan terms. At
September 30, 1995, watch list loans totaled $2,055,000 (including
$181,000 of loans guaranteed by U.S. governmental agencies). At such
date, $82,000 of loans not classified and not on the watch list were
designated as 90 days past due or restructured. See "Nonperforming
Assets" below.
-26-
<PAGE>
Nonperforming Assets
Nonperforming loans consist of past due, nonaccrual and
restructured loans. A past due loan is an accruing loan that is
contractually past due 90 days or more as to principal or interest
payments. Loans on which management does not expect to collect
interest in the normal course of business are placed on nonaccrual or
are restructured. When a loan is placed on nonaccrual, any interest
previously accrued but not yet collected is reversed against current
income unless, in the opinion of management, the outstanding interest
remains collectible. Thereafter, interest is included in income only
to the extent of cash received. A loan is restored to accrual status
when all interest and principal payments are current and the borrower
has demonstrated to management the ability to make payments of
principal and interest as scheduled.
A "troubled debt restructuring" is a restructured loan upon
which interest accrues at a below market rate or upon which certain
principal has been forgiven so as to aid the borrower in the final
repayment of the loan, with any interest previously accrued, but not
yet collected, being reversed against current income. Interest is
accrued based upon the new loan terms.
Nonperforming loans are fully or substantially secured by
assets, with any excess of loan balances over collateral values
allocated in the allowance. Assets acquired through foreclosure are
carried at the lower of cost or estimated fair value, net of
estimated costs of disposal, if any. See "Real Estate and Other
Repossessed Assets" below.
The following table lists nonaccrual, past due and restructured
loans and real estate and other repossessed assets at September 30,
1995, and December 31, 1994.
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
------------- ------------
(In thousands)
<S> <C> <C>
Nonaccrual loans $178 $ 48
Accruing loans contractually
past due over 90 days 22 26
Restructured loans 69 80
Real estate and other repossessed
assets 446 631
---- ----
Total nonperforming assets $715 $785
==== ====
</TABLE>
The gross interest income that would have been recorded during
the third quarter and first nine months of 1995 on the Company's
nonaccrual loans if such loans had been current, in accordance with
the original terms thereof and outstanding throughout the period or,
if shorter, since origination, was approximately $4,000 and $13,000,
respectively. No interest income was actually recorded (received) on
loans that were on nonaccrual during the third quarter and first nine
months of 1995.
A potential problem loan is a loan where information about
possible credit problems of the borrower is known, causing management
to have serious doubts as to the ability of the borrower
-27-
<PAGE>
to comply with the present loan repayment terms and which may result
in the inclusion of such loan in one of the loan categories set forth
in the preceding table. The Company does not believe it has any
potential problem loans other than those reported in the preceding
table.
Real Estate and Other Repossessed Assets
Real estate and other repossessed assets consists of real
property and other assets unrelated to banking premises or
facilities. Income derived from this real estate and other
repossessed assets, if any, is generally less than that which would
have been earned as interest at the original contract rates on the
related loans. At September 30, 1995, and December 31, 1994, real
estate and other repossessed assets had an aggregate book value of
$446,000 and $631,000, respectively. Real estate and other
repossessed assets decreased $185,000, or 29.3%, during the first
nine months of 1995, partially due to the reclassification from in-
substance repossession at December 31, 1994, to nonperforming
(nonaccrual) loans at September 30, 1995, of one loan in the amount
of $125,000 as a result of the adoption by the Company on January 1,
1995, of FAS 114 and partially due to sales of several parcels of
real estate. Of the September 30, 1995 balance, $245,000 represents
twenty-three (23) repossessed automobiles, $43,000 represents
unimproved lots in a residential subdivision, and $34,000 represents
real estate and a commercial building. None of the remaining
individual parcels of real estate or other repossessed assets are
carried at more than $23,000.
Premises and Equipment
Premises and equipment decreased $156,000, or 3.6%, during the
first nine months of 1995, from $4,345,000 at December 31, 1994, to
$4,189,000 at September 30, 1995. The decrease was due to
depreciation recorded on the Company's premises and equipment during
the first nine months of 1995.
Accrued Interest Receivable
Accrued interest receivable consists of interest that has
accrued on loans and securities, but is not yet payable under the
terms of the related agreements. The balance of accrued interest
receivable increased $336,000, or 35.6%, from $945,000 at December
31, 1994, to $1,281,000 at September 30, 1995. The increase was a
result of additional funds being invested in securities on which
interest is collected semi-annually, at September 30, 1995, as
opposed to federal funds sold on which interest is paid daily. Of
the total balance at September 30, 1995, $749,000, or 58.5%, was
interest accrued on securities and $532,000, or 41.5%, was interest
accrued on loans. The amounts of accrued interest receivable and
percentages attributable to loans and securities at December 31,
1994, were $560,000, or 59.3%, and $385,000, or 40.7%, respectively.
Other Assets
The most significant component of other assets at September 30,
1995, is a net deferred tax asset of $2,089,000. The balance of
other assets increased $1,355,000, or 98.1% to $2,736,000 at
September 30, 1995, from $1,381,000 at December 31, 1994, as a result
of a $1,600,000 decrease in the Company's valuation allowance on its
deferred tax asset which was partially offset by a $401,000 decrease
in the gross deferred tax asset due to the utilization of a portion
of the Company's net operating loss carryforwards.
-28-
<PAGE>
Deposits
The Banks' lending and investing activities are funded almost
entirely by core deposits, 51.8% of which are demand, savings and
money market deposits at September 30, 1995. Total deposits
increased $12,230,000, or 8.4%, from $146,184,000 at December 31,
1994, to $158,414,000 at September 30, 1995. The increase is due to
an increase in interest-bearing time deposits at the Banks, primarily
as a result of an increase in the rates paid on such deposits. The
Banks do not accept brokered deposits.
The following table presents the average amounts of and the
average rates paid on deposits of the Company for the quarters and
nine-month periods ended September 30, 1995 and 1994:
<TABLE>
<CAPTION>
Quarter Ended September 30, Nine-month Period Ended September 30,
-------------------------------------------- --------------------------------------------
1995 1994 1995 1994
---- ---- ---- ----
Average Average Average Average Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate
------- ------- ------- ------- ------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Noninterest-bearing
demand deposits $ 28,264 --% $ 29,099 --% $ 28,866 --% $ 30,628 --%
Interest-bearing demand,
savings and money
market deposits 52,897 2.37 59,188 2.23 53,486 2.35 60,510 2.10
Time deposits of less
than $100,000 53,844 5.65 42,339 3.68 51,537 5.32 42,991 3.46
Time deposits of $100,000
or more 20,793 5.75 13,513 3.91 18,567 5.57 13,340 3.54
-------- ---- -------- ---- -------- ----
Total deposits $155,798 3.52% $144,139 2.36% $152,456 3.30% $147,469 2.19%
======== ==== ======== ==== ======== ====
</TABLE>
The maturity distribution of time deposits of $100,000 or more
at September 30, 1995, is presented below.
<TABLE>
<CAPTION>
At September 30, 1995
---------------------
(In thousands)
<S> <C>
3 months or less $ 6,081
Over 3 through 6 months 7,268
Over 6 through 12 months 4,352
Over 12 months 3,873
-------
Total time deposits of $100,000
or more $21,574
=======
</TABLE>
The Banks experience limited reliance on time deposits of
$100,000 or more. Time deposits of $100,000 or more are a more
volatile source of funds than other deposits and are most likely to
affect the Company's future earnings because of interest rate
sensitivity. At September 30, 1995, deposits of $100,000 or more
represented approximately 12.4% of the Company's total assets,
compared to 9.1% of total assets at December 31, 1994.
Notes Payable
The Company's notes payable increased $144,000, or 15.5%, from
$930,000 at December 31, 1994, to $1,074,000 at September 30, 1995.
The increase represents the additional
-29-
<PAGE>
debt incurred as a result of the final settlement of certain
litigation, which was partially offset by the regular quarterly
principal payments made by the Company on the Term Note (as defined
below) on January 15, April 15 and July 15, 1995, and a $100,000
principal payment made by the Company on the Acquisition Note
(as defined below) on August 30, 1995.
Accrued Interest Payable
Accrued interest payable consists of interest that has accrued
on deposits and notes payable, but is not yet payable under the terms
of the related agreements. The balance of accrued interest payable
increased $366,000, or 89.7%, from $408,000 at December 31, 1994, to
$774,000 at September 30, 1995. The increase was a result of an
increase in the amount of outstanding certificates of deposit and the
rising interest rate environment on certificates of deposit during
the last year.
Other Liabilities
The most significant components of other liabilities are amounts
accrued for various types of expenses. The balance of other
liabilities decreased $950,000, or 75.1%, from $1,265,000 at December
31, 1994, to $315,000 at September 30, 1995, as a result of the final
settlement of certain litigation during the second quarter of 1995.
A total of $900,000 of the settlement amount had been accrued at
December 31, 1994.
Interest Rate Sensitivity
Interest rate risk arises when an interest-earning asset matures
or when its rate of interest changes in a time frame different from
that of the supporting interest-bearing liability. The Company seeks
to minimize the difference between the amount of interest-earning
assets and the amount of interest-bearing liabilities that could
change interest rates in the same time frame in an attempt to reduce
the risk of significant adverse effects on the Company's net interest
income caused by interest rate changes. The Company does not attempt
to match each interest-earning asset with a specific interest-bearing
liability. Instead, as shown in the table below, it aggregates all
of its interest-earning assets and interest-bearing liabilities to
determine the difference between the two in specific time frames.
This difference is known as the rate-sensitivity gap. A positive gap
indicates that more interest-earning assets than interest-bearing
liabilities mature in a time frame, and a negative gap indicates the
opposite. Maintaining a balanced position will reduce risk
associated with interest rate changes, but it will not guarantee a
stable interest rate spread because the various rates within a time
frame may change by differing amounts and occasionally change in
different directions. Management regularly monitors the interest
sensitivity position and considers this position in its decisions in
regard to interest rates and maturities for interest-earning assets
acquired and interest-bearing liabilities accepted.
The Company's objective is to maintain a ratio of interest-
sensitive assets to interest-sensitive liabilities that is as
balanced as possible. The following table shows that ratio to be
64.5% at the 90-day interval, 59.5% at the 180-day interval and
53.1% at the 365-day interval at September 30, 1995. Currently, the
Company is in a liability-sensitive position at the three intervals.
During a rising interest rate environment, this position normally
produces a lower net interest margin than in a falling interest rate
environment. However, because the Company had
-30-
<PAGE>
$52,874,000 of interest-bearing demand, savings and money market
deposits at September 30, 1995, that are somewhat less rate-sensitive,
the Company's net interest margin does not necessarily decrease
significantly in a rising interest rate environment. Excluding these
types of deposits, the Company's interest-sensitive assets to interest-
sensitive liabilities ratio would have been 98.1% at the 365-day interval.
The interest sensitivity position is presented as of a point in time and
can be modified to some extent by management as changing conditions dictate.
The following table shows the interest rate sensitivity position
of the Company at September 30, 1995.
<TABLE>
<CAPTION>
Volumes
Cumulative Volumes Subject to Subject to
Repricing Within Repricing
90 Days 180 Days 365 Days After 1 Year Total
------- -------- -------- ------------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Federal funds sold $ 13,750 $ 13,750 $ 13,750 $ 0 $ 13,750
Securities 8,118 11,844 19,381 39,593 58,974
Loans, net of unearned income 23,903 25,293 28,114 54,445 82,559
-------- -------- -------- ------- --------
Total interest-earning assets 45,771 50,887 61,245 94,038 155,283
-------- -------- -------- ------- --------
Interest-bearing liabilities:
Demand, savings and money market
deposits 52,874 52,874 52,874 0 52,874
Time deposits 17,361 31,950 61,570 14,765 76,335
Notes payable 727 728 840 234 1,074
-------- -------- -------- ------- --------
Total interest-bearing
liabilities 70,962 85,552 115,284 14,999 130,283
-------- -------- -------- ------- --------
Rate-sensitivity gap(1) $(25,191) $(34,665) $(54,039) $79,039 $ 25,000
======== ======== ======== ======= ========
Rate-sensitivity ratio(2) 64.5% 59.5% 53.1%
==== ==== ====
<FN>
______________________________
(1) Rate-sensitive interest-earning assets less rate-sensitive interest-bearing
liabilities.
(2) Rate-sensitive interest-earning assets divided by rate-sensitive interest-
bearing liabilities.
</FN>
</TABLE>
-31-
<PAGE>
Selected Financial Ratios
The following table presents selected financial ratios
(annualized) for the quarters and nine-month periods ended September
30, 1995 and 1994.
<TABLE>
<CAPTION>
Quarter Ended Nine-month Period
September 30, Ended September 30,
----------------- -------------------
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income to:
Average assets 0.74% 0.20% 0.66% 0.46%
Average interest-earning assets 0.81 0.23 0.72 0.51
Average stockholders' equity 9.47 2.77 9.06 6.64
Dividend payout (1) to:
Net income 9.83 29.11 10.23 8.45
Average stockholders' equity 0.93 0.81 0.93 0.56
Average stockholders' equity to:
Average total assets 7.81 7.25 7.32 6.95
Average loans (2) 16.24 15.05 14.78 15.32
Average total deposits 8.59 7.92 8.02 7.57
Average interest-earning assets to:
Average total assets 91.49 90.00 91.62 90.05
Average total deposits 100.64 98.42 100.44 98.11
Average total liabilities 99.24 97.03 98.85 96.78
Ratio to total average deposits of:
Average loans (2) 52.89 52.63 54.27 49.43
Average noninterest-bearing deposits 18.14 20.20 18.93 20.77
Average interest-bearing deposits 81.86 79.80 81.07 79.23
Total interest expense to total interest income 45.95 34.92 43.71 33.30
<FN>
_________________________
(1) Dividends on Common Stock only.
(2) Before allowance for possible loan losses.
</FN>
</TABLE>
Liquidity
The Banks
Liquidity with respect to a financial institution is the ability
to meet its short-term needs for cash without suffering an
unfavorable impact on its on-going operations. The need for the
Banks to maintain funds on hand arises principally from maturities of
short-term money market borrowings, deposit withdrawals, customers'
borrowing needs and the maintenance of reserve requirements.
Liquidity with respect to a financial institution can be met from
either assets or liabilities. On the asset side, the primary sources
of liquidity are cash and due from banks, federal funds sold,
maturities of securities and scheduled repayments and maturities of
loans. The Banks maintain adequate levels of cash and near-cash
investments to meet their day-to-day needs. Cash and due from banks
averaged $6,658,000 and $7,031,000 during the third quarter and first
nine months of 1995, respectively, and $7,580,000 and $8,231,000
during the third quarter and first nine months of 1994, respectively.
These amounts comprised 3.9% and 4.2% of average total assets during
the third quarter and the first nine months of 1995, respectively,
and 4.8% and 5.1% of average total assets during the third quarter
and first nine months of 1994, respectively. The average level of
securities and federal funds sold was $74,387,000 and $70,396,000
during the third quarter and first nine months of 1995, respectively,
and $65,964,000 and $71,783,000 during the
-32-
<PAGE>
third quarter and first nine months of 1994, respectively. An
increasing amount of the Banks' available funds have been invested in
loans, particularly loans to individuals, due to increased loan
demand in the Company's market area.
The Banks sold no securities during the quarters or nine-month
periods ended September 30, 1995 and 1994. At September 30, 1995,
$19,381,000, or 32.9%, of the Company's securities portfolio matured
within one year and $39,593,000, or 67.1%, matured after one but within
five years. The Banks' commercial lending activities are
concentrated in loans with maturities of less than five years and
with adjustable interest rates, while their installment lending
activities are concentrated in loans with maturities of three to five
years and with fixed interest rates. The Banks' experience, however,
has been that these installment loans are paid off in an average of
approximately thirty months. At September 30, 1995, approximately
$28,114,000, or 34.1%, of the Company's total loans, net of unearned
income, matured within one year and/or had adjustable interest rates.
Approximately, $25,272,000, or 58.3% of the Company's commercial type
loans matured within one year and/or had adjustable interest rates.
See "Analysis of Financial Condition - Loan Portfolio" above.
On the liability side, the principal sources of liquidity are
deposits, borrowed funds and the accessibility to money and capital
markets. Customer deposits are by far the largest source of funds.
During the third quarter and first nine months of 1995, the Company's
average deposits were $155,798,000 and $152,456,000, respectively, or
90.9% and 91.2% of average total assets, respectively, compared to
$144,072,000 and $147,454,000, or 91.4% and 91.8% of average total
assets during the third quarter and first nine months of 1994,
respectively. The Company attracts its deposits primarily from
individuals and businesses located within the market areas served by
the Banks. See "Analysis of Financial Condition - Deposits" above.
The level of nonperforming assets has squeezed interest margins
and has resulted in noninterest expenses from net operating costs and
write-downs associated with nonperforming assets, although the level
of such nonperforming assets has been decreasing over the past two
years. In order to improve liquidity, the Banks have implemented
various cost-cutting and revenue-generating measures and have
extended efforts to reduce nonperforming assets.
The Company
The Company depends on the Banks for liquidity in the form of
cash flow, primarily to meet debt service and dividend requirements
and to cover other operating expenses. This cash flow from
subsidiaries comes from three sources: (1) dividends resulting from
earnings of the Banks, (2) current tax liabilities generated by the
Banks and (3) management and service fees for services performed for
the Banks.
The payment of dividends to the Company is subject to applicable
law and the scrutiny of regulatory authorities. Dividends paid by
the Banks to Independent Financial during the third quarter and first
nine months of 1995 were $300,000 and $500,000, respectively.
Dividends paid by Independent Financial to the Company during the
same time periods were $305,000 and $705,000, respectively.
Dividends paid by the Banks to Independent Financial during the third
quarter and the first nine months of 1994 were $250,000 and $450,000,
respectively; in turn, Independent Financial paid dividends to the
Company totaling $300,000 and $450,000 during the
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<PAGE>
same time periods. At September 30, 1995, there were approximately
$1,022,000 in dividends available for payment to Independent
Financial by the Banks without regulatory approval.
The payment of current tax liabilities generated by the Banks
and management and service fees constituted 36% and 8%, respectively,
of the Company's cash flow during the third quarter of 1995. These
percentages were 39% and 7%, respectively, for the first nine months
of 1995.
Pursuant to a tax-sharing agreement, the Company's subsidiaries
pay to the Company an amount equal to their individual tax
liabilities on the accrual method of federal income tax reporting.
The accrual method generates more timely payments of current tax
liabilities by the Banks to the Company, increasing the regularity of
cash flow and shifting the time value of such funds to the Company.
In the event that certain Banks incur losses, the Company may be
required to refund tax liabilities previously collected. Current tax
liabilities totaling $210,000 and $729,000 were paid by the Banks to
the Company during the third quarter and first nine months of 1995,
respectively, compared to a total of $188,000 and $505,000 during the
third quarter and first nine months of 1994, respectively.
The Banks pay management fees to the Company for services
performed. These services include, but are not limited to, financial
and accounting consultation, attendance at the subsidiaries' board
meetings, audit and loan review services and related expenses. The
Banks paid a total of $47,000 and $134,000 in management fees to the
Company during the third quarter and first nine months of 1995,
respectively, compared to $44,000 and $113,000 paid by the Banks
during the third quarter and first nine months of 1994, respectively.
The Company's fees must be reasonable in relation to the management
services rendered, and each Bank is prohibited from paying management
fees to the Company if the Bank would be undercapitalized after any
such distribution or payment.
The Company has a promissory note with the Amarillo Bank (the
"Term Note") that matures April 15, 1996. The balance of the Term
Note at September 30, 1995, was $526,000. Payments of principal and
interest, which are due quarterly on January 15, April 15, July 15
and October 15, are based on a seven-year amortization. The Company
has a second note with the Amarillo Bank, which was used for the
acquisition of Winters State (the "Acquisition Note"). The
Acquisition Note, which had an original principal balance of
$450,000, matured on August 30, 1994. The Company paid the Amarillo
Bank $150,000, and the maturity date was extended to August 30, 1997.
The Acquisition Note had a balance of $200,000 at September 30, 1995.
Principal payments of $100,000 are due annually, beginning August 30,
1995. Interest payments are due quarterly on February 28, May 30,
August 30 and November 30. These notes bear interest at the Amarillo
Bank's floating base rate plus 1% (9.75% at September 30, 1995) and
are secured by 100% of the stock of First State, N.A., Abilene and
First State, N.A., Odessa.
The loan agreement between the Company and the Amarillo Bank
contains certain covenants that, among other things, restrict the
ability of the Company to incur additional debt, to create liens on
its property, to merge or to consolidate with any other person, to
make certain investments, to purchase or sell assets and to pay cash
dividends on the Common Stock if the indebtedness due to the Amarillo
Bank is $1,000,000 or greater. The loan agreement also requires the
Company and the Banks to meet certain financial ratios. The Company
and the Banks were in compliance with
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<PAGE>
all of these ratios at September 30, 1995, and have been in
compliance with these ratios since the inception of the loan
agreement.
Capital Resources
At September 30, 1995, stockholders' equity totaled $13,488,000,
or 7.7% of total assets, compared to $11,073,000, or 6.9% of total
assets, at December 31, 1994.
Bank regulatory authorities in the United States have issued
risk-based capital standards by which all bank holding companies and
banks are evaluated in terms of capital adequacy. These guidelines
relate a banking company's capital to the risk profile of its assets.
The risk-based capital standards require all banks to have Tier 1
capital of at least 4% and total capital (Tier 1 and Tier 2) of at
least 8%, of risk-weighted assets. Tier 1 capital includes common
stockholders' equity, qualifying perpetual preferred stock and
minority interests in unconsolidated subsidiaries, reduced by
goodwill and net deferred tax assets in excess of regulatory capital
limits. Tier 2 capital may be comprised of certain other preferred
stock, qualifying debt instruments and all or a part of the allowance
for possible loan losses.
Banking regulators have also issued leverage ratio requirements.
The leverage ratio requirement is measured as the ratio of Tier 1
capital to adjusted quarterly average assets. The following table
provides a calculation of the Company's risk-based capital and
leverage ratios and a comparison of the Company's and the Banks'
risk-based capital ratios and leverage ratios to the minimum
regulatory requirements at September 30, 1995.
<TABLE>
<CAPTION>
The Company September 30, 1995
----------- ------------------
(In thousands)
<S> <C>
Tier 1 capital:
Common stockholders' equity, excluding unrealized
gain on available-for-sale securities $ 12,768
Preferred stockholders' equity (1) 696
Net deferred tax asset in excess of regulatory
capital limits (2) (359)
--------
Total Tier 1 capital 13,105
--------
Tier 2 capital:
Allowance for possible loan losses (3) 765
--------
Total Tier 2 capital 765
--------
Total capital $ 13,870
========
Risk-weighted assets $ 87,585
========
Adjusted quarterly average assets $172,162
========
</TABLE>
-35-
<PAGE>
<TABLE>
<CAPTION>
Minimum Actual
Regulatory Ratios for
The Company Requirement(4) September 30, 1995
- ----------- -------------- ------------------
<S> <C> <C>
Tier 1 capital to risk-weighted assets ratio 4.00% 14.96%
Total capital to risk-weighted assets ratio 8.00 15.84
Leverage ratio 3.00 7.61
The Banks
- ---------
Tier 1 capital to risk-weighted assets ratio 4.00% 12.10 - 16.45%
Total capital to risk-weighted assets ratio 8.00 12.90 - 17.40
Leverage ratio 3.00 7.23 - 7.65
<FN>
___________________________
(1) Limited to 25% of total Tier 1 capital, with the remainder, if any,
qualifying as Tier 2 capital.
(2) The amount of the net deferred tax asset in excess of the lesser of (i) 10%
of Tier 1 capital or (ii) the amount of the tax benefit from utilization of
net operating loss carryforwards expected to be realized within one year.
(3) Limited to 1.25% of risk-weighted assets.
(4) For top rated banking organizations.
</FN>
</TABLE>
The Federal Deposit Insurance Corporation Improvement Act of
1991 ("FDICIA") requires each federal banking agency to revise its
risk-based capital standards to ensure that those standards take
adequate account of interest rate risk, concentration of credit risk
and the risks of non-traditional activities, as well as reflect the
actual performance and expected risk of loss on multi-family
mortgages. The new law also required each federal banking agency to
specify the levels at which an insured institution would be
considered "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" and "critically
undercapitalized." Under the FDIC's regulations, the Company and the
Banks were all "well capitalized" at September 30, 1995.
The Company's ability to generate capital internally through
retention of earnings and access to capital markets is essential for
satisfying the capital guidelines for bank holding companies as
prescribed by the Board of Governors of the Federal Reserve System.
The payment of dividends on the Common Stock and Series C
Preferred Stock is determined by the Company's board of directors in
light of circumstances and conditions then existing, including the
earnings of the Company and the Banks, funding requirements and
financial condition, applicable loan covenants and applicable laws
and regulations. The Company's ability to pay cash dividends is
restricted by the requirement that it maintain a certain level of
capital as discussed above in accordance with regulatory guidelines
and by the terms of its loan agreement with the Amarillo Bank.
Holders of the Series C Preferred Stock are entitled to receive, if,
as and when declared by the Company's board of directors, out of
funds legally available therefor, quarterly cumulative cash dividends
at the annual rate of 10%. The Federal Reserve Board has promulgated
a policy prohibiting bank holding companies from paying dividends on
common stock unless such bank holding company can pay such dividends
from current earnings. The Federal Reserve Board has asserted that
this policy is also applicable to payment of dividends on preferred
stock. Such an interpretation may limit the ability of the Company
to pay dividends on the Series C Preferred Stock.
The Company began paying quarterly cash dividends of $0.03 per
share on its Common Stock during the second quarter of 1994. Cash
dividends were also paid during the third and fourth
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<PAGE>
quarters of 1994 and the first three quarters of 1995. The Company
also paid a 33-1/3% stock dividend on May 31, 1995, to stockholders
of record on May 10, 1995. Subsequent to September 30, 1995, the
Company declared a $0.03 per share cash dividend payable to
stockholders of record on November 15, 1995. The cash dividend is
payable on November 30, 1995.
First State, N.A., Abilene has entered into an agreement to
acquire Peoples National Bank, Winters, Texas in a cash transaction
that First State, N.A., Abilene plans to fund from internal sources.
An application for such acquisition was filed with the Office of the
Comptroller of the Currency on September 29, 1995, and the OCC approved
the application on November 6, 1995. Consummation of the acquisition
is subject to certain other regulatory approvals. If all remaining
approvals are received, the transaction would be consummated either on
December 31, 1995, or during the first quarter of 1996. At September
30, 1995, Peoples National Bank had total assets of $6,687,000, total
loans, net of unearned income, of $3,642,000, total deposits of $5,903,000
and stockholders' equity of $689,000. First State, N.A., Abilene
currently operates an existing branch facility in Winters. By
combining the two locations in Winters, the Company anticipates that
it will be able to achieve economies of scale in various areas.
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<PAGE>
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
In 1985, a former subsidiary bank of the Company foreclosed on
the stock of Texas Bank & Trust Company, Sweetwater, Texas ("TB&T-
Sweetwater"), which became a repossessed asset of the former
subsidiary. TB&T-Sweetwater subsequently failed, resulting in a
legal action begin brought in federal court against the thirteen
TB&T-Sweetwater directors by the Federal Deposit Insurance
Corporation (the "FDIC"). In September 1993, nine former outside
directors of TB&T-Sweetwater (the "Outside Directors") settled with
the FDIC for an aggregate of $60,000.
All former directors of TB&T-Sweetwater requested that the
Company reimburse them for their expenses and settlement costs
incurred by them in their defense of the FDIC litigation. This
request was based upon their interpretation of certain
indemnification provisions contained in the Company's Articles of
Incorporation.
In January 1994, the Company filed a declaratory judgment action
in state district court to petition the court to rule on certain
matters that would have precluded indemnification. Certain of the
directors filed counterclaims against the Company asserting their
right to be indemnified. A hearing occurred in July 1994, and the
court issued an order in September 1994, denying the Company's
petition and upholding the directors' counterclaims.
In December 1994, a settlement was entered into between the
FDIC, one Outside Director and the three management directors of
TB&T-Sweetwater, who were also management directors of the Company
(the "Inside Directors"), with the Inside Directors paying the FDIC
a total of $450,000. As a result of the two settlements and
indemnification requests, the Outside Directors claimed
indemnification in the amount of approximately $467,000 and the
Inside Directors claimed indemnification in the amount of
approximately $900,000. In 1994, the Company accrued $900,000 for
the potential reimbursement of the $1,367,000 in claims.
On March 7, 1995, the Company agreed to settle the
indemnification requests of the Inside Directors for $450,000 in cash
and by delivery of three promissory notes in the aggregate principal
amount of $350,000. These notes are payable in three equal
installments over three years and bear interest at 6% per annum. As
a result of the below-market interest rate, the notes were discounted
to an aggregate of $323,000. In April and May 1995, the Company
consummated this settlement with the Inside Directors by paying them
an aggregate of $450,000 and delivering such promissory notes to
them. In May and June 1995, the Company settled with the Outside
Directors by paying them $252,000 in cash.
The Company is involved in various litigation proceedings
incidental to the ordinary course of business. In the opinion of
management, the ultimate liability, if any, resulting from such
litigation would not be material in relation to the Company's
financial position and results of operations.
Item 2. Changes in Securities.
None
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<PAGE>
Item 3. Defaults upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
4.1 Restated Articles of Incorporation of the Company
(Exhibit 3.1)*
4.2 Bylaws of the Company (Exhibit 3.2)*
27 Financial Data Schedule
(b) Reports on Form 8-K
None
______________________
* Incorporated herein by reference to the exhibit shown in
parenthesis filed as an exhibit to the Annual Report of the
Company on Form 10-K for the fiscal year ended December 31,
1994.
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<PAGE>
SIGNATURE
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.
Date: November 14, 1995 Independent Bankshares, Inc.
(Registrant)
By: Randal N. Crosswhite
Randal N. Crosswhite
Senior Vice President and
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
unaudited financial statements for Independent Bankshares, Inc. as of and for
the three-month and nine-month periods ended September 30, 1995 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1995
<PERIOD-START> JUL-01-1995 JAN-01-1995
<PERIOD-END> SEP-30-1995 SEP-30-1995
<CASH> 10,895,000 10,895,000
<INT-BEARING-DEPOSITS> 0 0
<FED-FUNDS-SOLD> 13,750,000 13,750,000
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 21,403,000 21,403,000
<INVESTMENTS-CARRYING> 58,974,000<F1> 58,974,000<F1>
<INVESTMENTS-MARKET> 59,033,000<F1> 59,033,000<F1>
<LOANS> 82,559,000<F2> 82,559,000<F2>
<ALLOWANCE> 765,000 765,000
<TOTAL-ASSETS> 174,065,000 174,065,000
<DEPOSITS> 158,414,000 158,414,000
<SHORT-TERM> 741,000 741,000
<LIABILITIES-OTHER> 1,089,000 1,089,000
<LONG-TERM> 333,000 333,000
<COMMON> 260,000 260,000
0 0
166,000 166,000
<OTHER-SE> 13,062,000 13,062,000
<TOTAL-LIABILITIES-AND-EQUITY> 174,065,000 174,065,000
<INTEREST-LOAN> 1,963,000 5,795,000
<INTEREST-INVEST> 674,000 1,517,000
<INTEREST-OTHER> 412,000 1,519,000
<INTEREST-TOTAL> 3,049,000 8,831,000
<INTEREST-DEPOSIT> 1,372,000 3,775,000
<INTEREST-EXPENSE> 1,401,000 3,860,000
<INTEREST-INCOME-NET> 1,684,000 4,971,000
<LOAN-LOSSES> 69,000 141,000
<SECURITIES-GAINS> 0 0
<EXPENSE-OTHER> 1,471,000 4,729,000
<INCOME-PRETAX> 479,000 1,257,000
<INCOME-PRE-EXTRAORDINARY> 479,000 1,257,000
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 317,000 831,000
<EPS-PRIMARY> .29 .75
<EPS-DILUTED> .23 .62
<YIELD-ACTUAL> 4.21 4.33
<LOANS-NON> 178,000 178,000
<LOANS-PAST> 22,000 22,000
<LOANS-TROUBLED> 69,000 69,000
<LOANS-PROBLEM> 0 0
<ALLOWANCE-OPEN> 803,000 817,000
<CHARGE-OFFS> 124,000 275,000
<RECOVERIES> 17,000 82,000
<ALLOWANCE-CLOSE> 765,000 765,000
<ALLOWANCE-DOMESTIC> 524,000 524,000
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 241,000 241,000
<FN>
<F1>Includes investments held for sale
<F2>Net of unearned income on installment loans of 3,823,000
</FN>
</TABLE>
