<PAGE>
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: March 31, 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 March 31, 1995.
Class: Common Stock, par value $0.25 per share
Outstanding at March 31, 1995: 779,459 shares
-1-
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements.
-2-
<PAGE>
INDEPENDENT BANKSHARES, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1995 AND DECEMBER 31, 1994
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1995 1994
----------- ------------
<S> <C> <C>
ASSETS
Cash and Cash Equivalents:
Cash and Due from Banks $ 7,768,000 $ 7,564,000
Federal Funds Sold 34,200,000 31,200,000
------------ ------------
Total Cash and Cash Equivalents 41,968,000 38,764,000
------------ ------------
Securities:
Available-for-sale 14,210,000 17,078,000
Held-to-maturity--Market Value of $17,549,000
for March 31, 1995, and $15,913,000 for
December 31, 1994 17,681,000 16,227,000
------------ ------------
Total Securities 31,891,000 33,305,000
------------ ------------
Loans:
Total Loans 88,615,000 85,518,000
Less:
Unearned Income on Installment Loans 4,442,000 4,212,000
Allowance for Possible Loan Losses 819,000 817,000
------------ ------------
Net Loans 83,354,000 80,489,000
------------ ------------
Premises and Equipment 4,276,000 4,345,000
Real Estate and Other Repossessed Assets 495,000 631,000
Accrued Interest Receivable 830,000 945,000
Other Assets 1,758,000 1,381,000
------------ ------------
Total Assets $164,572,000 $159,860,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest-bearing Demand Deposits $ 28,337,000 $ 30,210,000
Interest-bearing Demand Deposits 53,758,000 56,520,000
Interest-bearing Time Deposits 67,965,000 59,454,000
------------ ------------
Total Deposits 150,060,000 146,184,000
Notes Payable 901,000 930,000
Accrued Interest Payable 535,000 408,000
Other Liabilities 1,242,000 1,265,000
------------ ------------
Total Liabilities 152,738,000 148,787,000
------------ ------------
Stockholders' Equity:
Series C Preferred Stock 166,000 167,000
Common Stock 195,000 195,000
Additional Paid-in Capital 8,642,000 8,241,000
Retained Earnings 2,862,000 2,570,000
Unrealized Loss on Available-for-sale Securities (31,000) (100,000)
------------ ------------
Total Stockholders' Equity 11,834,000 11,073,000
------------ ------------
Total Liabilities and Stockholders'
Equity $164,572,000 $159,860,000
============ ============
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
-3-
<PAGE>
INDEPENDENT BANKSHARES, INC.
CONSOLIDATED INCOME STATEMENTS
QUARTERS ENDED MARCH 31, 1995 AND 1994
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED MARCH 31,
------------------------------
1995 1994
---------- ----------
<S> <C> <C>
Interest Income:
Interest and Fees on Loans $1,891,000 $1,640,000
Interest on Federal Funds Sold 493,000 94,000
Interest on Securities 427,000 737,000
---------- ----------
Total Interest Income 2,811,000 2,471,000
---------- ----------
Interest Expense:
Interest on Deposits 1,106,000 770,000
Interest on Notes Payable 22,000 21,000
---------- ----------
Total Interest Expense 1,128,000 791,000
---------- ----------
Net Interest Income 1,683,000 1,680,000
Provision for Loan Losses 42,000 21,000
---------- ----------
Net Interest Income After Provision
for Loan Losses 1,641,000 1,659,000
---------- ----------
Noninterest Income:
Service Charges 308,000 278,000
Trust Fees 55,000 45,000
Insurance Premiums 21,000 6,000
Other Income 17,000 24,000
---------- ----------
Total Noninterest Income 401,000 353,000
---------- ----------
Noninterest Expenses:
Salaries and Employee Benefits 714,000 720,000
Equipment Expense 171,000 125,000
Net Occupancy Expense 168,000 168,000
FDIC Insurance Expense 79,000 82,000
Stationery, Printing and Supplies Expense 62,000 65,000
Legal Fees and Expense 51,000 110,000
Accounting Fees and Expense 32,000 32,000
Data Processing Expense 17,000 121,000
Net Costs Applicable to Real Estate
and Other Repossessed Assets (4,000) (15,000)
Other Expenses 250,000 280,000
---------- ----------
Total Noninterest Expenses 1,540,000 1,688,000
---------- ----------
Income Before Federal Income Taxes 502,000 324,000
Federal Income Taxes:
Current 10,000 2,000
Deferred 160,000 107,000
---------- ----------
Net Income $ 332,000 $ 215,000
========== ==========
Preferred Stock Dividends $ 18,000 $ 18,000
========== ==========
Net Income Available to Common Stockholders $ 314,000 $ 197,000
========== ==========
Primary Earnings per Common Share Available to
Common Stockholders $ 0.40 $ 0.25
========== ==========
Fully Diluted Earnings Per Common Share
Available to Common Stockholders $ 0.33 $ 0.21
========== ==========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
-4-
<PAGE>
INDEPENDENT BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
QUARTERS ENDED MARCH 31, 1995 and 1994
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED MARCH 31,
--------------------------
1995 1994
----------- -----------
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income $ 332,000 $ 215,000
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Deferred Federal Income Tax Expense 160,000 107,000
Depreciation and Amortization 101,000 102,000
Provision for Loan Losses 42,000 21,000
(Gain) Loss on Sales of Premises and Equipment (3,000) 0
(Gain) Loss on Sales of Real Estate and
Other Repossessed Assets (14,000) 0
Writedown of Real Estate and Other Repossessed
Assets 12,000 0
(Increase) Decrease in Accrued Interest
Receivable 115,000 (40,000)
(Increase) Decrease in Other Assets (377,000) (42,000)
Increase (Decrease) in Accrued Interest Payable 127,000 (7,000)
Increase (Decrease) in Other Liabilities (23,000) (50,000)
----------- -----------
Net Cash Provided by Operating Activities 472,000 306,000
----------- -----------
Cash Flows from Investing Activities:
Proceeds from Maturities of Available-for-sale
Securities 2,968,000 4,824,000
Proceeds from Maturities of Held-to-maturity
Securities 542,000 3,083,000
Purchases of Available-for-sale Securities 0 (3,001,000)
Purchases of Held-to-maturity Securities (2,000,000) (2,979,000)
Net Increase in Loans (2,701,000) (1,433,000)
Additions to Premises and Equipment (31,000) (71,000)
Proceeds from Sales of Premises and Equipment 3,000 0
Proceeds from Sales of Real Estate and
Other Repossessed Assets 145,000 92,000
----------- -----------
Net Cash Provided by (Used in) Investing
Activities (1,074,000) 515,000
----------- -----------
Cash Flows from Financing Activities:
Increase in Deposits 3,876,000 2,472,000
Repayment of Notes Payable (29,000) (28,000)
Payment of Cash Dividends (41,000) (18,000)
----------- -----------
Net Cash Provided by Financing Activities 3,806,000 2,426,000
----------- -----------
Net Increase in Cash and Cash Equivalents 3,204,000 3,247,000
Cash and Cash Equivalents at Beginning of Period 38,764,000 19,268,000
----------- -----------
Cash and Cash Equivalents at End of Period $41,968,000 $22,515,000
=========== ===========
Cash paid during the quarter for:
Interest $ 1,001,000 $ 798,000
Federal income taxes 5,000 0
Noncash investing activities:
Additions to real estate and other
repossessed assets through foreclosures
during the quarter $ 201,000 $ 289,000
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
-5-
<PAGE>
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 three months of 1995 and 1994 totaled $160,000 and
$107,000, respectively.
(3) NOTES PAYABLE
The Company has two notes payable to a financial institution in Amarillo,
Texas (the "Amarillo Bank"). The long-term note (the "Long-term Note") had
an outstanding principal balance of $581,000 at March 31, 1995. The
Long-term Note has a maturity of April 15, 1996, and equal principal
payments, based on a seven-year amortization, plus accrued interest, are due
on a quarterly basis. 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 $300,000 at March 31, 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% (10% at March 31, 1995). The
notes are secured by 100% of the
-6-
<PAGE>
stock of First State Bank, N.A., Abilene, Texas ("First State, N.A.,
Abilene") and 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 March 31, 1995, and
December 31, 1994.
(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 quarter of 1994, the Company reduced its gross deferred tax asset and
the related valuation allowance by $107,000 due to the utilization of a
portion of its net operating loss carryforwards. During the first quarter of
1995, the Company reduced its gross deferred tax asset by $160,000 as a
result of the utilization of a portion of its net operating loss
carryforwards. The Company also reduced the valuation allowance by $400,000
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. This net deferred
tax asset equaled $1,140,000 at March 31, 1995, after the $400,000 reduction
in the deferred tax asset valuation allowance. Assuming that the Company's
earnings continue to support reductions in the deferred tax asset valuation
allowance, reductions and transfers to additional paid-in capital will
continue to be made in the future.
(5) STOCKHOLDERS' EQUITY
In the first three months of 1995 and 1994, the Company paid $18,000 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.
-7-
<PAGE>
Subsequent to March 31, 1995, the Company declared a 33-1/3% stock
dividend. The dividend will be payable on May 31, 1995, to stockholders of
record on May 10, 1995. Approximately 259,700 additional shares of Common
Stock will be issued as a result of the stock dividend.
(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 ended
March 31, 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 March 31, 1995 and 1994, was 781,000 and 782,000 shares,
respectively. The weighted average common shares outstanding used in
computing fully diluted earnings per common share for the quarters ended
March 31, 1995 and 1994, was 1,010,000 and 1,011,000 shares, respectively.
(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 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
-8-
<PAGE>
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. Subsequent to March 31, 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. The
Company will continue to dispute the indemnification requests of the Outside
Directors.
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.
-9-
<PAGE>
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, at December 31, 1994, owned 100% of Independent Financial Corp.
("Independent Financial") which, in turn, owned 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.
GENERAL
The following discussion and analysis presents the more significant
factors affecting the Company's financial condition at March 31, 1995, and
December 31, 1994, and results of operations for each of the quarters ended
March 31, 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 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 three
months of 1995 and 1994 totaled $160,000 and $107,000, respectively.
-10-
<PAGE>
RESULTS OF OPERATIONS
GENERAL
Net income for the quarter ended March 31, 1995, amounted to $332,000
($0.40 primary earnings per common share) compared to net income of $215,000
($0.25 primary earnings per common share) for the quarter ended March 31,
1994.
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 $1,683,000 for the first quarter of 1995,
an increase of $3,000, or 0.2%, from the first quarter of 1994. Net interest
income for the first quarter of 1994 was $1,680,000. The small increase in
1995 was due to an increase in average earning assets, which was offset by a
slight reduction in the Company's net interest margin as a result of
increasing interest rates being paid on certificates of deposit. The net
interest margin on a fully taxable-equivalent basis, was 4.54% for the first
quarter of 1995, compared to 4.58% for the first quarter of 1994.
At March 31, 1995, approximately $20,231,000, or 24.0%, of the Company's
total loans, net of unearned income, were tied to fluctuations in the prime
interest rate. Average rates paid for various types of deposits,
particularly certificates of deposit, increased from March 31, 1994, to March
31, 1995. For example, the average rate paid by the Company for certificates
of deposit of $100,000 or more increased to 5.08% during the first quarter of
1995 from 3.28% during the first quarter of 1994. The average rate paid for
certificates of deposit less than $100,000 also increased from 3.29% in the
first quarter of 1994 to 4.80% in the first quarter of 1995. Rates on other
types of deposits, such as interest-bearing demand, savings and money market
deposits, rose from an average of 2.00% during the first quarter of 1994 to
an average of 2.36% during the first quarter of 1995. Given the fact that
the Company's interest-bearing liabilities are subject to repricing faster
than its interest-earning assets in the very short term, a rising interest
rate environment would normally produce a lower net interest margin than a
falling interest rate environment. As noted under "Analysis of Financial
Condition - Interest Rate Sensitivity" below, because the Company's
interest-bearing demand, savings and money market deposits are somewhat less
rate-sensitive, the Company's net interest margin does not necessarily
decrease significantly in a rising interest rate environment.
The following table presents the average balance sheets of the Company
for the quarters ended March 31, 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
-11-
<PAGE>
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 MARCH 31,
-------------------------------------------------------------
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 $ 33,537 $ 493 5.88% $ 12,249 $ 94 3.07%
Securities (1) 32,281 428 5.30 64,843 739 4.56
Loans, net of unearned income (2) 82,540 1,891 9.16 69,742 1,640 9.41
-------- ------ ---- -------- ------ ----
Total interest-earning assets 148,358 2,812 7.58 146,834 2,473 6.74
-------- ------ ---- -------- ------ ----
Noninterest-earning assets:
Cash and due from banks 7,713 8,601
Premises and equipment 4,194 4,517
Accrued interest receivable and other assets 3,009 3,622
Allowance for possible loan losses (806) (861)
-------- --------
Total noninterest-earning assets 14,110 15,879
-------- --------
Total assets $162,468 $162,713
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Demand, savings and money market deposits $ 54,689 $ 323 2.36% $ 61,420 $ 307 2.00%
Time deposits 64,412 783 4.86 56,359 463 3.29
-------- ------ ---- -------- ------ ----
Total deposits 119,101 1,106 3.71 117,779 770 2.62
Notes payable 905 22 9.72 1,167 21 7.20
-------- ------ ---- -------- ------ ----
Total interest-bearing liabilities 120,006 1,128 3.76 118,946 791 2.66
-------- ------ ---- -------- ------ ----
Noninterest-bearing liabilities:
Demand deposits 29,381 31,825
Accrued interest payable and other liabilities 1,796 950
-------- --------
Total noninterest-bearing liabilities 31,177 32,775
-------- --------
Total liabilities 151,183 151,721
Stockholders' equity 11,285 10,992
-------- --------
Total liabilities and stockholders' equity $162,468 $162,713
======== ========
Net interest income $1,684 $1,682
====== ======
Interest rate spread (3) 3.82% 4.08%
==== ====
Net interest margin (4) 4.54% 4.58%
==== ====
<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.
</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
-13-
<PAGE>
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.
<TABLE>
<CAPTION>
MARCH 31, 1995 VS 1994
--------------------------
INCREASE (DECREASE) DUE TO
CHANGES IN:
--------------------------
VOLUME RATE TOTAL
------ ---- -----
(IN THOUSANDS)
<S> <C> <C> <C>
Interest-earning assets:
Federal funds sold $ 261 $ 138 $ 399
Securities (1) (416) 105 (311)
Loans, net of unearned income (2) 294 (43) 251
----- ----- -----
Total interest income 139 200 339
----- ----- -----
Interest-bearing liabilities:
Deposits:
Demand, savings and money market deposits (36) 52 16
Time deposits 74 246 320
----- ----- -----
Total deposits 38 298 336
Notes payable (5) 6 1
----- ----- -----
Total interest expense 33 304 337
----- ----- -----
Increase (decrease) in net interest income $ 106 $(104) $ 2
===== ===== =====
<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.
</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
ended March 31, 1995, was $42,000, compared to $21,000 for the quarter ended
March 31, 1994. This represents an increase of $21,000, or 100.0%. The
reduced provisions in both quarters reflect the general stabilization of the
economic conditions in the Company's primary service area. In addition, the
overall quality of the Company's loan portfolio has improved, necessitating
generally lower provisions.
NONINTEREST INCOME
-14-
<PAGE>
Noninterest income increased $48,000, or 13.6%, from $353,000 during the
first quarter of 1994 to $401,000 during the first quarter 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
increased from $278,000 in the first three months of 1994 to $308,000 during
the first three months of 1995, a 10.8% increase, primarily due to increases
in service charges on commercial demand deposits.
Trust fees from the operation of the trust department of First State,
N.A., Odessa increased $10,000, or 22.2%, from $45,000 during the first three
months of 1994 to $55,000 during the same period in 1995 as a result of a
one-time fee that was charged by the trust department for functioning as the
executor of an estate.
Insurance premiums earned on automobiles financed through the Company's
indirect installment loan program increased $15,000, or 250.0% from $6,000
during the first quarter of 1994 to $21,000 during the first quarter of 1995.
The increase was due to an increase in the number of insurance policies
written during 1995 at First State, N.A., Abilene and rebates that had to be
made during the first quarter of 1994 by First State, N.A., Odessa.
Other income is the sum of several small components of noninterest income
including safe deposit box rental income and other sources of miscellaneous
income. Other income decreased $7,000, or 29.2%, from $24,000 during the
first quarter of 1994 to $17,000 during the first quarter of 1995 due to a
decrease in miscellaneous income at First State, N.A., Abilene.
NONINTEREST EXPENSES
Noninterest expenses decreased $148,000, or 8.8%, from $1,688,000 during
the first quarter of 1994 to $1,540,000 during the first quarter of 1995. A
large part of the decrease from 1994 to 1995 was due to the conversion of the
Banks from an outside data processing service bureau to an in-house data
processing system during the fourth quarter of 1993 and the first quarter of
1994. The contracts with the data processing service bureau expired in the
second quarter of 1994. As a result, some duplication of expense was
incurred during the first quarter of 1994.
Salaries and employee benefits declined $6,000 or 0.8%, from $720,000 for
the first quarter of 1994 to $714,000 for the corresponding period of 1995.
The decrease was a result of 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. This savings was offset by increases in overall
salaries which were effective January 1, 1995.
Equipment expense increased from $125,000 for the first quarter of 1994
to $171,000 for the corresponding period in 1995, representing an increase of
$46,000, or 36.8%. This increase is 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
-15-
<PAGE>
with the new system. The Company anticipates the significant overall savings
in data processing related expenses to continue in the future.
Net occupancy expense was $168,000 for the first three months of 1995,
which was the same amount of expense that was recorded for the first three
months of 1994.
As noted above, data processing was being provided to the Company and the
Banks by a service bureau under contracts that expired during April 1994.
Data processing expense decreased $104,000, or 86.0%, from $121,000 for the
first quarter of 1994 to $17,000 for the first quarter of 1995, as a result
of the conversion to the Company's in-house system.
Federal Deposit Insurance Corporation (the "FDIC") insurance expense
decreased from $82,000 for the first quarter of 1994 to $79,000 during the
same period of 1995. The decrease was due primarily to the merger of Winters
State into First State, N.A., Abilene. The Company had been paying a higher
rate for FDIC insurance on the deposits of Winters State prior to the merger.
The merger lowered the rate for those deposits to the rate paid by First
State, N.A., Abilene. Should FDIC insurance rates decrease as is currently
anticipated, the Company could see substantial savings in this area during
the latter part of 1995.
Stationery, printing and supplies expense decreased $3,000, or 4.6%, from
$65,000 for the first three months of 1994 to $62,000 for the first three
months of 1995, primarily due to the merger of First National and Winters
State into First State, N.A., Abilene. Accounting fees were $32,000 for both
the first quarter of 1995 and the first quarter of 1994. The Company
anticipates reductions in accounting fees in the future as a result of the
change in its independent public accountants, which was made during 1994.
Legal fees decreased $59,000, or 53.6%, from $110,000 during the first
quarter of 1994 to $51,000 during the same period of 1995. The decrease was
due to legal expenses incurred by the Company regarding a lawsuit that was
filed during the first quarter of 1994 involving a request for indemnity and
reimbursement of settlement costs and attorneys fees by a group of former
directors of a commercial bank that had been a repossessed asset of a former
subsidiary of the Company during the mid-1980s. The former directors had
incurred their expenses in defense of litigation brought against them by the
FDIC as a result of the failure of the subject bank.
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. The Company recorded $4,000 in net income during the first quarter
of 1995 compared to $15,000 in net income during the first quarter of 1994 as
a result of the gains on sales and income received on various repossessed
assets. The amount of real estate and other repossessed assets has declined
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 $30,000, or
-16-
<PAGE>
10.7%, from $280,000 for the first quarter of 1994 to $250,000 for the first
quarter 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 decrease.
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 $170,000 and $109,000 in federal income taxes in the first quarter of
1995 and 1994, respectively, and all of these amounts except for $10,000 in
1995 and $2,000 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 rate-sensitive assets and
liabilities. See "Analysis of Financial Condition - Interest Rate
Sensitivity" below.
ANALYSIS OF FINANCIAL CONDITION
ASSETS
Total assets increased $4,712,000, or 2.9%, from $159,860,000 at December
31, 1994, to $164,572,000 at March 31, 1995, due to the growth in deposits at
the Banks during the first quarter of 1995.
CASH AND CASH EQUIVALENTS
The amount of cash and cash equivalents increased $3,204,000, or 8.3%,
from $38,764,000 at December 31, 1994, to $41,968,000 at March 31, 1995,
primarily due to a decrease in securities and the cash from such maturities
being invested in federal funds sold at March 31, 1995.
SECURITIES
-17-
<PAGE>
Securities decreased $1,414,000, or 4.2%, from $33,305,000 at December
31, 1994, to $31,891,000 at March 31, 1995. The decrease in 1995 is due to
the fact that the Banks invested additional amounts in federal funds sold at
March 31, 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. At March 31, 1995, the
Company's securities portfolio included $45,000 book value of unrated
securities (local school district issues), representing 0.14% of the total
securities portfolio. Securities totalling $14,210,000 are classified as
available-for-sale and are carried at fair value at March 31, 1995.
Securities totalling $17,681,000 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
March 31, 1995, the book value of U.S. Treasury and other U.S. Government
agency securities so pledged amounted to $5,095,000, or 16.0% of the total
securities portfolio.
The following table summarizes the amounts and the distribution of the
Company's securities held at the dates indicated.
<TABLE>
<CAPTION>
MARCH 31,1995 DECEMBER 31, 1994
---------------- -----------------
AMOUNT % AMOUNT %
------- ------ ------- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Carrying value:
U.S. Treasury securities $28,085 88.1% $31,441 94.4%
Obligations of other U.S.
Government agencies and
corporations 3,318 10.4 1,331 4.0
Obligations of states and
political subdivisions 45 0.1 90 0.3
Other securities 443 1.4 443 1.3
------- ------ ------- ------
Total carrying value of securities $31,891 100.0% $33,305 100.0%
======= ====== ======= ======
Total market value of securities $31,759 $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.
-18-
<PAGE>
The following table provides the maturity distribution and weighted
average interest rates of the Company's total securities portfolio at March
31, 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. The restatement of the yields on
obligations of states and political subdivisions to a fully
taxable-equivalent basis has been computed assuming a tax rate of 34%.
<TABLE>
<CAPTION>
ESTIMATED WEIGHTED
TYPE AND MATURITY GROUPING PRINCIPAL CARRYING FAIR AVERAGE
AT MARCH 31, 1995 AMOUNT VALUE VALUE YIELD
- -------------------------- --------- -------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
U.S. Treasury securities:
Within one year $26,250 $26,090 $25,960 5.13%
After one but within five years 2,000 1,995 1,987 6.19
------- ------- ------- -----
Total U.S. Treasury securities 28,250 28,085 27,947 5.21
------- ------- ------- -----
Obligations of other U.S. Government
agencies and corporations:
Within one year 1,125 1,138 1,141 8.24
After one but within five years 2,179 2,180 2,181 8.05
------- ------- ------- -----
Total obligations of other U.S.
Government agencies and
corporations 3,304 3,318 3,322 8.12
------- ------- ------- -----
Obligations of states and political
subdivisions:
Within one year 45 45 47 14.39
------- ------- ------- -----
Total obligations of states
and political subdivisions 45 45 47 14.39
------- ------- ------- -----
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 $32,042 $31,891 $31,759 5.50%
======= ======= ======= =====
</TABLE>
LOAN PORTFOLIO
Total loans, net of unearned income, increased $2,867,000, or 3.5%, from
$81,306,000 at December 31, 1994, to $84,173,000 at March 31, 1995. The
increase during the first quarter of 1995 was primarily a result of increases
in the Banks' indirect installment 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
-19-
<PAGE>
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 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 March 31, 1995, the Company had
approximately $32,062,000, 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>
MARCH 31, DECEMBER 31,
--------- -------------
1995 1994
------- -------
(IN THOUSANDS)
<S> <C> <C>
Loans to individuals $45,301 $43,113
Real estate loans 22,697 22,760
Commercial and industrial loans 14,812 14,391
Agricultural loans 3,056 2,742
Loans secured by equity securities
of financial institutions 2,717 2,311
Other loans 32 201
------- -------
Total loans 88,615 85,518
Less unearned income 4,442 4,212
------- -------
Loans, net of unearned
income $84,173 $81,306
======= =======
</TABLE>
Loan concentrations are considered to exist when there are 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 March 31, 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 March 31, 1995.
-20-
<PAGE>
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 March 31, 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.
<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 $ 1,832 $15,442 $5,423 $22,697
Commercial and industrial loans 6,386 5,216 3,210 14,812
Agricultural loans 1,987 621 448 3,056
Loans secured by equity securities of
financial institutions 1,751 966 0 2,717
Other loans 32 0 0 32
------- ------- ------ -------
Total loans $11,988 $22,245 $9,081 $43,314
======= ======= ====== =======
With fixed interest rates $ 5,304 $14,460 $3,319 $23,083
With variable interest rates 6,684 7,785 5,762 20,231
------- ------- ------ -------
Total loans $11,988 $22,245 $9,081 $43,314
======= ======= ====== =======
</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
$819,000, or 1.0% of loans, net of unearned income, at March 31, 1995,
compared to $817,000, or 1.0% of loans, net of unearned income, at December
31, 1994.
-21-
<PAGE>
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
$62,000 in loans during the first quarter of 1995. Recoveries during the
first quarter of 1995 were $22,000.
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 ended March 31, 1995 and 1994.
<TABLE>
<CAPTION>
MARCH 31,
---------------------
1995 1994
------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Analysis of allowance for
possible loan losses:
Balance, at January 1 $ 817 $ 896
Provision for loan losses 42 21
------- -------
859 917
------- -------
Loans charged off:
Loans to individuals 51 32
Real estate loans 11 95
Commercial and industrial loans 0 0
Agricultural loans 0 21
Loans secured by equity securities
of financial institutions 0 0
Other loans 0 0
------- -------
Total charge-offs 62 148
------- -------
Recoveries of loans previously
charged off:
Loans to individuals 5 9
Real estate loans 0 0
Commercial and industrial loans 9 5
Agricultural loans 5 3
Loans secured by equity securities
of financial institutions 3 8
Other loans 0 0
------- -------
Total recoveries 22 25
------- -------
Net loans charged off 40 123
------- -------
Balance, at March 31 $ 819 $ 794
======= =======
Average loans outstanding,
net of unearned income $82,540 $69,742
======= =======
Ratio of net loan charge-offs
to average loans outstanding,
net of unearned income 0.19% 0.71%
Ratio of allowance for possible
loan losses to total loans,
net of unearned income, at
March 31 0.97 1.12
</TABLE>
-22-
<PAGE>
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.
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 allowances 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.
-23-
<PAGE>
The following table shows the allocations in the allowance and the
respective percentages of each loan category to total loans at March 31,
1995, and December 31, 1994.
<TABLE>
<CAPTION>
MARCH 31, 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 $ 87 48.5% $207 47.8%
Real estate loans 141 27.0 165 28.0
Commercial and industrial loans 110 17.6 117 17.7
Agricultural loans 68 3.6 67 3.4
Loans secured by equity
securities of financial
institutions 2 3.2 5 2.8
Other loans 0 0.1 1 0.3
---- ----- ---- -----
427 100.0% 562 100.0%
Unallocated 392 ===== 255 =====
Total allowance for possible ---- ----
loan losses $819 $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
March 31, 1995, substandard loans totaled $1,876,000, of which $184,000 were
loans designated as nonaccrual. There were no loans classified doubtful or
loss at March 31, 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 March 31, 1995, are current and paying in accordance
with loan
-24-
<PAGE>
terms. At March 31, 1995, watch list loans totaled $1,960,000 (including
$184,000 of loans guaranteed by U.S. governmental agencies). At such date,
no watch list loans were designated as nonaccrual or 90 days past due. See
"Nonperforming Assets" below.
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 March 31, 1995, and December 31,
1994.
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1995 1994
--------- ------------
(IN THOUSANDS)
<S> <C> <C>
Nonaccrual loans $184 $ 48
Accruing loans contractually
past due over 90 days 0 26
Restructured loans 57 80
Real estate and other repossessed
assets 495 631
---- ----
Total nonperforming assets $736 $785
==== ====
</TABLE>
The gross interest income that would have been recorded during the first
quarter 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
-25-
<PAGE>
origination, was approximately $4,000. No interest income was actually
recorded (received) on loans that were on nonaccrual during the first quarter
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 to comply with the present loan
repayment terms and which may result in the inclusion of such loan in one of
the nonperforming asset categories. The Company does not believe it has any
potential problem loans other than those reported in the above 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 March 31, 1995, and December 31, 1994, real
estate and other repossessed assets had an aggregate book value of $495,000
and $631,000, respectively. Real estate and other repossessed assets
decreased $136,000, or 21.6%, during the first three months of 1995,
primarily due to the reclassification from in-substance repossession at
December 31, 1994, to nonperforming (nonaccrual) loans at March 31, 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. Of the March 31, 1995 balance, $62,000 is
represented by a repossessed house and $44,000 is represented by unimproved
lots in the same residential subdivision. The house was sold subsequent to
March 31, 1995, for a loss of approximately $4,000. None of the remaining
individual parcels of real estate or other repossessed assets are carried at
more than $36,000.
PREMISES AND EQUIPMENT
Premises and equipment decreased $69,000, or 1.6%, during the first
quarter of 1995, from $4,345,000 at December 31, 1994, to $4,276,000 at March
31, 1995. The decrease was due to depreciation recorded on the Company's
premises and equipment during the first quarter 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 decreased $115,000,
or 12.2%, from $945,000 at December 31, 1994, to $830,000 at March 31, 1995.
The decrease was a result of additional funds being invested at March 31,
1995, in federal funds sold on which interest is paid daily. Of the total
balance at March 31, 1995, $517,000, or 62.3%, was interest accrued on loans
and $313,000, or 37.7%, was interest accrued on securities. 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
-26-
<PAGE>
The most significant component of other assets at March 31, 1995, is a
net deferred tax asset of $1,140,000. The balance of other assets increased
$377,000, or 27.3%, to $1,758,000 at March 31, 1995, from $1,381,000 at
December 31, 1994, as a result of a $400,000 decrease in the Company's
valuation allowance on its deferred tax asset which was partially offset by a
$160,000 decrease in the gross deferred tax asset due to the utilization of a
portion of the Company's net operating loss carryforwards.
DEPOSITS
The Banks' lending and investing activities are funded almost entirely by
core deposits, 54.7% of which are demand, savings and money market deposits
at March 31, 1995. Total deposits increased $3,876,000, or 2.7%, from
$146,184,000 at December 31, 1994, to $150,060,000 at March 31, 1995. The
increase is due to an increase in interest-bearing time deposits at the
Banks, primarily as a result of a recent 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 ended March 31, 1995 and
1994.
<TABLE>
<CAPTION>
QUARTER ENDED MARCH 31,
-------------------------------------
1995 1994
------------------ -----------------
AVERAGE AVERAGE AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE
-------- ------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Noninterest-bearing demand deposits $ 29,381 --% $ 31,825 --%
Interest-bearing demand, savings
and money market deposits 54,689 2.36 61,420 2.00
Time deposits of less than $100,000 48,270 4.80 43,558 3.29
Time deposits of $100,000 or more 16,142 5.08 12,801 3.28
-------- ---- -------- ----
Total deposits $148,482 2.98% $149,604 2.06%
======== ==== ======== ====
</TABLE>
The maturity distribution of time deposits of $100,000 or more at March
31, 1995, is presented below.
<TABLE>
<CAPTION>
AT MARCH 31, 1995
-----------------
(IN THOUSANDS)
<S> <C>
3 months or less $ 6,570
Over 3 through 6 months 4,168
Over 6 through 12 months 3,507
Over 12 months 3,508
-------
Total time deposits of $100,000
or more $17,753
=======
</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
-27-
<PAGE>
March 31, 1995, deposits of $100,000 or more represented approximately 10.8%
of the Company's total assets, compared to 9.1% of total assets at December
31, 1994.
NOTES PAYABLE
The Company's notes payable decreased $29,000, or 3.1%, from $930,000 at
December 31, 1994, to $901,000 at March 31, 1995. The decrease represents
the regular quarterly principal payment made by the Company on the Long-term
Note (as defined below) on January 15, 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
$127,000, or 31.1%, from $408,000 at December 31, 1994, to $535,000 at March
31, 1995. The increase was a result of an increase in the amount of
outstanding certificates of deposit and the rising interest rate environment,
particularly during the last six months.
OTHER LIABILITIES
The most significant components of other liabilities are amounts accrued
for various types of expenses. The balance of other liabilities decreased
$23,000, or 1.8%, from $1,265,000 at December 31, 1994, to $1,242,000 at
March 31, 1995.
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
-28-
<PAGE>
81.6% at the 90-day interval, 81.7% at the 180-day interval and 81.9% at the
365-day interval at March 31, 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 $53,758,000 of interest-bearing demand, savings and
money market deposits at March 31, 1995, that are somewhat less
rate-sensitive, the Company's net interest margin does not necessarily
decrease significantly in a rising interest rate environment. 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 March 31, 1995.
<TABLE>
<CAPTION>
CUMULATIVE VOLUMES SUBJECT TO VOLUMES
REPRICING WITHIN SUBJECT TO
------------------------------- 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 $ 34,200 $ 34,200 $ 34,200 $ 0 $ 34,200
Securities 3,993 11,272 26,051 5,840 31,891
Loans, net of unearned income 22,653 24,521 28,308 55,865 84,173
-------- -------- -------- ------- --------
Total interest-earning assets 60,846 69,993 88,559 61,705 150,264
-------- -------- -------- ------- --------
Interest-bearing liabilities:
Demand, savings and money
market deposits 53,758 53,758 53,758 0 53,758
Time deposits 19,914 31,013 53,547 14,418 67,965
Notes payable 882 883 885 16 901
-------- -------- -------- ------- --------
Total interest-bearing
liabilities 74,554 85,654 108,190 14,434 122,624
-------- -------- -------- ------- --------
Rate-sensitivity gap(1) $(13,708) $(15,661) $(19,631) $47,271 $ 27,640
======== ======== ======== ======= ========
Rate-sensitivity ratio(2) 81.6% 81.7% 81.9%
==== ==== ====
<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.
</TABLE>
-29-
<PAGE>
SELECTED FINANCIAL RATIOS
The following table presents selected financial ratios (annualized) for
the quarters ended March 31, 1995 and 1994.
<TABLE>
<CAPTION>
QUARTER ENDED MARCH 31,
-----------------------
1995 1994
------ ------
<S> <C> <C>
Net income to:
Average assets 0.82% 0.53%
Average interest-earning assets 0.90 0.59
Average stockholders' equity 11.77 7.82
Dividend payout (1) to:
Net income 7.04 N/A
Average stockholders' equity 0.83 N/A
Average stockholders' equity to:
Average total assets 6.95 6.76
Average loans (2) 13.67 15.76
Average total deposits 7.60 7.35
Average interest-earning assets to:
Average total assets 91.32 90.24
Average total deposits 99.92 98.15
Average total liabilities 98.13 96.78
Ratio to total average deposits of:
Average loans (2) 55.59 46.62
Average noninterest-bearing deposits 19.79 21.27
Average interest-bearing deposits 80.21 78.73
Total interest expense to total interest income 40.13 32.01
<FN>
_________________________
(1) Dividends on Common Stock only.
(2) Before allowance for possible loan losses.
</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 $7,713,000 during the
first quarter of 1995 and $8,601,000 during the first quarter of 1994. These
amounts comprised 4.7% and 5.3% of average total assets during the first
three months of 1995 and 1994, respectively. The average level of securities
and federal funds sold was $65,818,000 during the first quarter of 1995 and
$77,092,000 during the first quarter of 1994. An increasing amount of the
Banks' available funds had been invested in loans, particularly loans to
individuals, due to increased loan demand in the Company's market area.
-30-
<PAGE>
The Banks sold no securities during the quarters ended March 31, 1995 and
1994. At March 31, 1995, $27,273,000, or 85.5%, of the Company's securities
portfolio matured within one year and $4,618,000, or 14.5%, 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 March 31, 1995, approximately $28,308,000, or 33.6%, of the Company's
loans, net of unearned income, 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 first quarter of
1995, the Company's average deposits were $148,482,000, or 91.4% of average
total assets, compared to $149,604,000, or 91.9% of average total assets,
during the first quarter of 1994. 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 implemented various cost-cutting and
revenue-generating measures and 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. First State, N.A., Odessa is
presently restricted in the payment of dividends to the Company without prior
approval of the regulatory authorities. It is anticipated that First State,
N.A., Odessa will be able to begin paying dividends by the end of the second
quarter of 1995. No dividends were paid by the Banks during the first
quarter of 1995 to Independent Financial. Dividends paid by Independent
Financial to the Company during the same time period were $200,000.
Dividends paid by the Banks to Independent Financial during the first quarter
of 1994 were $100,000; in turn, Independent Financial paid dividends to the
Company totaling $50,000 during the same time period. At March 31, 1995,
there were approximately $995,000 in dividends available for payment to
Independent Financial by First State, N.A., Abilene without regulatory
approval.
The payment of current tax liabilities generated by the Banks and
management and service fees constituted 56% and 8%, respectively, of the
Company's cash flow during the first
-31-
<PAGE>
quarter 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 $313,000 were paid by
the Banks to the Company during the first three months of 1995, compared to a
total of $160,000 during the first three months of 1994.
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 $43,000 in
management fees to the Company in the first quarter of 1995, compared to
$30,000 paid by the Banks during the first quarter of 1994. 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.
In November 1992, the Company settled the outstanding $2,535,000
principal balance of its note payable to the Dallas Bank for a total of
$2,243,000 and recognized an extraordinary gain of $192,000, net of tax
expense of $100,000, from the settlement. To fund the pay-off of the note
payable, the Company obtained a loan from the Amarillo Bank for the
discounted settlement amount plus accrued interest due as of the settlement
date.
In March and April 1993, the Company used $1,487,000 from a $1,500,000
capital distribution made to it from First National to reduce the principal
amount of the loan from the Amarillo Bank to $775,000. The Amarillo Bank
renewed the long-term note (the "Long-term Note") for a period of three years
(until April 15, 1996). The balance of the Long-Term Note at March 31, 1995,
was $581,000. Payments of principal and interest, which are due on a
quarterly basis, are based on a seven-year amortization. The Company also
has a second note, 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 $300,000 at March 31, 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. The notes bear interest at the Amarillo Bank's floating base
rate plus 1% (10.0% at March 31, 1995) and are secured by 100% of the stock
of the 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 all of these
ratios at March 31, 1995, and have been in compliance with these ratios since
the inception of the loan agreement.
-32-
<PAGE>
CAPITAL RESOURCES
At March 31, 1995, stockholders' equity totaled $11,834,000, or 7.2% 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. 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 March 31, 1995.
<TABLE>
<CAPTION>
THE COMPANY MARCH 31, 1995
----------- --------------
(DOLLARS IN THOUSANDS)
<S> <C>
Tier 1 capital:
Common stockholders' equity, excluding
unrealized loss on available-for-sale
securities $ 11,169
Preferred stockholders' equity (1) 696
--------
Total Tier 1 capital 11,865
--------
Tier 2 capital:
Allowance for possible loan losses (2) 819
--------
Total Tier 2 capital 819
--------
Total capital $ 12,684
========
Risk-weighted assets $ 88,110
========
Adjusted quarterly average assets $162,468
========
</TABLE>
-33-
<PAGE>
<TABLE>
<CAPTION>
MINIMUM ACTUAL
REGULATORY RATIOS FOR
THE COMPANY REQUIREMENT(3) MARCH 31, 1995
- ----------- -------------- --------------
<S> <C> <C>
Tier 1 capital to risk-weighted assets ratio 4.00% 13.47%
Total capital to risk-weighted assets ratio 8.00 14.40
Leverage ratio 3.00 7.30
THE BANKS
- ---------
Tier 1 capital to risk-weighted assets ratio 4.00% 11.35 - 16.01%
Total capital to risk-weighted assets ratio 8.00 12.14 - 17.06
Leverage ratio 3.00 7.41 - 7.88
<FN>
___________________________
(1) Limited to 25% of total Tier 1 capital, with any remainder qualifying as
Tier 2 capital.
(2) Limited to 1.25% of risk-weighted assets.
(3) For top rated banking organizations.
</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 March 31, 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
-34-
<PAGE>
fourth quarters of 1994 and the first quarter of 1995. Subsequent to March
31, 1995, the Company declared a 33-1/3% stock dividend payable to
stockholders of record on May 10, 1995, and a $0.03 per share cash dividend
payable to stockholders of record on May 15, 1995. Both the stock and cash
dividends are payable on May 31, 1995.
-35-
<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. Subsequent to March 31, 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. The
Company will continue to dispute the indemnification requests of the Outside
Directors.
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
-36-
<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
None
(b) Reports on Form 8-K
None
-37-
<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: May 15, 1995 Independent Bankshares, Inc.
(Registrant)
By: Randal N. Crosswhite
----------------------------------
Randal N. Crosswhite
Senior Vice President and
Chief Financial Officer
-38-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
unaudited financial statements for Independent Bankshares, Inc. for the three
months ended March 31, 1995 and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> MAR-31-1995
<CASH> 7,768,000
<INT-BEARING-DEPOSITS> 121,723,000
<FED-FUNDS-SOLD> 34,200,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 14,210,000
<INVESTMENTS-CARRYING> 17,681,000
<INVESTMENTS-MARKET> 17,549,000
<LOANS> 84,173,000<F1>
<ALLOWANCE> 819,000
<TOTAL-ASSETS> 164,572,000
<DEPOSITS> 150,060,000
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,777,000
<LONG-TERM> 901,000
<COMMON> 195,000
0
166,000
<OTHER-SE> 11,473,000
<TOTAL-LIABILITIES-AND-EQUITY> 164,572,000
<INTEREST-LOAN> 1,891,000
<INTEREST-INVEST> 427,000
<INTEREST-OTHER> 493,000
<INTEREST-TOTAL> 2,811,000
<INTEREST-DEPOSIT> 1,106,000
<INTEREST-EXPENSE> 1,128,000
<INTEREST-INCOME-NET> 1,683,000
<LOAN-LOSSES> 42,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,540,000
<INCOME-PRETAX> 502,000
<INCOME-PRE-EXTRAORDINARY> 502,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 332,000
<EPS-PRIMARY> .40
<EPS-DILUTED> .33
<YIELD-ACTUAL> 4.54
<LOANS-NON> 184,000
<LOANS-PAST> 0
<LOANS-TROUBLED> 57,000
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 817,000
<CHARGE-OFFS> 62,000
<RECOVERIES> 22,000
<ALLOWANCE-CLOSE> 819,000
<ALLOWANCE-DOMESTIC> 427,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 392,000
<FN>
<F1>Net of unearned income on installment loans of 4,442,000
</FN>
</TABLE>
