<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: June 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 June 30, 1995.
Class: Common Stock, par value $0.25 per share
Outstanding at June 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
JUNE 30, 1995 AND DECEMBER 31, 1994
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1995 1994
------------ ------------
<S> <C> <C>
ASSETS
Cash and Cash Equivalents:
Cash and Due from Banks $ 6,234,000 $ 7,564,000
Federal Funds Sold 44,500,000 31,200,000
------------ ------------
Total Cash and Cash Equivalents 50,734,000 38,764,000
------------ ------------
Securities:
Available-for-sale 10,535,000 17,078,000
Held-to-maturity--Market Value of
$17,430,000 for June 30, 1995,
and $15,913,000 for December 31, 1994 17,443,000 16,227,000
------------ ------------
Total Securities 27,978,000 33,305,000
------------ ------------
Loans:
Total Loans 87,586,000 85,518,000
Less:
Unearned Income on Installment Loans 4,192,000 4,212,000
Allowance for Possible Loan Losses 803,000 817,000
------------ ------------
Net Loans 82,591,000 80,489,000
------------ ------------
Premises and Equipment 4,253,000 4,345,000
Real Estate and Other Repossessed Assets 370,000 631,000
Accrued Interest Receivable 884,000 945,000
Other Assets 2,892,000 1,381,000
------------ ------------
Total Assets $169,702,000 $159,860,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest-bearing Demand Deposits $ 28,301,000 $ 30,210,000
Interest-bearing Demand Deposits 52,569,000 56,520,000
Interest-bearing Time Deposits 73,465,000 59,454,000
------------ ------------
Total Deposits 154,335,000 146,184,000
Notes Payable 1,324,000 930,000
Accrued Interest Payable 652,000 408,000
Other Liabilities 197,000 1,265,000
------------ ------------
Total Liabilities 156,508,000 148,787,000
------------ ------------
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 2,927,000 2,570,000
Unrealized Loss on Available-for-sale
Securities (1,000) (100,000)
------------ ------------
Total Stockholders' Equity 13,194,000 11,073,000
------------ ------------
Total Liabilities and
Stockholders' Equity $169,702,000 $159,860,000
============ ============
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
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INDEPENDENT BANKSHARES, INC.
CONSOLIDATED INCOME STATEMENTS
QUARTERS AND SIX-MONTH PERIODS ENDED JUNE 30, 1995 AND 1994
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended June 30, Six Months Ended June 30,
---------------------- -------------------------
1995 1994 1995 1994
---------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
Interest Income:
Interest and
Fees on Loans $1,941,000 $1,701,000 $3,832,000 $3,341,000
Interest on
Federal Funds Sold 614,000 125,000 1,107,000 219,000
Interest on
Securities 416,000 665,000 843,000 1,402,000
---------- ---------- ---------- ----------
Total Interest
Income 2,971,000 2,491,000 5,782,000 4,962,000
---------- ---------- ---------- ----------
Interest Expense:
Interest on
Deposits 1,297,000 799,000 2,403,000 1,569,000
Interest on Notes
Payable 34,000 22,000 56,000 43,000
---------- ---------- ---------- ----------
Total Interest
Expense 1,331,000 821,000 2,459,000 1,612,000
---------- ---------- ---------- ----------
Net Interest Income 1,640,000 1,670,000 3,323,000 3,350,000
Provision for Loan
Losses 30,000 31,000 72,000 52,000
---------- ---------- ---------- ----------
Net Interest Income
After Provision
for Loan Losses 1,610,000 1,639,000 3,251,000 3,298,000
---------- ---------- ---------- ----------
Noninterest Income:
Service Charges 304,000 291,000 612,000 569,000
Trust Fees 52,000 41,000 107,000 86,000
Insurance Premiums 12,000 7,000 33,000 13,000
Other Income 16,000 13,000 33,000 37,000
---------- ---------- ---------- ----------
Total Noninterest
Income 384,000 352,000 785,000 705,000
---------- ---------- ---------- ----------
Noninterest Expenses:
Salaries and
Employee Benefits 696,000 693,000 1,410,000 1,413,000
Equipment Expense 181,000 163,000 352,000 288,000
Net Occupancy Expense 159,000 180,000 327,000 348,000
Legal Fees and
Expense 229,000 71,000 280,000 181,000
FDIC Insurance
Expense 79,000 86,000 158,000 168,000
Stationery, Printing
and Supplies Expense 55,000 55,000 117,000 120,000
Accounting Fees and
Expense 26,000 32,000 58,000 64,000
Data Processing
Expense 31,000 49,000 48,000 170,000
Net Costs Applicable
to Real Estate
and Other
Repossessed Assets (5,000) 0 (9,000) (15,000)
Other Expenses 267,000 265,000 517,000 545,000
---------- ---------- ---------- ----------
Total Noninterest
Expenses 1,718,000 1,594,000 3,258,000 3,282,000
---------- ---------- ---------- ----------
Income Before Federal
Income Taxes 276,000 397,000 778,000 721,000
Federal Income Taxes 94,000 135,000 264,000 244,000
---------- ---------- ---------- ----------
Net Income $ 182,000 $ 262,000 $ 514,000 $ 477,000
========== ========== ========== ==========
Preferred Stock
Dividends $ 17,000 $ 18,000 $ 35,000 $ 36,000
========== ========== ========== ==========
Net Income Available
to Common
Stockholders $ 165,000 $ 244,000 $ 479,000 $ 441,000
========== ========== ========== ==========
Primary Earnings per
Common Share
Available to
Common Stockholders $ 0.16 $ 0.23 $ 0.46 $ 0.42
========== ========== ========== ==========
Fully Diluted Earnings
Per Common Share
Available to Common
Stockholders $ 0.14 $ 0.19 $ 0.38 $ 0.35
========== ========== ========== ==========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
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INDEPENDENT BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX-MONTH PERIODS ENDED JUNE 30, 1995 and 1994
(Unaudited)
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income $ 514,000 $ 477,000
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Deferred Federal Income Tax Expense 248,000 240,000
Depreciation and Amortization 188,000 200,000
Provision for Loan Losses 72,000 52,000
(Gain) Loss on Sales of Premises and Equipment (3,000) 5,000
(Gain) Loss on Sales of Real Estate and
Other Repossessed Assets (25,000) 5,000
Writedown of Real Estate and Other Repossessed Assets 18,000 0
(Increase) Decrease in Accrued Interest Receivable 61,000 126,000
(Increase) Decrease in Other Assets 89,000 68,000
Increase (Decrease) in Accrued Interest Payable 244,000 10,000
Increase (Decrease) in Other Liabilities (741,000) (46,000)
----------- -----------
Net Cash Provided by Operating Activities 655,000 1,137,000
----------- -----------
Cash Flows from Investing Activities:
Proceeds from Maturities of Available-for-sale Securities 6,658,000 13,612,000
Proceeds from Maturities of Held-to-maturity Securities 782,000 9,024,000
Purchases of Available-for-sale Securities 0 (9,000,000)
Purchases of Held-to-maturity Securities (2,000,000) (2,879,000)
Net Increase in Loans (2,614,000) (6,531,000)
Additions to Premises and Equipment (95,000) (136,000)
Proceeds from Sales of Premises and Equipment 3,000 13,000
Proceeds from Sales of Real Estate and
Other Repossessed Assets 444,000 308,000
----------- -----------
Net Cash Provided by Investing Activities 3,178,000 4,411,000
----------- -----------
Cash Flows from Financing Activities:
Increase in Deposits 8,151,000 (2,417,000)
Proceeds from Notes Payable 250,000 0
Repayment of Notes Payable (182,000) (57,000)
Payment of Cash Dividends (89,000) (58,000)
Payment for Fractional Shares in Stock Dividend (3,000) 0
----------- -----------
Net Cash Provided by (Used in) Financing Activities 8,127,000 (2,532,000)
----------- -----------
Net Increase in Cash and Cash Equivalents 11,970,000 3,016,000
Cash and Cash Equivalents at Beginning of Period 38,764,000 19,268,000
----------- -----------
Cash and Cash Equivalents at End of Period $50,734,000 $22,284,000
=========== ===========
Cash paid during the six-month period for:
Interest $ 2,215,000 $ 1,602,000
Federal income taxes 15,000 8,000
Noncash investing activities:
Additions to real estate and other repossessed assets
through foreclosures during the six-month period $ 418,000 $ 354,000
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
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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 six months of 1995 and 1994
totaled $248,000 and $240,000, respectively.
(3) Notes Payable
At June 30, 1995, the Company had three 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 $553,000 at June 30, 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
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 $300,000 at June 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 short-term note (the
"Short-term Note"), which had a principal balance of $125,000 at
June 30, 1995, represented the outstanding balance of a $125,000
line of credit the Company has with the Amarillo Bank. The
proceeds
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from the advance on the Short-term Note were used for the final
settlement of certain litigation. See "Note 7: Commitments and
Contingent Liabilities." The Short-term Note was paid off on July
15, 1995. The notes bear interest at the Amarillo Bank's floating
base rate plus 1% (10% at June 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 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
June 30, 1995, and December 31, 1994.
In addition, at June 30, 1995, the Company had notes payable
to one current and two former directors of the Company aggregating
$327,000. 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 half of 1994, the Company
reduced its gross deferred tax asset and the related valuation
allowance by $240,000 due to the utilization of a portion of its
net operating loss carryforwards. During the first half of 1995,
the Company reduced its gross deferred tax asset by $248,000 as a
result of the utilization of a portion of its net operating loss
carryforwards. 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.
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(5) Stockholders' Equity
In the first six months of 1995 and 1994, the Company paid
$35,000 and $36,000, 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.
In addition, the Company declared a 33-1/3% stock dividend.
The dividend was 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 six-month periods ended June 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
June 30, 1995 and 1994, was 1,044,000 and 1,042,000 shares,
respectively. The weighted average common shares outstanding used
in computing fully diluted earnings per common share for the
quarters and six-month periods ended June 30, 1995 and 1994, was
1,349,000 and 1,348,000 shares, respectively. The weighted average
common shares outstanding used in computing primary earnings per
common share for the first six months of 1995 and 1994, was
1,043,000 and 1,042,000 shares, respectively. The weighted average
common shares outstanding used in computing fully diluted earnings
per common share for the first six months of 1995 and 1994, was
1,348,000 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.
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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 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.
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<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 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.
General
The following discussion and analysis presents the more
significant factors affecting the Company's financial condition at
June 30, 1995, and December 31, 1994, and results of operations for
each of the quarters and six-month periods ended June 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, 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 six months of 1995 and 1994
totaled $248,000 and $240,000, respectively.
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Results of Operations
General
Net income for the quarter ended June 30, 1995, amounted to
$182,000 ($0.16 primary earnings per common share) compared to net
income of $262,000 ($0.23 primary earnings per common share) for
the quarter ended June 30, 1994. Net income for the six-month
period ended June 30, 1995, was $514,000 ($0.46 primary earnings
per common share) compared to net income of $477,000 ($0.42 primary
earnings per common share) for the six-month period ended June 30,
1994. The results of operations for the quarter and six-month
period ended June 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. 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 $1,640,000 for the second
quarter of 1995, a decrease of $30,000, or 1.8%, from the second
quarter of 1994. Net interest income for the second quarter of
1994 was $1,670,000. Net interest income for the first six months
of 1995 was $3,323,000, a decrease of $27,000, or 0.8%, from net
interest income of $3,350,000 for the first six months of 1994.
The decreases in 1995 were due to a shift of approximately
$8,000,000 from noninterest-bearing and interest-bearing demand
deposits to interest-bearing time deposits from December 31, 1994,
to June 30, 1995, and an increasing interest rate environment on
such time deposits during the first six months of 1995. The net
interest margin on a fully taxable-equivalent basis, was 4.25% and
4.39% for the second quarter and first six months of 1995,
respectively, compared to 4.60% and 4.59% for the second quarter
and first six months of 1994, respectively.
At June 30, 1995, approximately $19,881,000, or 23.8%, of the
Company's total loans, net of unearned income, were tied to
fluctuations in the prime interest rate. This amount represents
45.8% 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 June 30, 1994, to June 30,
1995. For example, the average rate paid by the Company for
certificates of deposit of $100,000 or more increased from 3.44%
during the second quarter of 1994 to 5.78% during the second
quarter of 1995. The average rate paid for certificates of deposit
less than $100,000 increased to 5.46% during the second quarter of
1995 from 3.36% during the second quarter of 1994. Rates on other
types of deposits, such as interest-bearing demand, savings and
money market deposits, rose from an average of 2.09% during the
second quarter of 1994 to an average of 2.35% during the second
quarter of 1995. Given the fact that the Company's interest-
bearing liabilities
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are subject to repricing faster than its interest-earning assets in
180-day and one-year periods, 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 six-month periods ended June 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.
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<TABLE>
<CAPTION>
Quarter Ended June 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 $ 40,403 $ 614 6.08% $ 12,988 $ 125 3.85%
Securities (1) 30,691 417 5.43 59,180 666 4.50
Loans, net of unearned income (2) 83,264 1,941 9.32 73,098 1,701 9.31
-------- ------ ----- -------- ------ ----
Total interest-earning assets 154,358 2,972 7.70 145,266 2,492 6.86
-------- ------ ----- -------- ------ ----
Noninterest-earning assets:
Cash and due from banks 6,721 8,509
Premises and equipment, net 4,256 4,469
Accrued interest receivable
and other assets 3,039 4,302
Allowance for possible loan losses (811) (790)
-------- --------
Total noninterest-earning assets 13,205 16,490
-------- --------
Total assets $167,563 $161,756
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Demand, savings and money
market deposits $ 52,873 $ 310 2.35% $ 60,948 $ 318 2.09%
Time deposits 71,265 987 5.54 56,782 480 3.38
-------- ------ ----- -------- ------ ----
Total deposits 124,138 1,297 4.18 117,730 798 2.71
Notes payable 1,284 34 10.59 1,142 23 8.06
-------- ------ ----- -------- ------ ----
Total interest-bearing liabilities 125,422 1,331 4.24 118,872 821 2.76
-------- ------ ----- -------- ------ ----
Noninterest-bearing liabilities:
Demand deposits 28,952 30,961
Accrued interest payable and
other liabilities 1,170 789
-------- --------
Total noninterest-bearing liabilities 30,122 31,750
-------- --------
Total liabilities 155,544 150,622
Stockholders' equity 12,019 11,134
-------- --------
Total liabilities and stockholders'
equity $167,563 $161,756
======== ========
Net interest income $1,641 $1,671
====== ======
Interest rate spread (3) 3.46% 4.10%
===== ====
Net interest margin (4) 4.25% 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>
Six Months Ended June 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 $ 36,980 $1,107 5.99% $ 12,619 $ 219 3.47%
Securities (1) 31,487 845 5.37 62,012 1,404 4.53
Loans, net of unearned income (2) 82,901 3,832 9.24 71,420 3,341 9.36
-------- ------ ----- -------- ------ ----
Total interest-earning assets 151,368 5,784 7.64 146,051 4,964 6.80
-------- ------ ----- -------- ------ ----
Noninterest-earning assets:
Cash and due from banks 7,216 8,550
Premises and equipment, net 4,225 4,492
Accrued interest receivable
and other assets 3,024 3,961
Allowance for possible loan losses (809) (825)
-------- --------
Total noninterest-earning assets 13,656 16,178
-------- --------
Total assets $165,024 $162,229
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Demand, savings and money
market deposits $ 53,780 $ 630 2.34% $ 61,181 $ 622 2.03%
Time deposits 67,838 1,773 5.23 56,569 947 3.35
-------- ------ ----- -------- ------ ----
Total deposits 121,618 2,403 3.95 117,750 1,569 2.66
Notes payable 1,094 56 10.24 1,154 43 7.45
-------- ------ ----- -------- ------ ----
Total interest-bearing liabilities 122,712 2,459 4.01 118,904 1,612 2.71
-------- ------ ----- -------- ------ ----
Noninterest-bearing liabilities:
Demand deposits 29,166 31,394
Accrued interest payable and
other liabilities 1,494 869
-------- --------
Total noninterest-bearing liabilities 30,660 32,263
-------- --------
Total liabilities 153,372 151,167
Stockholders' equity 11,652 11,062
-------- --------
Total liabilities and stockholders'
equity $165,024 $162,229
======== ========
Net interest income $3,325 $3,352
====== ======
Interest rate spread (3) 3.63% 4.09%
===== ====
Net interest margin (4) 4.39% 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
-14-
<PAGE>
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>
Quarters Ended Six-Month Periods Ended
June 30, 1995 vs. 1994 June 30, 1995 vs 1994
------------------------------ ------------------------------
Increase (Decrease) Due To Increase (Decrease) Due To
Changes In: Changes In:
------------------------------ ------------------------------
Volume Rate Total Volume Rate Total
------ ---- ----- ------ ---- -----
(In thousands) (In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Federal funds sold $384 $ 105 $489 $645 $ 243 $888
Securities (1) (367) 118 (249) (784) 225 (559)
Loans, net of unearned
income (2) 233 7 240 534 (43) 491
---- ----- ---- ---- ----- ----
Total interest income 250 230 480 395 425 820
---- ----- ---- ---- ----- ----
Interest-bearing liabilities:
Deposits:
Demand, savings and
money market deposits (45) 37 (8) (80) 88 8
Time deposits 144 363 507 217 609 826
---- ----- ---- ---- ----- ----
Total deposits 99 400 499 137 697 834
Notes payable 3 8 11 (2) 15 13
---- ----- ---- ---- ----- ----
Total interest expense 102 408 510 135 712 847
---- ----- ---- ---- ----- ----
Increase (decrease) in net
interest income $148 $(178) $(30) $260 $(287) $(27)
==== ===== ==== ==== ===== ====
<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 six-
month period ended June 30, 1995, were $30,000 and $72,000,
respectively, compared to $31,000 and $52,000, respectively, for
the quarter and six-month period ended June 30, 1994. These
represent a decrease of $1,000 and an increase of $20,000,
respectively. The reduced provisions in all periods 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.
-15-
<PAGE>
Noninterest Income
Noninterest income increased $32,000, or 9.1%, from $352,000
during the second quarter of 1994 to $384,000 during the second
quarter of 1995. Noninterest income also increased $80,000, or
11.3%, from $705,000 for the first six months of 1994 to $785,000
for the first six 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 increased from $291,000 during the second
quarter of 1994 to $304,000 during the second quarter of 1995, a
4.5% increase, and increased $43,000, or 7.6%, from $569,000 for
the first six months of 1994 to $612,000 for the first six months
of 1995, 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 $11,000, or 26.8%, from $41,000
during the second quarter of 1994 to $52,000 during the same period
in 1995 and increased $21,000, or 24.4%, from $86,000 for the first
six months of 1994, to $107,000 for the first six months of 1995 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 increased $5,000, or
71.4%, from $7,000 during the second quarter of 1994 to $12,000
during the second quarter of 1995, and increased from $13,000 for
the first six months of 1994 to $33,000 for the first six months of
1995, an increase of $20,000, or 153.8%. The increases were 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 second quarter and first six months 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, check
printing income and other sources of miscellaneous income. Other
income increased $3,000, or 23.1%, from $13,000 during the second
quarter of 1994 to $16,000 during the second quarter of 1995, but
decreased $4,000, or 10.8%, from $37,000 for the first six months
of 1994 to $33,000 for the corresponding period in 1995 due to a
decrease in miscellaneous income at First State, N.A., Abilene.
Noninterest Expenses
Noninterest expenses increased $124,000, or 7.8%, from
$1,594,000 during the second quarter of 1994 to $1,718,000 during
the second quarter of 1995, but decreased $24,000, or 0.7%, from
$3,282,000 during the first six months of 1994 to $3,258,000 during
the first six months of 1995. Noninterest expenses for the quarter
and six-month period ended June 30, 1995, were higher than normal
due to the payment of an additional $205,000 in legal fees and
settlement expenses on the final settlement of certain litigation.
Such expenses had not been previously accrued.
Salaries and employee benefits rose $3,000, or 0.4%, from
$693,000 for the second quarter of 1994 to $696,000 for the
corresponding period of 1995, but decreased $3,000, or
-16-
<PAGE>
0.2%, from $1,413,000 for the six-month period ended June 30, 1994, to
$1,410,000 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 $163,000 for the second
quarter of 1994 to $181,000 for the corresponding period in 1995,
representing an increase of $18,000, or 11.0%. These expenses also
increased $64,000, or 22.2%, from $288,000 for the first six months
of 1994 to $352,000 for the first six 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
$18,000, or 36.7%, from $49,000 for the second quarter of 1994 to
$31,000 for the second quarter of 1995 and decreased $122,000, or
71.8%, from $170,000 for the first six months of 1994 to $48,000
for the corresponding period in 1995.
Net occupancy expense decreased $21,000, or 11.7%, from
$180,000 for the second quarter of 1994 to $159,000 for the same
period in 1995, and decreased $21,000, or 6.0%, from $348,000 for
the first six months of 1994 to $327,000 for the first six 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 increased $158,000, or 222.5%, from $71,000 during
the second quarter of 1994 to $229,000 during the second quarter of
1995, and increased $99,000, or 54.7%, from $181,000 during the
first six months of 1994 to $280,000 for the corresponding period
of 1995. The increases were due to the litigation noted above.
Federal Deposit Insurance Corporation (the "FDIC") insurance
expense decreased from $86,000 during the second quarter of 1994 to
$79,000 during the same period of 1995, and decreased $10,000, or
6.0%, from $168,000 for the first six months of 1994 to $158,000
for the corresponding period in 1995. The decreases were 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 and future
years.
Stationery, printing and supplies expense remained constant at
$55,000 during the second quarter of 1995 when compared to the
corresponding period of 1994, and decreased $3,000, or 2.5%, from
$120,000 for the first six months of 1994 to $117,000 for the first
six months of 1995, primarily due to the merger of First National
and Winters State into First State, N.A., Abilene. Accounting fees
decreased $6,000, or 18.8%, from $32,000 during the second quarter
of 1994 to $26,000 during the second quarter of 1995, and decreased
$6,000, or 9.4%, from $64,000 during the first half of 1994 to
$58,000 during the same period of 1995. The Company
-17-
<PAGE>
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 $0 in expense for the second quarter of
1994 to $5,000 in income for the corresponding period of 1995, but
increased $6,000 from $15,000 in income during the first half of
1994 compared to $9,000 in income for the first six 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 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 increased
$2,000, or 0.8%, from $265,000 during the second quarter of 1994 to
$267,000 during the second quarter of 1995, but decreased $28,000,
or 5.1%, from $545,000 for the first six months of 1994 to $517,000
for the first half 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 year-to-date 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 $264,000 and $244,000 in federal income
taxes in the first six months of 1995 and 1994, respectively, and
all of these amounts except for $16,000 in 1995 and $4,000 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.
-18-
<PAGE>
Analysis of Financial Condition
Assets
Total assets increased $9,842,000, or 6.2%, from $159,860,000
at December 31, 1994, to $169,702,000 at June 30, 1995, primarily
due to the growth in deposits at the Banks during the first six
months of 1995.
Cash and Cash Equivalents
The amount of cash and cash equivalents increased $11,970,000,
or 30.9%, from $38,764,000 at December 31, 1994, to $50,734,000 at
June 30, 1995, primarily due to a decrease in securities and the
cash from such maturities being temporarily invested in federal
funds sold at June 30, 1995.
Securities
Securities decreased $5,327,000, or 16.0%, from $33,305,000 at
December 31, 1994, to $27,978,000 at June 30, 1995. The decrease
in 1995 is due to the fact that the Banks had temporarily invested
additional amounts in federal funds sold at June 30, 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 June 30, 1995, the Company's securities portfolio included
$45,000 book value of unrated securities (local school district
issues), representing 0.16% of the total securities portfolio.
Securities totalling $10,535,000 are classified as available-for-
sale and are carried at fair value at June 30, 1995. Securities
totalling $17,443,000 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 June 30, 1995, the book value of U.S.
Treasury and other U.S. Government agency securities so pledged
amounted to $4,089,000, or 14.6% 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>
June 30, 1995 December 31, 1994
------------------- --------------------
Amount % Amount %
-------- ----- -------- -----
(In thousands)
<S> <C> <C> <C> <C>
Carrying value:
U.S. Treasury securities $24,176 86.4% $31,441 94.4%
Obligations of other U.S.
Government agencies and corporations 3,314 11.8 1,331 4.0
Obligations of states and
political subdivisions 45 0.2 90 0.3
Other securities 443 1.6 443 1.3
------- ----- ------- -----
Total carrying value of securities $27,978 100.0% $33,305 100.0%
======= ===== ======= =====
Total market value of securities $27,965 $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 June 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. 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 June 30, 1995 Amount Value Value Yield
-------------------------- --------- -------- --------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
U.S. Treasury securities:
Within one year $24,250 $24,176 $24,142 5.14%
------- ------- ------- -----
Total U.S. Treasury securities 24,250 24,176 24,142 5.14
------- ------- ------- -----
Obligations of other U.S. Government
agencies and corporations:
Within one year 1,125 1,137 1,140 8.24
After one but within five years 2,161 2,177 2,193 8.05
------- ------- ------- -----
Total obligations of other U.S.
Government agencies and
corporations 3,286 3,314 3,333 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 $28,024 $27,978 $27,965 5.49%
======= ======= ======= =====
</TABLE>
Loan Portfolio
Total loans, net of unearned income, increased $2,088,000, or
2.6%, from $81,306,000 at December 31, 1994, to $83,394,000 at June
30, 1995. The increase during the first six months 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
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.
-21-
<PAGE>
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 June 30, 1995, the Company had approximately
$33,005,000, 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>
June 30, December 31,
1995 1994
-------- ------------
(In thousands)
<S> <C> <C>
Loans to individuals $44,154 $43,113
Real estate loans 22,163 22,760
Commercial and industrial loans 18,545 16,702
Other loans 2,724 2,943
------- -------
Total loans 87,586 85,518
Less unearned income 4,192 4,212
------- -------
Loans, net of unearned
income $83,394 $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 June 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 June 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 June 30, 1995. The
-22-
<PAGE>
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 $ 1,842 $14,690 $5,631 $22,163
Commercial and industrial
loans 9,327 6,142 3,076 18,545
Other loans 1,740 420 564 2,724
------- ------- ------ -------
Total loans $12,909 $21,252 $9,271 $43,432
======= ======= ====== =======
With fixed interest rates $ 7,161 $12,084 $4,306 $23,551
With variable interest rates 5,748 9,168 4,965 19,881
------- ------- ------ -------
Total loans $12,909 $21,252 $9,271 $43,432
======= ======= ====== =======
</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 $803,000, or 0.96% of
loans, net of unearned income, at June 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 $89,000 and $151,000 in loans during the second quarter and
first six months of 1995, respectively. Recoveries during the
second quarter and first six months of 1995 were $43,000 and
$65,000, 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
-23-
<PAGE>
outstanding and certain pertinent ratios for the quarters and
six-month periods ended June 30, 1995 and 1994.
<TABLE>
<CAPTION>
Quarter Ended Six-Month Period Ended
June 30, June 30,
------------------ ----------------------
1995 1994 1995 1994
---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Analysis of allowance for
possible loan losses:
Balance, beginning of period $ 819 $ 794 $ 817 $ 896
Provision for loan losses 30 31 72 52
------- ------- ------- -------
849 825 889 948
------- ------- ------- -------
Loans charged off:
Loans to individuals 72 27 123 59
Real estate loans 17 0 28 95
Commercial and industrial loans 0 27 0 27
Other loans 0 0 0 21
------- ------- ------- -------
Total charge-offs 89 54 151 202
------- ------- ------- -------
Recoveries of loans previously
charged off:
Loans to individuals 18 5 23 14
Real estate loans 0 0 0 0
Commercial and industrial loans 20 9 37 22
Other loans 5 3 5 6
------- ------- ------- -------
Total recoveries 43 17 65 42
------- ------- ------- -------
Net loans charged off 46 37 86 160
------- ------- ------- -------
Balance, end of period $ 803 $ 788 $ 803 $ 788
======= ======= ======= =======
Average loans outstanding,
net of unearned income $83,264 $73,098 $82,901 $71,420
======= ======= ======= =======
Ratio of net loan charge-offs
to average loans outstanding,
net of unearned income (annualized) 0.22% 0.20% 0.21% 0.45%
Ratio of allowance for possible
loan losses to total loans,
net of unearned income, at
end of period 0.96 1.04 0.96 1.04
</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.
-24-
<PAGE>
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
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
June 30, 1995, and December 31, 1994.
<TABLE>
<CAPTION>
June 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 $142 47.9% $207 47.8%
Real estate loans 191 26.6 165 28.0
Commercial and industrial loans 109 22.2 122 20.5
Other loans 70 3.3 68 3.7
---- ----- ---- -----
Total allocated 512 100.0% 562 100.0%
===== =====
Unallocated 291 255
---- ----
Total allowance for possible
loan losses $803 $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 June 30, 1995, substandard loans totaled
$1,698,000, of which $170,000 were loans designated as nonaccrual
or 90 days past due. At June 30, 1995, doubtful loans totaled
$8,000, all of which were 90 days past due. There were no loans
classified as loss at June 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
June 30, 1995, are current and paying in accordance with loan
terms. At June 30, 1995, watch list loans totaled $1,955,000
(including $184,000 of loans guaranteed by U.S. governmental
agencies). At such date, $89,000 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
June 30, 1995, and December 31, 1994.
<TABLE>
<CAPTION>
June 30, December 31,
1995 1994
-------- ------------
(In thousands)
<S> <C> <C>
Nonaccrual loans $167 $ 48
Accruing loans contractually
past due over 90 days 34 26
Restructured loans 65 80
Real estate and other repossessed
assets 370 631
---- ----
Total nonperforming assets $636 $785
==== ====
</TABLE>
The gross interest income that would have been recorded during
the second quarter and first six 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 $5,000 and
$9,000, respectively. No interest income was actually recorded
(received) on loans that were on nonaccrual during the second
quarter and first six 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 on the watch list or in one of
the classified loan 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 June 30, 1995, and December 31, 1994, real
estate and other repossessed assets had an aggregate book value of
$370,000 and $631,000, respectively. Real estate and other
repossessed assets decreased $261,000, or 41.4%, during the first
six months of 1995, partially due to the reclassification from
in-substance repossession at December 31, 1994, to nonperforming
(nonaccrual) loans at June 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 June 30, 1995 balance, $79,000 represents ten
(10) repossessed automobiles, $44,000 represents unimproved lots
in a residential subdivision and $36,000 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 $26,000.
Premises and Equipment
Premises and equipment decreased $92,000, or 2.1%, during the
first six months of 1995, from $4,345,000 at December 31, 1994, to
$4,253,000 at June 30, 1995. The decrease was due to depreciation
recorded on the Company's premises and equipment during the first
six 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 decreased $61,000, or 6.5%, from $945,000 at December
31, 1994, to $884,000 at June 30, 1995. The decrease was a result
of additional funds being invested temporarily at June 30, 1995, in
federal funds sold on which interest is paid daily. Of the total
balance at June 30, 1995, $562,000, or 63.6%, was interest accrued
on loans and $322,000, or 36.4%, 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
The most significant component of other assets at June 30,
1995, is a net deferred tax asset of $2,243,000. The balance of
other assets increased $1,511,000, or 109.4% to $2,892,000 at June
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 $248,000
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, 52.4% of which are demand, savings and
money market deposits at June 30, 1995. Total deposits increased
$8,151,000, or 5.6%, from $146,184,000 at December 31, 1994, to
$154,335,000 at June 30, 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 and
six-month periods ended June 30, 1995 and 1994:
<TABLE>
<CAPTION>
Quarter Ended June 30, Six-Month Period Ended June 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 $ 28,952 --% $ 30,961 --% $ 29,166 --% $ 31,394 --%
Interest-bearing demand,
savings and money
market deposits 52,873 2.35 60,948 2.09 53,780 2.34 61,181 2.03
Time deposits of less
than $100,000 52,497 5.46 43,074 3.36 50,383 5.14 43,316 3.34
Time deposits of $100,000
or more 18,768 5.78 13,708 3.44 17,455 5.47 13,253 3.38
-------- ---- -------- ---- -------- ---- -------- ----
Total deposits $153,090 3.39% $148,691 2.15% $150,784 3.19% $149,144 2.10%
======== ==== ======== ==== ======== ==== ======== ====
</TABLE>
The maturity distribution of time deposits of $100,000 or more
at June 30, 1995, is presented below.
<TABLE>
<CAPTION>
At June 30, 1995
----------------
(In thousands)
<S> <C>
3 months or less $ 6,321
Over 3 through 6 months 3,265
Over 6 through 12 months 6,613
Over 12 months 3,767
-------
Total time deposits of $100,000
or more $19,966
=======
</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 June 30, 1995, deposits of $100,000 or more
represented approximately 11.8% of the Company's total assets,
compared to 9.1% of total assets at December 31, 1994.
Notes Payable
The Company's notes payable increased $394,000, or 42.4%, from
$930,000 at December 31, 1994, to $1,324,000 at June 30, 1995. The
increase represents the additional debt
-29-
<PAGE>
incurred ($323,000) and additional funds borrowed from the Amarillo Bank
($125,000) as a result of the final settlement of certain litigation, which
were partially offset by the regular quarterly principal payments made
by the Company on the Long-term Note (as defined below) on January
15 and April 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 $244,000, or 59.8%, from $408,000 at December 31,
1994, to $652,000 at June 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, particularly during the last nine months.
Other Liabilities
The most significant components of other liabilities are
amounts accrued for various types of expenses. The balance of
other liabilities decreased $1,068,000, or 84.4%, from $1,265,000
at December 31, 1994, to $197,000 at June 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
103.0% at the 90-day interval, 96.4% at the 180-day interval and
87.4% at the 365-day interval at June 30, 1995. Currently, the
Company is in a liability-sensitive position at the 180-day and
365-day intervals; however, the Company is in an asset-sensitive
position at the 90-day interval. The reason the Company is in an
asset-sensitive position in the very short-term is the fact that
the
-30-
<PAGE>
Company had a higher-than-normal amount of federal funds
sold at June 30, 1995. During a rising interest rate
environment, this position normally produces a higher net interest
margin in the very short term, but a lower net interest margin
after approximately 90 days. 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 June 30, 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 $44,500 $44,500 $ 44,500 $ 0 $ 44,500
Securities 8,988 14,396 25,358 2,620 27,978
Loans, net of unearned income 22,442 24,421 28,440 54,954 83,394
------- ------- -------- ------- --------
Total interest-earning assets 75,930 83,317 98,298 57,574 155,872
------- ------- -------- ------- --------
Interest-bearing liabilities:
Demand, savings and money market
deposits 52,569 52,569 52,569 0 52,569
Time deposits 20,142 32,916 58,852 14,613 73,465
Notes payable 980 981 1,090 234 1,324
------- ------- -------- ------- --------
Total interest-bearing liabilities 73,691 86,466 112,511 14,847 127,358
------- ------- -------- ------- --------
Rate-sensitivity gap(1) $ 2,239 $(3,149) $(14,213) $42,727 $ 28,514
======= ======= ======== ======= ========
Rate-sensitivity ratio(2) 103.0% 96.4% 87.4%
===== ==== ====
<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>
<PAGE>
Selected Financial Ratios
The following table presents selected financial ratios
(annualized) for the quarters and six-month periods ended
June 30, 1995 and 1994.
<TABLE>
<CAPTION>
Six-Month Period
Quarter Ended June 30, Ended June 30,
---------------------- -----------------
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income to:
Average assets 0.43% 0.65% 0.62% 0.59%
Average interest-earning assets 0.47 0.72 0.68 0.65
Average stockholders' equity 6.06 9.41 8.82 8.62
Dividend payout (1) to:
Net income 17.03 8.89 10.51 4.88
Average stockholders' equity 1.03 0.84 0.93 0.42
Average stockholders' equity to:
Average total assets 7.17 6.88 7.06 6.82
Average loans (2) 14.43 15.23 14.06 15.49
Average total deposits 7.85 7.49 7.73 7.42
Average interest-earning assets to:
Average total assets 92.12 89.81 91.72 90.03
Average total deposits 100.83 97.70 100.39 97.93
Average total liabilities 99.24 96.44 98.69 96.62
Ratio to total average deposits of:
Average loans (2) 54.39 49.16 54.98 47.89
Average noninterest-bearing deposits 18.91 20.82 19.34 21.05
Average interest-bearing deposits 81.09 79.18 80.66 78.95
Total interest expense to total
interest income 44.80 32.96 42.53 32.49
<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 $6,721,000 and $7,216,000
during the second quarter and first six months of 1995,
respectively, and $8,509,000 and $8,550,000 during the second
quarter and first six months of 1994, respectively. These amounts
comprised 4.0% and 4.4% of average total assets during the second
quarter and the first six months of 1995, respectively, and 5.3% of
average total assets during both the second quarter and first six
months of 1994. The average level of securities and federal funds
sold was $71,094,000 and $68,467,000 during the second quarter and
first six months of 1995, respectively, and $72,168,000 and
$74,631,000 during the second quarter and first six months of
1994, respectively. An increasing amount of the Banks' available
funds have been
-32-
<PAGE>
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 six-month
periods ended June 30, 1995 and 1994. At June 30, 1995,
$25,358,000, or 90.6%, of the Company's securities portfolio
matured within one year and $2,620,000, or 9.4%, 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 June 30, 1995,
approximately $28,440,000, or 34.1%, of the Company's total loans,
net of unearned income, matured within one year and/or had
adjustable interest rates. Approximately, $27,042,000, or 62.3%,
of the Company's commercial 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 second quarter and first six months of 1995, the
Company's average deposits were $153,090,000 and $150,784,000,
respectively, or 91.4% of average total assets, compared to
$148,691,000 and $149,144,000, or 91.9% of average total assets,
during the second quarter and first six 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 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 both
the second quarter and first six months of 1995 were $200,000.
Dividends paid by Independent Financial to the Company during the
same time periods were $200,000 and $400,000, respectively.
Dividends paid by the Banks to Independent Financial during the
second quarter and the first six months of 1994 were $100,000 and
$200,000, respectively; in turn, Independent Financial paid
dividends to the Company totaling $100,000 and $150,000 during the
same time periods. At June 30 1995,
-33-
<PAGE>
there were approximately $930,000 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 29% and 6%,
respectively, of the Company's cash flow during the second quarter
of 1995. These percentages were 41% and 7%, respectively, for the
first six 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 $206,000 and $519,000
were paid by the Banks to the Company during the second quarter and
first six months of 1995, respectively, compared to a total of
$157,000 and $317,000 during the second quarter and first six
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 $44,000 and $87,000 in
management fees to the Company during the second quarter and first
six months of 1995, respectively, compared to $39,000 and $69,000
paid by the Banks during the second quarter and first six 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.
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. 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 June 30, 1995, was $553,000.
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, 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 June 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. The Company had a third note payable to the
Amarillo Bank (the "Short-term Note"), which had a principal
balance of $125,000 at June 30, 1995, and represented the maximum
amount of the Company's $125,000 revolving line of credit with the
Amarillo Bank. The proceeds from the advance on the Short-term
Note were
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<PAGE>
used for the final settlement of certain litigation. See
"Note 7: Commitments and Contingent Liabilities." The Short-term
Note was paid off on July 15, 1995, and the full amount of the
revolving line of credit is currently available. These notes bear
interest at the Amarillo Bank's floating base rate plus 1% (10.0%
at June 30, 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 June 30, 1995, and have been in compliance with
these ratios since the inception of the loan agreement.
Capital Resources
At June 30, 1995, stockholders' equity totaled $13,194,000, or
7.8% 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 June 30, 1995.
<TABLE>
<CAPTION>
The Company June 30, 1995
----------- ----------------------
(Dollars in thousands)
<S> <C>
Tier 1 capital:
Common stockholders' equity, excluding
unrealized loss on available-for-sale
securities $ 12,499
Preferred stockholders' equity (1) 696
Net deferred tax asset in excess of
regulatory capital limits (2) (512)
--------
Total Tier 1 capital 12,683
--------
Tier 2 capital:
Allowance for possible loan losses (3) 803
--------
Total Tier 2 capital 803
--------
Total capital $ 13,486
========
Risk-weighted assets $ 90,518
========
Adjusted quarterly average assets $168,374
========
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Minimum Actual
Regulatory Ratios for
The Company Requirement(4) June 30, 1995
----------- -------------- -------------
<S> <C> <C>
Tier 1 capital to risk-weighted assets ratio 4.00% 14.01%
Total capital to risk-weighted assets ratio 8.00 14.90
Leverage ratio 3.00 7.53
The Banks
---------
Tier 1 capital to risk-weighted assets ratio 4.00% 11.79 - 15.68%
Total capital to risk-weighted assets ratio 8.00 12.58 - 16.67
Leverage ratio 3.00 7.27 - 7.78
<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% Tier 1 capital or (ii) the amount of the
tax benefit from utilization of net operating loss carry-
forwards 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 June 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 and second 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 June 30, 1995, the Company
declared a $0.03 per share cash dividend payable to stockholders of
record on August 15, 1995. The cash dividend is payable on August
31, 1995.
-37-
<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 parenthesis
filed as an exhibit to the Annual Report of the Company on Form
10-k for the fiscal year ended December 31, 1994.
-39-
<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: August 14, 1995 Independent Bankshares, Inc.
(Registrant)
By: Randal N. Crosswhite
Randal N. Crosswhite
Senior Vice President and
Chief Financial Officer
-40-
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
unaudited financial statements for Independent Bankshares, Inc. for the quarter
ended June 30, 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> APR-01-1995
<PERIOD-END> JUN-30-1995
<CASH> 6,234,000
<INT-BEARING-DEPOSITS> 126,034,000
<FED-FUNDS-SOLD> 44,500,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 10,535,000
<INVESTMENTS-CARRYING> 17,443,000
<INVESTMENTS-MARKET> 17,430,000
<LOANS> 83,394,000<F1>
<ALLOWANCE> 803,000
<TOTAL-ASSETS> 169,702,000
<DEPOSITS> 154,335,000
<SHORT-TERM> 0
<LIABILITIES-OTHER> 849,000
<LONG-TERM> 1,324,000
<COMMON> 260,000
0
166,000
<OTHER-SE> 12,768,000
<TOTAL-LIABILITIES-AND-EQUITY> 169,702,000
<INTEREST-LOAN> 1,941,000
<INTEREST-INVEST> 416,000
<INTEREST-OTHER> 641,000
<INTEREST-TOTAL> 2,971,000
<INTEREST-DEPOSIT> 1,297,000
<INTEREST-EXPENSE> 1,331,000
<INTEREST-INCOME-NET> 1,640,000
<LOAN-LOSSES> 30,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,718,000
<INCOME-PRETAX> 276,000
<INCOME-PRE-EXTRAORDINARY> 276,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 182,000
<EPS-PRIMARY> .16
<EPS-DILUTED> .14
<YIELD-ACTUAL> 4.25
<LOANS-NON> 167,000
<LOANS-PAST> 34,000
<LOANS-TROUBLED> 65,000
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 819,000
<CHARGE-OFFS> 89,000
<RECOVERIES> 43,000
<ALLOWANCE-CLOSE> 803,000
<ALLOWANCE-DOMESTIC> 512,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 291,000
<FN>
<F1>Net of unearned income on installment loans of 4,192,000
</FN>
</TABLE>
