<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 1996
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, 1996.
Class: Common Stock, par value $0.25 per share
Outstanding at June 30, 1996: 1,103,910 shares
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements.
<PAGE>
INDEPENDENT BANKSHARES, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1996 AND DECEMBER 31, 1995
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
ASSETS 1996 1995
------- ------------
<S> <C> <C>
Cash and Cash Equivalents:
Cash and Due from Banks $ 7,204,000 $ 8,559,000
Federal Funds Sold 19,600,000 26,200,000
------------ ------------
Total Cash and Cash Equivalents 26,804,000 34,759,000
------------ ------------
Securities:
Available-for-sale 32,992,000 16,746,000
Held-to-maturity--Market Value of
$46,916,000 at June 30, 1996, and
$39,384,000 at December 31, 1995 47,704,000 39,161,000
------------ ------------
Total Securities 80,696,000 55,907,000
------------ ------------
Loans:
Total Loans 87,333,000 85,281,000
Less:
Unearned Income on Installment Loans 2,769,000 3,354,000
Allowance for Possible Loan Losses 796,000 759,000
------------ ------------
Net Loans 83,768,000 81,168,000
Premises and Equipment 4,544,000 4,155,000
Real Estate and Other Repossessed Assets 295,000 337,000
Accrued Interest Receivable 1,806,000 1,494,000
Goodwill 991,000
0
Other Assets 2,397,000 2,524,000
------------ ------------
Total Assets $201,301,000 $180,344,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest-bearing Demand Deposits $ 30,419,000 $ 33,267,000
Interest-bearing Demand Deposits 57,531,000 52,430,000
Interest-bearing Time Deposits 97,631,000 79,007,000
------------ ------------
Total Deposits 185,581,000 164,704,000
Notes Payable 608,000 849,000
Accrued Interest Payable 798,000 882,000
Other Liabilities 119,000 91,000
------------ ------------
Total Liabilities 187,106,000 166,526,000
------------ ------------
Stockholders' Equity:
Series C Preferred Stock 135,000 164,000
Common Stock 276,000 263,000
Additional Paid-in Capital 9,890,000 9,875,000
Retained Earnings 4,005,000 3,448,000
Unrealized Gain (Loss) on
Available-for-sale Securities (111,000) 68,000
------------ ------------
Total Stockholders' Equity 14,195,000 13,818,000
------------ ------------
Total Liabilities and
Stockholders' Equity $201,301,000 $180,344,000
============ ============
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
<PAGE>
INDEPENDENT BANKSHARES, INC.
CONSOLIDATED INCOME STATEMENTS
QUARTERS AND SIX-MONTH PERIODS ENDED JUNE 30, 1996 AND 1995
(Unaudited)
<TABLE>
<CAPTION>
Six Month Period
Quarter Ended June 30, Ended June 30,
1996 1995 1996 1995
---------------------- -------------------
<S> <C> <C> <C> <C>
Interest Income:
Interest and Fees on Loans $1,926,000 $1,941,000 $3,886,000 $3,832,000
Interest on Securities 1,123,000 416,000 2,094,000 843,000
Interest on Federal Funds Sold 235,000 614,000 527,000 1,107,000
---------- ---------- ---------- ----------
Total Interest Income 3,284,000 2,971,000 6,507,000 5,782,000
---------- ---------- ---------- ----------
Interest Expense:
Interest on Deposits 1,529,000 1,297,000 2,992,000 2,403,000
Interest on Notes Payable 15,000 34,000 37,000 56,000
---------- ---------- ---------- ----------
Total Interest Expense 1,544,000 1,331,000 3,029,000 2,459,000
---------- ---------- ---------- ----------
Net Interest Income 1,740,000 1,640,000 3,478,000 3,323,000
Provision for Loan Losses 71,000 30,000 121,000 72,000
---------- ---------- ---------- ----------
Net Interest Income After
Provision for Loan Losses 1,669,000 1,610,000 3,357,000 3,251,000
---------- ---------- ---------- ----------
Noninterest Income:
Service Charges 302,000 304,000 594,000 612,000
Trust Fees 43,000 52,000 96,000 107,000
Other Income 34,000 28,000 52,000 66,000
---------- ---------- ---------- ----------
Total Noninterest Income 379,000 384,000 742,000 785,000
---------- ---------- ---------- ----------
Noninterest Expenses:
Salaries and Employee Benefits 759,000 696,000 1,517,000 1,410,000
Net Occupancy Expense 177,000 159,000 345,000 327,000
Equipment Expense 161,000 181,000 321,000 352,000
Professional Fees 82,000 255,000 140,000 338,000
Stationery, Printing and Supplies Expense 77,000 55,000 140,000 117,000
Net Costs (Revenues) Applicable to
Real Estate and Other
Repossessed Assets (3,000) (5,000) 2,000 (9,000)
Other Expenses 316,000 377,000 608,000 723,000
---------- ---------- ---------- ----------
Total Noninterest Expenses 1,569,000 1,718,000 3,073,000 3,258,000
---------- ---------- ---------- ----------
Income Before Federal Income Taxes 479,000 276,000 1,026,000 778,000
Federal Income Taxes 163,000 94,000 349,000 264,000
---------- ---------- ---------- ----------
Net Income $ 316,000 $ 182,000 $ 677,000 $ 514,000
========== ========== ========== ==========
Preferred Stock Dividends $ 17,000 $ 17,000 $ 34,000 $ 35,000
========== ========== ========== ==========
Net Income Available to
Common Stockholders $ 299,000 $ 165,000 $ 643,000 $ 479,000
========== ========== ========== ==========
Primary Earnings per Common
Share Available
to Common Stockholders $ 0.27 $ 0.16 $ 0.60 $ 0.46
========== ========== ========== ==========
Fully Diluted Earnings Per Common Share
Available to Common Stockholders $ 0.23 $ 0.14 $ 0.50 $ 0.38
========== ========== ========== ==========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
<PAGE>
INDEPENDENT BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX-MONTH PERIODS ENDED JUNE 30, 1996 AND 1995
(UNAUDITED)
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income $ 677,000 $ 514,000
----------- -----------
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Deferred Federal Income Tax Expense 144,000 248,000
Depreciation and Amortization 195,000 188,000
Provision for Loan Losses 121,000 72,000
Loss on Sale of Available-for-sale Securities 12,000 0
Gain on Sale of Held-to-maturity Securities (2,000) 0
Gain on Sales of Premises and Equipment 0 (3,000)
Gain on Sales of Real Estate and Other
Repossessed Assets (16,000) (25,000)
Writedown of Real Estate and Other
Repossessed Assets 15,000 18,000
(Increase) Decrease in Accrued Interest
Receivable (312,000) 61,000
Increase in Goodwill (991,000) 0
Decrease in Other Assets 127,000 89,000
Increase (Decrease) in Accrued Interest Payable (84,000) 244,000
Increase (Decrease) in Other Liabilities 28,000 (741,000)
----------- -----------
Net Cash Provided by (Used in)
Operating Activities (86,000) 665,000
----------- -----------
Cash Flows from Investing Activities:
Proceeds from Maturities of
Available-for-sale Securities 28,000 6,658,000
Proceeds from Maturities of Held-to-maturity Securities 12,141,000 782,000
Proceeds from Sale of Available-for-sale Securities 30,000 0
Proceeds from Sale of Held-to-maturity Securities 2,000,000 0
Purchases of Available-for-sale Securities (16,575,000) 0
Purchases of Held-to-maturity Securities (22,684,000) (2,000,000)
Net Increase in Loans (4,534,000) (2,614,000)
Additions to Premises and Equipment (666,000) (95,000)
Proceeds from Sales of Premises and Equipment 94,000 3,000
Proceeds from Sales of Real Estate and Other
Repossessed Assets 467,000 444,000
Cash and Cash Equivalents Held by Peoples
National Bank, Winters, Texas, on
January 1, 1996 (Date of Acquisition) 1,265,000 0
Cash and Cash Equivalents Held by Coastal
Banc ssb, San Angelo, Texas, on
May 27, 1996 (Date of Acquisition) 54,000 0
Net Cash Provided by (Used in) Investing
Activities (28,380,000) 3,178,000
----------- -----------
Cash Flows from Financing Activities:
Increase in Deposits 20,877,000 8,151,000
Proceeds from Notes Payable 0 250,000
Repayment of Notes Payable (245,000) (182,000)
Payment of Cash Dividends (121,000) (89,000)
Payment for Fractional Shares in Stock Dividend 0 (3,000)
----------- -----------
Net Cash Provided by Financing Activities 20,511,000 8,127,000
----------- -----------
Net Increase (Decrease) in Cash and Cash Equivalents (7,955,000) 11,970,000
Cash and Cash Equivalents at Beginning of Period 34,759,000 38,764,000
----------- -----------
Cash and Cash Equivalents at End of Period $26,804,000 $50,734,000
=========== ===========
Cash Paid During the Period for:
Interest $3,113,000 $2,215,000
Federal Income Taxes 248,000 15,000
Noncash Investing Activities:
Additions to Real Estate and Other Repossessed Assets
Through Foreclosures $469,000 $418,000
Sales of Real Estate and Other Repossessed Assets
Financed with Loans 45,000 117,000
Transfer of Real Estate and Other Repossessed
Assets to Loans 0 125,000
Increase (Decrease) in Unrealized Gain/Loss on
Available-for-sale
Securities, Net of Tax (179,000) 99,000
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
<PAGE>
INDEPENDENT BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
For information with regard to significant accounting policies,
reference is made to Notes to Consolidated Financial Statements included in
the Company's Annual Report on Form 10-K for the year ended December 31,
1995, which was filed with the Securities and Exchange Commission pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended.
The accompanying financial statements reflect all adjustments that are,
in the opinion of management of the Company, 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 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
subsequent to December 31, 1994, the tax effect of the utilization of the
Company's net operating loss carryforwards has been and will be credited
against the Company's gross deferred tax asset. The reduction in the
Company's deferred tax asset during the first six months of 1996 and 1995
totaled $144,000 and $248,000, respectively.
(3) Notes Payable
The Company has a note payable to a financial institution in Amarillo,
Texas (the "Amarillo Bank"). This note (the "Long-term Note") had a maturity
of April 15, 1996. On April 15, 1996, the Company paid the Amarillo Bank
$100,000 to reduce the outstanding principal balance to $371,000 and the
maturity date was extended to April 15, 1999. Equal principal payments of
$31,000, plus accrued interest, are due quarterly on January 15, April 15,
July 15 and October 15. The Long-term Note bears interest at the Amarillo
Bank's floating base rate plus 1% (9.25% at June 30, 1996) and is
collateralized 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
<PAGE>
requires the Company and the Banks to meet certain financial ratios, all of
which were met at June 30, 1996, and December 31, 1995.
In addition, at June 30, 1996, the Company had notes payable to one
current and two former directors of the Company aggregating $223,000. These
notes had an original face amount of $350,000 but were discounted upon
issuance because they bear interest at a below-market interest rate (6%).
The notes are payable in three equal annual installments, plus accrued
interest. The first annual installment of $117,000 was made on March 1,
1996. The notes represent a portion of the final settlement of certain
litigation.
(4) Federal Income Taxes
In February 1992, 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
company's quasi-reorganization as of December 31, 1989. FAS 109 requires
that consideration be given to establishing a valuation allowance against
such deferred tax assets. Initially, 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 acquisition of Winters State Bank, Winters, Texas
("Winters State"), the Company increased its gross deferred tax asset and the
related valuation allowance by approximately $972,000 during 1993. This
gross deferred tax asset arose mainly due to net operating loss carryforwards
and other future deductible temporary differences. The Company reduced the
valuation allowance during 1995 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. Additionally, during 1995, the Company
reduced its gross deferred tax asset and related valuation allowance by
$708,000 as a result of the write-off of a portion of the deferred tax asset
related to the Winters State net operating loss carryforwards that will not
be utilized.
(5) 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, 1996 and 1995, 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, 1996 and 1995, was 1,083,000 and 1,044,000
shares, respectively. The weighted average common shares outstanding used in
computing fully diluted earnings per common share for the quarters ended June
30, 1996 and 1995, was 1,357,000 and 1,349,000
<PAGE>
shares, respectively. The weighted average common shares outstanding used in
computing primary earnings per common share for the first six months of 1996
and 1995, was 1,069,000 and 1,043,000 shares, respectively. The weighted
average common shares outstanding used in computing fully diluted earnings
per common share for the first six months of 1996 and 1995 was 1,357,000 and
1,348,000 shares, respectively.
(6) Acquisition of Subsidiary Bank
First State, N.A., Abilene acquired 100% of the outstanding shares of
Peoples National Bank, Winters, Texas ("Peoples National") effective January
1, 1996, in a cash transaction. At that date, Peoples National had total
assets of $5,505,000, total loans, net of unearned income of $2,767,000,
total deposits of $4,958,000 and stockholders' equity of $525,000. This
acquisition was accounted for using the purchase method of accounting. A
total of $260,000 of goodwill was recorded as a result of this acquisition.
Peoples National was merged with and into First State, N.A., Abilene.
First State, N.A., Abilene also acquired the San Angelo, Texas branch of
Coastal Banc ssb effective May 27, 1996, in a cash transaction. First State,
N.A., Abilene purchased $155,000 in loans and assumed $14,895,000 in deposits
in the transaction. This acquisition was accounted for using the purchase
method of accounting. A total of $743,000 of goodwill was recorded as a
result of the acquisition.
(7) Pending Acquisition
On July 11, 1996, the Company and First State, N.A., Abilene entered
into a definitive agreement to acquire Crown Park Bancshares, Inc. ("Crown
Park") for approximately $7,425,000 and to merge Crown Park's subsidiary
bank, Western National Bank, Lubbock, Texas ("Western National"), with and
into First State, N.A., Abilene. At June 30, 1996, Western National had
total assets of $55,524,000, total loans, net of unearned income, of
$34,560,000, total deposits of $49,938,000, and stockholders' equity of
$5,261,000.
Consummation of the acquisition is subject to various regulatory
approvals and other conditions. Among other things, the Company will file an
application with the Office of the Comptroller of the Currency (the
"Comptroller") for approval of the merger. Additionally, to recognize
certain cost savings and to utilize the Banks' capital more effectively than
on a stand-alone basis, the application filed with the Comptroller will seek
approval to merge First State, N.A., Odessa with and into First State, N.A.
Abilene. If the approvals are received and the conditions satisfied, the
transaction will probably be consummated in December 1996 or January 1997, at
which time Western National will become a branch of First State, N.A.,
Abilene.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This Quarterly Report on Form 10-Q contains certain forward-looking
statements and information relating to Independent Bankshares, Inc. (the
"Company") and its subsidiaries that are based on the beliefs of the
Company's management as well as assumptions made by and information currently
available to the Company's management. When used in this report, the words
"anticipate," "believe," "estimate," "expect" and "intend" and words or
phrases of similar import, as they relate to the Company or its subsidiaries
or Company management, are intended to identify forward-looking statements.
Such statements reflect the current view of the Company with respect to
future events and are subject to certain risks, uncertainties and assumptions
related to certain factors including, without limitation, competitive
factors, general economic conditions, customer relations, the interest rate
environment, governmental regulation and supervision, nonperforming asset
levels, loan concentrations, changes in industry practices, one time events
and other factors described herein. Based upon changing conditions, should
any one or more of these risks or uncertainties materialize, or should any
underlying assumptions prove incorrect, actual results may vary materially
from those described herein as anticipated, believed, estimated, expected or
intended. The Company does not intend to update these forward-looking
statements.
The Company
The Company is a multi-bank holding company that, at June 30, 1996,
owned 100% of Independent Financial Corp. ("Independent Financial") which, in
turn, owned 100% of First State Bank, National Association, Abilene, Texas
("First State, N.A., Abilene") and First State Bank, National Association,
Odessa, Texas ("First State, N.A., Odessa") (collectively, the "Banks"). At
June 30, 1996, First State, N.A., Abilene had two full-service banking
locations in Abilene, one in San Angelo, Texas, one in Stamford, Texas and
one in Winters, Texas, and First State, N.A., Odessa had two full-service
banking locations in Odessa.
First State, N.A., Abilene acquired Peoples National Bank, Winters,
Texas ("Peoples National") effective January 1, 1996. The existing location
of Peoples National was subsequently closed and merged with and into First
State, N.A., Abilene's existing branch facility in Winters. Effective May
27, 1996, First State, N.A., Abilene also acquired the San Angelo branch of
Coastal Banc ssb ("Coastal Banc - San Angelo"). Coast Banc - San Angelo was
merged with and into and became a branch of First State, N.A., Abilene.
General
The following discussion and analysis presents the more significant
factors affecting the Company's financial condition at June 30, 1996, and
December 31, 1995, and results of operations for each of the quarters and
six-month periods ended June 30, 1996 and 1995. 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.
<PAGE>
Quasi-reorganization
In connection with the restructuring of its indebtedness to a financial
institution in Dallas, Texas, the Company effected a quasi-reorganization as
of December 31, 1989. A quasi-reorganization is an elective accounting
procedure under Generally Accepted Accounting Principles ("GAAP") in which
assets and liabilities of the Company were restated to fair value and the
Company's accumulated deficit was reduced to zero. Under GAAP, utilization
of any of the Company's net operating loss carryforwards subsequent to the
quasi-reorganization date will not be credited to future income. For periods
subsequent to December 31, 1994, the tax effect of the utilization of the
Company's net operating loss carryforwards has 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 1996
and 1995 totaled $144,000 and $248,000, respectively.
Results of Operations
General
Net income for the quarter ended June 30, 1996, amounted to $316,000
($0.27 primary earnings per common share) compared to net income of $182,000
($0.16 primary earnings per common share) for the quarter ended June 30,
1995. Net income for the six-month period ended June 30, 1996, was $677,000
($0.60 primary earnings per common share) compared to net income of $514,000
($0.46 primary earnings per common share) for the six-month period ended June
30, 1995. 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, as a
result of the final settlement of certain litigation.
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 $1,740,000 for the second quarter of
1996, an increase of $100,000, or 6.1%, from the second quarter of 1995. Net
interest income for the second quarter of 1995 was $1,640,000. Net interest
income for the first six months of 1996 was $3,478,000, an increase of
$155,000, or 4.7%, from net interest income of $3,323,000 for the first six
months of 1995. The increases in 1996 were due to the acquisitions of
Peoples National effective January 1, 1996, and Coastal Banc - San Angelo
effective May 27, 1996. The net interest margin on a fully taxable-
equivalent basis, was 3.93% and 4.02% for the second quarter and first six
months of 1996, respectively, compared to 4.25% and 4.39% for the second
quarter and first six months of 1995, respectively. The reason for the
decreases in the net interest margin during 1996 is the fact that in the
acquisitions of Peoples National and Coastal Banc - San Angelo, the Company
acquired $19,853,000 in deposits and only $2,922,000 in loans. As a result,
a significant amount of the increased funds has been invested in investment
<PAGE>
securities and federal funds sold which yield a lower rate of interest than
loans and, therefore, have a negative impact on the Company's net interest
margin.
At June 30, 1996, approximately $21,975,000, or 26.0%, of the Company's
total loans, net of unearned income, were tied to fluctuations in the prime
interest rate. This amount represents 47.7% 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 for the first six months of 1996, compared
to the first six months of 1995. For example, the average rate paid by the
Company for certificates of deposit of $100,000 or more decreased slightly
from 5.47% for the first six months of 1995 to 5.41% for the first six months
of 1996. The average rate paid for certificates of deposit less than
$100,000 increased to 5.41% during the first half of 1996 from 5.14% during
the first half of 1995. Rates on other types of deposits, such as interest-
bearing demand, savings and money market deposits, decreased slightly from an
average of 2.34% during the first six months of 1995 to an average of 2.33%
during the first half of 1996. Given the fact that the Company's interest-
bearing liabilities are subject to repricing faster than its interest-earning
assets, an overall 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, 1996 and 1995, 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.
<PAGE>
<TABLE>
<CAPTION>
Quarter Ended June 30,
---------------------------------------------------------------
1996 1995
------------------------------ ------------------------------
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:
Loans, net of unearned income (1) $ 83,121 $ 1,927 9.27% $ 83,264 $ 1,941 9.32%
Securities (2) 76,100 1,123 5.90 30,691 417 5.43
Federal funds sold 17,744 234 5.28 40,403 614 6.08
-------- ------- ---- -------- ------- ----
Total interest-earning assets 176,965 3,284 7.42 154,358 2,972 7.70
-------- ------- ---- -------- ------- ----
Noninterest-earning assets:
Cash and due from banks 6,858 6,721
Premises and equipment 4,382 4,256
Accrued interest receivable
and other assets 4,943 3,039
Allowance for possible loan losses (861) (811)
-------- --------
Total noninterest-earning assets 15,322 13,205
-------- --------
Total assets $192,287 $167,563
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Demand, savings and money
market deposits $57,324 $334 2.33% $52,873 $310 2.35%
Time deposits 89,462 1,195 5.34 71,265 987 5.54
-------- ------- ---- -------- ------- ----
Total interest-bearing deposits 146,786 1,529 4.17 124,138 1,297 4.18
Notes payable 622 15 9.65 1,284 34 10.59
-------- ------- ---- -------- ------- ----
Total interest-bearing liabilities 147,408 1,544 4.19 125,422 1,331 4.24
-------- ------- ---- -------- ------- ----
Noninterest-bearing liabilities:
Demand deposits 29,798 28,952
Accrued interest payable and
other liabilities 1,009 1,170
-------- --------
Total noninterest-bearing liabilities 30,807 30,122
-------- --------
Total liabilities 178,215 155,544
Stockholders' equity 14,072 12,019
-------- --------
Total liabilities and
stockholders' equity $192,287 $167,563
======== ========
Net interest income $1,740 $1,641
====== ======
Interest rate spread (3) 3.23% 3.46%
==== ====
Net interest margin (4) 3.93% 4.25%
==== ====
<FN>
______________________________
(1) 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.
(2) Nontaxable interest income on securities for 1995 was adjusted to a
taxable yield assuming a tax rate of 34%.
(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>
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended June 30,
---------------------------------------------------------------
1996 1995
------------------------------ ------------------------------
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:
Loans, net of unearned income (1) $ 83,319 $ 3,886 9.33% $ 82,901 $3,832 9.24%
Securities (2) 70,050 2,094 5.98 31,487 845 5.37
Federal funds sold 19,635 527 5.37 36,980 1,107 5.99
-------- ------ ---- -------- ------ -----
Total interest-earning assets 173,004 6,507 7.52 151,368 5,784 7.64
-------- ------ ---- -------- ------ -----
Noninterest-earning assets:
Cash and due from banks 7,225 7,216
Premises and equipment 4,348 4,225
Accrued interest receivable
and other assets 4,962 3,024
Allowance for possible loan losses (868) (809)
-------- --------
Total noninterest-earning assets 15,667 13,656
-------- --------
Total assets $188,671 $165,024
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Demand, savings and money
market deposits $56,172 $654 2.33% $53,780 $630 2.34%
Time deposits 86,375 2,337 5.41 67,838 1,773 5.23
-------- ------ ---- -------- ------ -----
Total interest-bearing deposits 142,547 2,991 4.20 121,618 2,403 3.95
Notes payable 703 38 10.81 1,094 56 10.24
-------- ------ ---- -------- ------ -----
Total interest-bearing liabilities 143,250 3,029 4.23 122,712 2,459 4.01
-------- ------ ---- -------- ------ -----
Noninterest-bearing liabilities:
Demand deposits 30,185 29,166
Accrued interest payable and
other liabilities 1,114 1,494
-------- --------
Total noninterest-bearing liabilities 31,299 30,660
-------- --------
Total liabilities 174,549 153,372
Stockholders' equity 14,122 11,652
-------- --------
Total liabilities and
stockholders' equity $188,671 $165,024
======== ========
Net interest income $3,478 $3,325
====== ======
Interest rate spread (3) 3.29% 3.63%
==== ====
Net interest margin (4) 4.02% 4.39%
==== ====
<FN>
______________________________
(1) 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.
(2) Nontaxable interest income on securities for 1995 was adjusted to a taxable yield assuming a tax rate of 34%.
(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
<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, 1996 vs. 1995 June 30, 1996 vs 1995
-------------------------- --------------------------
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:
Loans, net of unearned income (1) (3) (11) (14) 18 36 54
Securities (2) 667 39 706 1,143 106 1,249
Federal funds sold (308) (72) (380) (475) (105) (580)
----- ---- ---- ---- ---- ----
Total interest income 356 (44) 312 686 37 723
----- ---- ---- ---- ---- ----
Interest-bearing liabilities:
Deposits:
Demand, savings and
money market deposits 26 (2) 24 27 (3) 24
Time deposits 245 (37) 208 501 63 564
----- ---- ---- ---- ---- ----
Total interest-bearing deposits 271 (39) 232 528 60 588
Notes payable (16) (3) (19) (21) 3 (18)
----- ---- ---- ---- ---- ----
Total interest expense 255 (42) 213 507 63 570
----- ---- ---- ---- ---- ----
Increase (decrease) in net interest
income $101 $ (2) $ 99 $179 $(26) $153
===== ==== ==== ==== ==== ====
<FN>
______________________________
(1) Nonaccrual loans have been included in average assets for the purposes of the computations, thereby reducing yields.
(2) Information with respect to tax-exempt securities for 1995 is provided on a fully taxable-equivalent basis assuming
a tax rate of 34%.
</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 provisions for loan losses for the quarter
and six-month period ended June 30, 1996, were $71,000 and $121,000,
respectively, compared to $30,000 and $72,000, respectively, for the quarter
and six-month period ended June 30, 1995. These represent increases of
$41,000 and $49,000, respectively. The increased provisions in 1996 were
primarily a result of the charge-off of the remaining balance of $100,000 on
a loan collateralized by real estate that had been on nonaccrual for several
years because the borrower was in bankruptcy. Collection of the loan is now
considered to be very unlikely. The reduced provisions in all periods
compared to several years ago reflect the general stabilization of the
<PAGE>
economic conditions in the Company's primary service areas. In addition, the
overall quality of the Company's loan portfolio has improved, necessitating
generally lower provisions.
Noninterest Income
Noninterest income decreased $5,000, or 1.3%, from $384,000 during the
second quarter of 1995 to $379,000 during the second quarter of 1996.
Noninterest income also decreased $43,000, or 5.5%, from $785,000 for the
first six months of 1995 to $742,000 for the first six months of 1996.
Service charges on deposit accounts and on other types of services are
the major source of noninterest income to the Company. This source of income
decreased from $304,000 during the second quarter of 1995 to $302,000 during
the second quarter of 1996, a 0.7% decrease, and decreased $18,000, or 2.9%,
from $612,000 for the first six months of 1995 to $594,000 for the first six
months of 1996. Despite the overall growth in total deposits during the past
year, the level of demand deposits, on which service charges are assessed,
has remained fairly stable.
Trust fees from the operation of the trust department of First State,
N.A., Odessa decreased $9,000, or 17.3%, from $52,000 during the second
quarter of 1995 to $43,000 during the same period in 1996 and decreased
$11,000, or 10.3%, from $107,000 for the first six months of 1995, to $96,000
for the first six months of 1996 as a result of a one-time $24,000 fee
received for services performed as executor of an estate during 1995, which
was partially offset in the 1996 periods by increased fees collected due to
an increased amount of assets under management.
Other income is the sum of several small components of noninterest
income including insurance premiums earned on automobiles financed through
the Company's indirect installment loan program and other sources of
miscellaneous income. Other income increased $6,000, or 21.4%, from $28,000
during the second quarter of 1995 to $34,000 during the second quarter of
1996, but decreased $14,000, or 21.2%, from $66,000 for the first six months
of 1995 to $52,000 for the corresponding period in 1996 due to a $26,000
decrease in insurance premium income as a result of decreasing loan activity
in that area and a net loss of $10,000 on sales of securities during the
first half of 1996. These decreases were partially offset by an increase in
other miscellaneous income.
Noninterest Expenses
Noninterest expenses decreased $149,000, or 8.7%, from $1,718,000 during
the second quarter of 1995 to $1,569,000 during the second quarter of 1996,
and decreased $185,000, or 5.7%, from $3,258,000 during the first six months
of 1995 to $3,073,000 during the first six months of 1996. 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.
Salaries and employee benefits rose $63,000, or 9.1%, from $696,000 for
the second quarter of 1995 to $759,000 for the corresponding period of 1996,
and increased $107,000, or 7.6%, from $1,410,000 for the six-month period
ended June 30, 1995, to $1,517,000 for the
<PAGE>
corresponding period of 1996. The increases were a result of the
acquisitions of Peoples National effective January 1, 1996, and Coastal Banc
- - San Angelo effective May 27, 1996, and overall salary increases effective
January 1, 1996.
Net occupancy expense increased $18,000, or 11.3%, from $159,000 for the
second quarter of 1995 to $177,000 for the same period in 1996, and increased
$18,000, or 5.5%, from $327,000 for the first six months of 1995 to $345,000
for the first six months of 1996. The increases are due primarily to a
reduction in rental income received in 1996 as a result of the loss of a
tenant in the building owned by First State, N.A., Odessa.
Equipment expense decreased from $181,000 for the second quarter of 1995
to $161,000 for the corresponding period in 1996, representing a decrease of
$20,000, or 11.0%. These expenses also decreased $31,000, or 8.8%, from
$352,000 for the first six months of 1995 to $321,000 for the first six
months of 1996. These decreases are a result of a significant amount of
furniture, fixtures and equipment at First State N.A., Odessa that became
fully depreciated during the latter part of 1995 and the first quarter of
1996, thereby decreasing depreciation expense associated with such assets.
Professional fees, which include legal and accounting fees, decreased
$173,000, or 67.8%, from $255,000 during the second quarter of 1995 to
$82,000 during the second quarter of 1996, and decreased $198,000, or 58.6%,
from $338,000 during the first six months of 1995 to $140,000 for the
corresponding period of 1996. The decreases were due to the settlement of
litigation noted above during 1995.
Stationery, printing and supplies expense increased $22,000, or 40.0%,
from $55,000 for the second quarter of 1995 to $77,000 for the second quarter
of 1996, and increased $23,000, or 19.7%, from $117,000 for the first six
months of 1995 to $140,000 for the first six months of 1996, primarily due to
the acquisitions of Peoples National and Coastal Banc - San Angelo effective
January 1, 1996, and May 27, 1996, respectively.
Net costs (revenues) applicable to real estate and other repossessed
assets consist 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. Net revenues decreased from $5,000 for
the second quarter of 1995 to $3,000 for the corresponding period of 1996,
and the Company recorded net revenues of $9,000 for the first six months of
1995, compared to $2,000 in net costs for the first six months of 1996. The
amount of real estate and other repossessed assets has declined over the past
few years, notwithstanding the bank acquisitions made in 1993 and 1996.
Other noninterest expense includes, among many other items, postage,
advertising, insurance, directors' fees, dues and subscriptions, regulatory
examinations, travel and entertainment, due from bank account charges and
Federal Deposit Insurance Corporation ("FDIC") insurance. These expenses
decreased $61,000, or 16.2%, from $377,000 during the second quarter of 1995
to $316,000 during the second quarter of 1996, and decreased $115,000, or
15.9%, from $723,000 for the first six months of 1995 to $608,000 for the
first half of 1996. FDIC insurance premiums decreased $155,000 during the
past year as a result of a reduction by the FDIC of deposit insurance rates
for banks. This decrease was partially offset by an
<PAGE>
increase in other expenses as a result of the acquisitions of Peoples
National and Coastal Banc - San Angelo.
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
subsequent to December 31, 1994, the tax effect of the utilization of the
Company's net operating loss carryforwards has been and will be credited
against the Company's gross deferred tax asset. The Company accrued $349,000
and $264,000 in federal income taxes in the first six months of 1996 and
1995, respectively. Of these amounts, $144,000 and $248,000 were offset
against the Company's gross deferred tax asset during the first six months of
1996 and 1995, respectively. See "Quasi-reorganization" above.
Impact of Inflation
The effects of inflation on the local economy and on the Company's
operating results have been relatively modest for the past several years.
Because substantially all of the Company's assets and liabilities are
monetary in nature, such as cash, securities, loans and deposits, their
values are less sensitive to the effects of inflation than to changing
interest rates, which do not necessarily change in accordance with inflation
rates. The Company tries to control the impact of interest rate fluctuations
by managing the relationship between its interest rate-sensitive assets and
liabilities. See "Analysis of Financial Condition - Interest Rate
Sensitivity" below.
Analysis of Financial Condition
Assets
Total assets increased $20,957,000, or 11.6%, from $180,344,000 at
December 31, 1995, to $201,301,000 at June 30, 1996, primarily due to the
acquisitions of Peoples National and Coastal Banc - San Angelo, which had
aggregate total assets of approximately $20,400,000 at the respective dates
of acquisition.
Cash and Cash Equivalents
The amount of cash and cash equivalents decreased $7,955,000, or 22.9%,
from $34,759,000 at December 31, 1995, to $26,804,000 at June 30, 1996, due
to a decrease in federal funds sold, and a corresponding increase in
securities, at June 30, 1996.
Securities
Securities increased $24,789,000, or 44.3%, from $55,907,000 at December
31, 1995, to $80,696,000 at June 30, 1996. The increase in 1996 is primarily
due to the reduction in federal funds sold noted above and the investment in
securities of the net proceeds received from the assumption of the deposits
from the Coastal Banc - San Angelo acquisition.
<PAGE>
The board of directors of each Bank reviews all securities transactions
monthly and the securities portfolio periodically. The Company's current
investment policy provides for the purchase of U.S. Treasury securities and
federal agency securities having maturities of five years or less and for the
purchase of state, county and municipal agencies' securities with maximum
maturities of 10 years. The Company's policy is to maintain a securities
portfolio with staggered maturities to meet its overall liquidity needs.
Municipal securities must be rated A or better. Certain school district
issues, however, are acceptable with a Baa rating. Securities totalling
$32,992,000 are classified as available-for-sale and are carried at fair
value at June 30, 1996. Securities totalling $47,704,000 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. During the
first quarter of 1996, the Company sold investments in certain mutual funds
obtained in the acquisition of Peoples National with a book value of $30,000
because they did not meet the Company's investment criteria. A loss of
$12,000 was recorded on the sale of such investments. During the second
quarter of 1996, the Company sold investments classified as held-to-maturity
with a book value of $1,998,000 approximately 30 days prior to their
scheduled maturity and recorded a $2,000 gain on such sale.
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, 1996, the book value of U.S. Treasury and other U.S. Government
agency securities so pledged amounted to $10,261,000, or 12.7% of the total
securities portfolio.
The following table summarizes the amounts and the distribution of the
Company's securities held at the dates indicated.
<TABLE>
<CAPTION>
June 30, 1996 December 31, 1995
------------- -----------------
Amount % Amount %
------ --- ------ ---
(In thousands)
<S> <C> <C> <C> <C>
Carrying value:
U.S. Treasury securities $39,843 49.4% $32,297 57.8%
Obligations of other
U.S. Government
agencies and corporations 34,539 42.8 23,021 41.2
Mortgage-backed securities 5,871 7.3 146 0.2
Other securities 443 0.5 443 0.8
------- ----- ------- -----
Total carrying value
of securities $80,696 100.0% $55,907 100.0%
======= ===== ======= =====
Total market value of securities $79,908 $56,132
======= =======
</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.
The following table provides the maturity distribution and weighted
average interest rates of the Company's total securities portfolio at June
30, 1996. 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.
<PAGE>
<TABLE>
<CAPTION>
Estimated Weighted
Type and Maturity Grouping Principal Carrying Fair Average
at June 30, 1996 Amount Value Value Yield
- -------------------------- --------- -------- --------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
U.S. Treasury securities:
Within one year $13,000 $13,023 $13,035 5.93%
After one but within five years 27,100 26,820 26,793 5.78
Total U.S. Treasury securities 40,100 39,843 39,828 5.83
------- ------- ------- ----
Obligations of other U.S. Government
agencies and corporations:
Within one year 500 498 494 4.80
After one but within five years 34,000 34,041 33,484 6.40
------- ------- ------- ----
Total obligations of U.S. Government
agencies and corporations 34,500 34,539 33,978 6.38
------- ------- ------- ----
Mortgage-backed securities 5,720 5,871 5,659 6.14
------- ------- ------- ----
Other securities:
After one but within five years 5 5 5 5.49
After ten years 438 438 438 3.56
------- ------- ------- ----
Total other securities 443 443 443 3.59
------- ------- ------- ----
Total securities $80,763 $80,696 $79,908 6.07%
======= ======= ======= ====
</TABLE>
Loan Portfolio
Total loans, net of unearned income, increased $2,637,000, or 3.2%, from
$81,927,000 at December 31, 1995, to $84,564,000 at June 30, 1996. The
increase during the first six months of 1996 was a result of the purchase of
Peoples National effective January 1, 1996.
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 collateralized by real estate, accounts receivable,
inventory or other business assets.
Due to diminished loan demand in most areas during the early 1990's, the
Banks instituted an installment loan program whereby they 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 collateralized by the
automobile, and the dealership realizes a profit based on
<PAGE>
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. At June 30, 1996, the Company had approximately
$29,960,000, 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>
June 30, December 31,
1996 1995
-------- ------------
(In thousands)
<S> <C> <C>
Loans to individuals $41,285 $39,868
Real estate loans 23,943 23,265
Commercial and industrial loans 19,127 19,510
Other loans 2,978 2,638
------- -------
Total loans 87,333 85,281
Less unearned income 2,769 3,354
------- -------
Loans, net of unearned
income $84,564 $81,927
======= =======
</TABLE>
Loan concentrations are considered to exist when there are amounts
loaned to a multiple number of borrowers engaged in similar activities that
would cause them to be similarly impacted by economic or other conditions.
The Company had no concentrations of loans at June 30, 1996, except for those
described above. The Banks had no loans outstanding to foreign countries or
borrowers headquartered in foreign countries at June 30, 1996.
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, 1996. The table also presents the portion
of loans that have fixed interest rates or interest rates that fluctuate over
the life of the loans in accordance with changes in the money market
environment as represented by the prime rate.
<PAGE>
<TABLE>
One to Over Total
One Year Five Five Carrying
and Less Years Years Value
-------- ------ ----- --------
(In thousands)
<S> <C> <C> <C> <C>
Real estate loans $ 2,346 $15,610 $ 5,987 $23,943
Commercial and industrial loans 6,737 7,254 5,136 19,127
Other loans 1,382 606 990 2,978
------- ------- ------- -------
Total loans $10,465 $23,470 $12,113 $46,048
======= ======= ======= =======
With fixed interest rates $ 2,611 $16,001 $ 5,461 $24,073
With variable interest rates 7,854 7,469 6,652 21,975
------- ------- ------- -------
Total loans $10,465 $23,470 $12,113 $46,048
======= ======= ======= =======
</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
$796,000, or 0.94% of loans, net of unearned income, at June 30, 1996,
compared to $759,000, or 0.93% of loans, net of unearned income, at December
31, 1995.
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
$182,000 and $268,000 in loans during the second quarter and first six months
of 1996, respectively. Recoveries during the second quarter and first six
months of 1996 were $13,000 and $35,000, respectively.
The following table presents the provisions for loan losses, loans
charged off and recoveries on loans previously charged off, the amount of the
allowance, the average loans outstanding and certain pertinent ratios for the
quarters and six-month periods ended June 30, 1996 and 1995.
<PAGE>
<TABLE>
<CAPTION>
Quarter Ended Six-Month Period Ended
June 30, June 30,
------------- ----------------------
1996 1995 1996 1995
---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Analysis of allowance for possible loan losses:
Balance, beginning of period $ 894 $ 819 $ 759 $ 817
Acquisition of subsidiary bank 0 0 149 0
Provision for loan losses 71 30 121 72
------- ------- ------- -------
965 849 1,029 889
------- ------- ------- -------
Loans charged off:
Loans to individuals 64 72 110 123
Real estate loans 100 17 100 28
Commercial and industrial loans 18 0 58 0
Other loans 0 0 0 0
------- ------- ------- -------
Total charge-offs 182 89 268 151
------- ------- ------- -------
Recoveries of loans previously charged off:
Loans to individuals 8 18 16 23
Real estate loans 0 0 0 0
Commercial and industrial loans 5 20 19 37
Other loans 0 5 0 5
------- ------- ------- -------
Total recoveries 13 43 35 65
------- ------- ------- -------
Net loans charged off 169 46 233 86
------- ------- ------- -------
Balance, end of period $ 796 $ 803 $ 796 $ 803
======= ======= ======= =======
Average loans outstanding, net of unearned income $83,121 $83,264 $83,319 $82,901
======= ======= ======= =======
Ratio of net loan charge-offs to average loans
outstanding, net of unearned income (annualized) 0.81% 0.22% 0.56% 0.21%
Ratio of allowance for possible loan losses to total
loans, net of unearned income, at end of period 0.94 0.96 0.94 0.96
</TABLE>
Foreclosures on defaulted loans have resulted in the Company acquiring
real estate and other repossessed assets; however, the amount of real estate
and other repossessed assets being carried on the Company's books is
decreasing. 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 economies of the Banks' market areas have recovered and
stabilized over the past several years, there has been a reduction in total
loan losses and in the amount of the provision necessary to maintain an
adequate balance in the allowance. This reflects not only the loan loss
trend, but management's assessment of the continued reduction of credit risks
associated with the loan portfolio.
The amount of the allowance is established by management based upon
estimated risks inherent in the existing loan portfolio. Management reviews
the loan portfolio on a continuing basis to evaluate potential problem loans.
This review encompasses management's estimate of current economic conditions
and the potential impact on various industries, prior loan loss experience
and the financial condition of individual borrowers. Loans that have been
specifically identified as problem or nonperforming loans are reviewed on at
least a quarterly basis, and management critically evaluates the prospect of
ultimate losses arising from such loans, based on the borrower's
<PAGE>
financial condition and the value of available collateral. When a risk can
be specifically quantified for a loan, that amount is specifically allocated
in the allowance. In addition, the Company allocates the allowance based
upon the historical loan loss experience of the different types of loans.
Despite such allocation, both allocated and unallocated allowances are
available for charge-offs for all loans.
On January 1, 1995, the Company adopted Statement of Financial
Accounting Standards No. 114, "Accounting by Creditors for Impairment of a
Loan" ("FAS 114"). In accordance with FAS 114, any change in the present
value of such loans will be recognized as an adjustment to the Company's
allowance for possible loan losses.
The following table shows the allocations in the allowance and the
respective percentages of each loan category to total loans at June 30, 1996,
and December 31, 1995.
<TABLE>
June 30, 1996 December 31, 1995
----------------------- ------------------------
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 $300 45.6% $136 44.6%
Real estate loans 130 28.3 197 28.4
Commercial and industrial loans 91 22.6 96 23.8
Other loans 44 3.5 59 3.2
---- ----- ---- -----
565 100.0% 488 100.0%
===== =====
Unallocated 231 271
---- ----
Total allowance for
possible loan losses $796 $759
==== ====
</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, 1996,
substandard loans totaled $1,568,000, of which $103,000 were loans designated
as nonaccrual or 90 days past due. There were no loans classified as
doubtful or loss at June 30, 1996.
<PAGE>
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, doubtful or loss), 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, 1996, are current and paying in
accordance with loan terms. At June 30, 1996, watch list loans totaled
$732,000 (including $285,000 of loans guaranteed by U.S. governmental
agencies). At such date, no watch list loans were designated as nonaccrual,
90 days past due or restructured. See "Nonperforming Assets" below.
Nonperforming Assets
Nonperforming loans consist of past due, nonaccrual and restructured
loans. A past due loan is an accruing loan that is contractually past due 90
days or more as to principal or interest payments. Loans on which management
does not expect to collect interest in the normal course of business are
placed on nonaccrual or are restructured. When a loan is placed on
nonaccrual, any interest previously accrued but not yet collected is reversed
against current income unless, in the opinion of management, the outstanding
interest remains collectible. Thereafter, interest is included in income
only to the extent of cash received. A loan is restored to accrual status
when all interest and principal payments are current and the borrower has
demonstrated to management the ability to make payments of principal and
interest as scheduled.
A "troubled debt restructuring" is a restructured loan upon which
interest accrues at a below market rate or upon which certain principal has
been forgiven so as to aid the borrower in the final repayment of the loan,
with any interest previously accrued, but not yet collected, being reversed
against current income. Interest is accrued based upon the new loan terms.
Nonperforming loans are fully or substantially collateralized 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, 1996, and December
31, 1995.
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
------- ------------
(In thousands)
<S> <C> <C>
Nonaccrual loans $ 97 $204
Accruing loans contractually
past due over 90 days 7 23
Restructured loans 80 65
Real estate and other repossessed assets 295 337
---- ----
Total nonperforming assets $479 $629
==== ====
</TABLE>
<PAGE>
The gross interest income that would have been recorded during the
second quarter and first six months of 1996 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 $7,000 and $13,000, respectively. No interest income was
actually recorded (received) on loans that were on nonaccrual during the
second quarter or the first six months of 1996.
A potential problem loan is a loan where information about possible
credit problems of the borrower is known, causing management to have serious
doubts as to the ability of the borrower to comply with the present loan
repayment terms and which may result in the inclusion of such loan in one of
the nonperforming asset categories. The Company does not believe it has any
potential problem loans other than those reported in the above table.
Real Estate and Other Repossessed Assets
Real estate and other repossessed assets consists of real property and
other assets unrelated to banking premises or facilities. Income derived
from this real estate and other repossessed assets, if any, is generally less
than that which would have been earned as interest at the original contract
rates on the related loans. At June 30, 1996, and December 31, 1995, real
estate and other repossessed assets had an aggregate book value of $295,000
and $337,000, respectively. Real estate and other repossessed assets
decreased $42,000, or 12.5%, during the first six months of 1996,
notwithstanding the acquisition of Peoples National effective January 1,
1996, due to the sale of several parcels of other real estate during that
time period. Of the June 30, 1996 balance, $107,000 represents twelve
repossessed automobiles, $98,000 represents various residential properties
and $90,000 represents various commercial properties. None of the individual
parcels of real estate are carried at more than $36,000.
Premises and Equipment
Premises and equipment increased $389,000, or 9.4%, during the first six
months of 1996, from $4,155,000 at December 31, 1995, to $4,544,000 at June
30, 1996. The increase was due to the acquisitions of Peoples National and
Coastal Banc - San Angelo which were partially offset by $180,000 of
depreciation expense recorded on the Company's premises and equipment during
the first half of 1996.
Accrued Interest Receivable
Accrued interest receivable consists of interest that has accrued on
loans and securities, but is not yet payable under the terms of the related
agreements. The balance of accrued interest receivable increased $312,000,
or 20.9%, from $1,494,000 at December 31, 1995, to $1,806,000 at June 30,
1996. The increase was a result of an increase in securities, on which
interest is collected semi-annually, and a decrease in federal funds sold, on
which interest is collected daily. Of the total balance at June 30, 1996,
$1,222,000, or 67.7%, was interest accrued on securities and $584,000, or
32.3%, was interest accrued on loans. The amounts of accrued interest
receivable and percentages attributable to securities and loans at December
31, 1995, were $920,000, or 61.6%, and $574,000, or 38.4%, respectively.
<PAGE>
Goodwill
Goodwill increased from $0 at December 31, 1995, to $991,000 at June 30,
1996, as a result of the recording of $260,000 in goodwill from the Peoples
National acquisition and $743,000 in goodwill from the Coastal Banc - San
Angelo acquisition. A total of $12,000 in goodwill amortization expense was
recorded during the first half of 1996.
Other Assets
The most significant component of other assets at June 30, 1996, is a
net deferred tax asset of $1,809,000. The balance of other assets decreased
$127,000, or 5.0%, to $2,397,000 at June 30, 1996, from $2,524,000 at
December 31, 1995, primarily as a result of the utilization of $128,000 of
the Company's net operating loss carryforwards.
Deposits
The Banks' lending and investing activities are funded to a great extent
by core deposits, 47.4% of which are demand, savings and money market
deposits at June 30, 1996. Total deposits increased $20,877,000, or 12.7%,
from $164,704,000 at December 31, 1995, to $185,581,000 at June 30, 1996.
The increase is due primarily to the acquisitions of Peoples National and
Coastal Banc - San Angelo, which had aggregate total deposits of $19,853,000
at their respective dates of acquisition. 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, 1996 and 1995:
<TABLE>
<CAPTION>
Quarter Ended June 30, Six-Month Period Ended June 30,
--------------------------------------------- --------------------------------------------
1996 1995 1996 1995
------------------- ------------------ ------------------- -------------------
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 $ 29,798 --% $ 28,952 --% $ 30,185 --% $ 29,166 --%
Interest-bearing demand,
savings and money
market deposits 57,324 2.33 52,873 2.35 56,172 2.33 53,780 2.34
Time deposits of less
than $100,000 62,453 5.31 52,497 5.46 59,848 5.41 50,383 5.14
Time deposits of $100,000
or more 27,009 5.39 18,768 5.78 26,527 5.41 17,455 5.47
-------- ---- -------- ---- -------- ---- -------- ----
Total deposits $176,584 3.46% $153,090 3.39% $172,732 3.46% $150,784 3.19%
======== ==== ======== ==== ======== ==== ======== ====
</TABLE>
The maturity distribution of time deposits of $100,000 or more at June
30, 1996, is presented below.
<PAGE>
<TABLE>
<CAPTION>
At June 30, 1996
----------------
(In thousands)
<S> <C>
3 months or less $10,065
Over 3 through 6 months 6,621
Over 6 through 12 months 9,876
Over 12 months 7,341
-------
Total time deposits of $100,000
or more $33,903
=======
</TABLE>
The Banks experience some 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, 1996, deposits of $100,000
or more represented approximately 16.8% of the Company's total assets,
compared to 13.2% of total assets at December 31, 1995.
Notes Payable
The Company's notes payable decreased $241,000, or 28.4%, from $849,000
at December 31, 1995, to $608,000 at June 30, 1996. The decrease represents
the regular quarterly principal payment made by the Company on the Long-term
Note (as defined below under "Liquidity - Notes Payable") on January 15,
1996, a $100,000 principal payment made on the Long-term Note on April 15,
1996, when it matured and was renewed and the first of three annual
installments on notes payable to one current and two former directors. See
"Note 3: Notes Payable" to the Company's Consolidated Financial Statements.
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 decreased
$84,000, or 9.5%, from $882,000 at December 31, 1995, to $798,000 at June 30,
1996. The decrease was primarily a result of a decrease in accrued interest
payable on Individual Retirement Accounts, a majority of which have annual
maturity and interest payment dates around April 15.
Other Liabilities
The most significant components of other liabilities are amounts accrued
for various types of expenses. The balance of other liabilities increased
$28,000, or 30.8%, from $91,000 at December 31, 1995, to $119,000 at June 30,
1996, primarily because of an increase in the federal income tax liability of
the Company due to the fact that, for alternative minimum tax purposes, all
of the Company's net operating loss carryforwards had been utilized at
December 31, 1995. As a result, the Company began paying federal income
taxes at the effective rate of approximately 20% beginning January 1, 1996,
as opposed to an effective rate of approximately 2% which the Company had
been paying since 1989. The Company still has net operating loss
carryforwards available for regular federal income tax purposes.
<PAGE>
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 54.5% at the 90-day interval,
50.5% at the 180-day interval and 45.4% at the 365-day interval at June 30,
1996. Currently, the Company is in a liability-sensitive position at the
three intervals. During a slowly rising interest rate environment,
especially on time deposits, as was the case during part of the first quarter
and all of the second quarter of 1996, this position normally produces a
lower net interest margin than in a rising interest rate environment. The
Company also had $57,531,000 of interest-bearing demand, savings and money
market deposits at June 30, 1996, that are somewhat less rate-sensitive.
Excluding these types of deposits, the Company's interest-sensitive assets to
interest-sensitive liabilities ratio would have been 77.4% at the 365-day
interval at June 30, 1996. 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, 1996.
<PAGE>
<TABLE>
<CAPTION>
Volumes
Cumulative Volumes Subject to Subject to
Repricing Within Repricing
---------------------------------
90 Days 180 Days 365 Days After 1 Year Total
------- -------- -------- ------------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Federal funds sold $ 19,600 $ 19,600 $ 19,600 0 $ 19,600
Securities 3,498 6,841 13,629 67,067 80,696
Loans, net of unearned income 24,806 26,500 29,938 54,626 84,564
-------- -------- -------- -------- --------
Total interest-earning assets 47,904 52,941 63,167 121,693 184,860
-------- -------- -------- -------- --------
Interest-bearing liabilities:
Demand, savings and money market
deposits 57,531 57,531 57,531 0 57,531
Time deposits 30,019 46,907 81,196 16,435 97,631
Notes payable 372 373 375 233 608
-------- -------- -------- -------- --------
Total interest-bearing liabilities 87,922 104,811 139,102 16,668 155,770
-------- -------- -------- -------- --------
Rate-sensitivity gap(1) $(40,018) $(51,870) $(75,935) $105,025 $29,090
======== ======== ======== ======== =======
Rate-sensitivity ratio(2) 54.5% 50.5% 45.4%
==== ==== ====
<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>
Selected Financial Ratios
The following table presents selected financial ratios (annualized) for
the quarters and six-month periods ended June 30, 1996 and 1995.
<TABLE>
<CAPTION>
Six-Month Period
Quarter Ended June 30, Ended June 30,
---------------------- ----------------
1996 1995 1996 1995
-------- -------- ------ ------
<S> <C> <C> <C> <C>
Net income to:
Average assets 0.66% 0.43% 0.72% 0.62%
Average interest-earning assets 0.71 0.47 0.78 0.68
Average stockholders' equity 8.98 6.06 9.59 8.82
Dividend payout (1) to:
Net income 17.45 17.03 12.80 10.51
Average stockholders' equity 1.57 1.03 1.23 0.93
Average stockholders' equity to:
Average total assets 7.32 7.17 7.48 7.06
Average loans (2) 16.93 14.43 16.95 14.06
Average total deposits 7.97 7.85 8.18 7.73
Average interest-earning assets to:
Average total assets 92.03 92.12 91.70 91.72
Average total deposits 100.22 100.83 100.16 100.39
Average total liabilities 99.30 99.24 99.11 98.69
Ratio to total average deposits of:
Average loans (2) 47.07 54.39 48.24 54.98
Average noninterest-bearing deposits 16.87 18.91 17.48 19.34
Average interest-bearing deposits 83.13 81.09 82.52 80.66
Total interest expense to total interest income 47.02 44.80 46.55 42.53
<FN>
_________________________
(1) Dividends on Common Stock only.
(2) Before allowance for possible loan losses.
</FN>
</TABLE>
<PAGE>
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 $6,858,000 and $7,225,000
during the second quarter and first six months of 1996, respectively, and
$6,721,000 and $7,216,000 during the second quarter and first six months of
1995, respectively. These amounts comprised 3.6% and 3.8% of average total
assets during the second quarter and first six months of 1996, respectively,
and 4.0% and 4.4% of average total assets during the second quarter and first
six months of 1995, respectively. The average level of securities and
federal funds sold was $93,844,000 and $89,685,000 during the second quarter
and first six months of 1996, respectively, and $71,094,000 and $68,467,000
during the second quarter and first six months of 1995, respectively.
Recently, a larger amount of the Banks' increasingly available funds has been
invested in securities, due to static loan demand in the Company's market
area and to the acquisition of Coastal Banc - San Angelo, which had
$14,895,000 in deposits and only $155,000 in loans at the date of
acquisition.
The Banks sold securities with a book value of $1,999,000 and $2,029,000
during the quarter and six-month period ended June 30, 1996, respectively.
The securities sold during the second quarter of 1996 were classified as
held-to-maturity and were sold approximately 30 days prior to their scheduled
maturity. A gain of $2,000 was recorded on such sale. The $30,000 of
securities sold during the first quarter of 1996 were obtained in the Peoples
National acquisition and were sold because they did not meet the Company's
investment criteria. A loss of $12,000 was recorded on such sale. There
were no sales of securities during the quarter or six-month period ended June
30, 1995. At June 30, 1996, $13,521,000, or 18.1%, of the Company's
securities portfolio, excluding mortgage-backed securities, matured within
one year and $60,866,000, or 81.3%, excluding mortgage-backed securities,
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 a combination of fixed and adjustable interest rates, while the
Banks' 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 30 months. At June 30, 1996, approximately
$29,938,000, or 35.4%, of the Company's loans, net of unearned income,
matured within one year and/or had adjustable interest rates. Approximately
$24,586,000, or 53.4%, of the Company's loans (excluding loans to
individuals) 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 1996, the Company's average deposits
<PAGE>
were $176,584,000 and $172,732,000, respectively, or 91.8% and 91.6% of
average total assets, respectively, compared to $153,090,000 and
$150,784,000, respectively, or 91.4% of average total assets, during the
second quarter and first six months of 1995. 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 several 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 the second quarter and first six months of 1996
totaled $150,000 and $375,000, respectively. 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 second quarter and first six months of 1996 were $150,000 and
$375,000, respectively. Independent Financial paid dividends to the Company
totaling $200,000 and $400,000 during the same time periods of 1995. At June
30, 1996, there were approximately $1,260,000 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 54% and 10%, respectively, of the
Company's cash flow during the second quarter of 1996. These percentages
were 49% and 9%, respectively, for the first six months of 1996. 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 $222,000 and $442,000 were paid by the Banks to the
Company during the second quarter and first six months of 1996, respectively,
compared to a total of $206,000 and $519,000 during the second quarter and
first six months of 1995, respectively, $81,000 of which represented the
final settlement of tax liabilities between the Company and the Banks for the
year ended December 31, 1993.
From January 1, 1989 through December 31, 1995, the Company collected
federal income taxes from the Banks based on an effective tax rate of
approximately 34% and paid taxes to the federal government at the rate of
approximately 2% as a result of the utilization of the Company's
<PAGE>
net operating loss carryforwards for both regular tax and alternative minimum
tax purposes. As of December 31, 1995, the Company's net operating loss
carryforwards for alternative tax purposes had been fully utilized. As a
result, the Company began paying federal income taxes at the effective tax
rate of approximately 20% during the first quarter of 1996. The Company
still has net operating carryforwards available for regular federal income
tax purposes.
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 $41,000 and
$84,000 in management fees to the Company during the second quarter and first
six months of 1996, respectively, compared to $44,000 and $87,000 paid by the
Banks during the second quarter and first six months of 1995, respectively.
The Company's fees must be reasonable in relation to the management services
rendered, and each Bank is prohibited from paying management fees to the
Company if the Bank would be undercapitalized after any such distribution or
payment.
The Company has a note payable to a financial institution in Amarillo,
Texas (the "Amarillo Bank"). This note (the "Long-term Note") had a maturity
of April 15, 1996. On April 15, 1996, the Company paid the Amarillo Bank
$100,000 to reduce the outstanding principal balance to $371,000 and the
maturity date was extended to April 15, 1999. Equal principal payments of
$31,000, plus accrued interest, are due quarterly on January 15, April 15,
July 15 and October 15. The Long-term Note bears interest at the Amarillo
Bank's floating base rate plus 1% (9.25% at June 30, 1996) and is
collateralized by 100% of the stock of First State, N.A., Abilene, and First
State, N.A., Odessa. The loan agreement between the Company and the Amarillo
Bank contains certain covenants that, among other things, restrict the
ability of the Company to incur additional debt, to create liens on its
property, to merge or to consolidate with any other person 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, 1996, and December 31, 1995.
In addition, at June 30, 1996, the Company had notes payable to one
current and two former directors of the Company aggregating $223,000. These
notes had an original face amount of $350,000 but were discounted upon
issuance because they bear interest at a below-market interest rate (6%).
The notes are payable in three equal annual installments, plus accrued
interest. The first annual principal installment of $117,000 was made on
March 1, 1996. The notes represent a portion of the final settlement of
certain litigation.
Capital Resources
At June 30, 1996, stockholders' equity totaled $14,195,000, or 7.1% of
total assets, compared to $13,818,000, or 7.7% of total assets, at December
31, 1995.
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
<PAGE>
2) of at least 8%, of risk-weighted assets. Tier 1 capital includes common
stockholders' equity, qualifying perpetual preferred stock and minority
interests in unconsolidated subsidiaries, reduced by goodwill and net
deferred tax assets in excess of regulatory capital limits. Tier 2 capital
may be comprised of certain other preferred stock, qualifying debt
instruments and all or a part of the allowance for possible loan losses.
Banking regulators have also issued leverage ratio requirements. The
leverage ratio requirement is measured as the ratio of Tier 1 capital to
adjusted quarterly average assets. The following table provides a
calculation of the Company's risk-based capital and leverage ratios and a
comparison of the Company's and the Banks' risk-based capital ratios and
leverage ratios to the minimum regulatory requirements at June 30, 1996.
<TABLE>
<CAPTION>
The Company June 30, 1996
----------- -------------
(Dollars in thousands)
<S> <C>
Tier 1 capital:
Common stockholders' equity, excluding unrealized loss on
available-for-sale securities $ 13,627
Preferred stockholders' equity (1) 568
Goodwill (991)
Net deferred tax asset in excess of regulatory capital limits (2) (106)
--------
Total Tier 1 capital 13,098
--------
Tier 2 capital:
Allowance for possible loan losses (3) 796
--------
Total Tier 2 capital 796
--------
Total capital $ 13,894
========
Risk-weighted assets $ 92,988
========
Adjusted quarterly average assets $193,148
========
</TABLE>
<TABLE>
<CAPTION>
Minimum Actual
Regulatory Ratios at
The Company Requirement(4) June 30, 1996
- ----------- -------------- -------------
<S> <C> <C>
Tier 1 capital to risk-weighted assets ratio 4.00% 14.09%
Total capital to risk-weighted assets ratio 8.00 14.94
Leverage ratio 3.00 6.78
The Banks
- ---------
Tier 1 capital to risk-weighted assets ratio 4.00% 12.54 - 13.65%
Total capital to risk-weighted assets ratio 8.00 13.37 - 14.55
Leverage ratio 3.00 5.79 - 7.43
<FN>
___________________________
(1) Limited to 25% of total Tier 1 capital, with any remainder qualifying as Tier 2 capital.
(2) The amount of the net deferred tax asset in excess of the lesser of (i) 10% of Tier 1 capital or (ii) the amount of
the tax benefit from utilization of net operating loss carryforwards expected to be realized within one year.
(3) Limited to 1.25% of risk-weighted assets.
(4) For top rated banking organizations.
</FN>
</TABLE>
<PAGE>
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, 1996.
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. The Company also paid a
33-1/3% stock dividend on May 31, 1995. The Company's Board of Directors
increased the Company's quarterly Common Stock cash dividend to $0.05 per
share effective for the cash dividend payable on May 31, 1996. A $0.05 per
share cash dividend was also declared by the Company's Board of Directors on
July 17, 1996. The dividend is payable on August 30, 1996, to holders of the
Common Stock on August 15, 1996.
Acquisition of Subsidiary Bank
First State, N.A., Abilene acquired 100% of the outstanding shares of
Peoples National effective January 1, 1996, in a cash transaction. At that
date, Peoples National had total assets of $5,505,000, total loans, net of
unearned income of $2,767,000, total deposits of $4,958,000 and stockholders'
equity of $525,000. This acquisition was accounted for using the purchase
method of accounting. A total of $260,000 of goodwill was recorded as a
result of this acquisition. Peoples National was merged with and into First
State, N.A., Abilene.
First State, N.A., Abilene also acquired Coastal Banc - San Angelo
effective May 27, 1996, in a cash transaction. First State, N.A., Abilene
purchased $155,000 in loans and assumed
<PAGE>
$14,895,000 in deposits in the transaction. This acquisition was accounted
for using the purchase method of accounting. A total of $743,000 of goodwill
was recorded as a result of the acquisition.
Pending Acquisition
On July 11, 1996, the Company and First State, N.A., Abilene entered
into a definitive agreement to acquire Crown Park Bancshares, Inc. ("Crown
Park") for approximately $7,425,000 and to merge Crown Park's subsidiary
bank, Western National Bank, Lubbock, Texas ("Western National"), with and
into First State, N.A., Abilene. At June 30, 1996, Western National had
total assets of $55,524,000, total loans, net of unearned income, of
$34,560,000, total deposits of $49,938,000, and stockholders' equity of
$5,261,000.
Consummation of the acquisition is subject to various regulatory
approvals and other conditions. Among other things, the Company will file an
application with the Office of the Comptroller of the Currency (the
"Comptroller") for approval of the merger. Additionally, to recognize
certain cost savings and to utilize the Banks' capital more effectively than
on a stand-alone basis, the application filed with the Comptroller will seek
approval to merge First State, N.A., Odessa with and into First State, N.A.
Abilene. If the approvals are received and the conditions satisfied, the
transaction will probably be consummated in December 1996 or January 1997, at
which time Western National will become a branch of First State, N.A.,
Abilene. In connection with the acquisition, the Company may sell common
stock or other securities that could result in dilution of the percentage
ownership of public stockholders.
<PAGE>
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
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 or results of operations.
Item 2. Changes in Securities.
None
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.
10.1 Agreement and Plan of Reorganization dated July 11, 1996,
between the Company and Crown Park Bancshares, Inc., Agreement
and Plan of Merger dated July 11, 1996 between Western
National Bank and First State, N.A., Abilene and Indemnity
Agreement dated July 11, 1996, in favor of the Company
(incorporated by reference from Exhibit 1.1 to the Company's
Current Report on Form 8-K dated July 11, 1996).
27.1 Financial Data Schedule (filed herewith).
(b) Reports on Form 8-K.
Current Report on Form 8-K dated May 27, 1996 relating to the
Company's acquisition of the San Angelo, Texas branch of Coastal
Banc ssb.
Current Report on Form 8-K dated July 11, 1996 relating to the
Company's proposed acquisition of Crown Park Bancshares, Inc. and
its subsidiary Western National Bank, Lubbock, Texas.
<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, 1996 Independent Bankshares, Inc.
(Registrant)
By: /s/ Randal N. Crosswhite
---------------------------
Randal N. Crosswhite
Senior Vice President and
Chief Financial Officer
<PAGE>
INDEX TO EXHIBITS
Exhibit
No. Item
10.1 Agreement and Plan of Reorganization dated July 11, 1996,
between the Company and Crown Park Bancshares, Inc., Agreement
and Plan of Merger dated July 11, 1996 between Western
National Bank and First State, N.A., Abilene and Indemnity
Agreement dated July 11, 1996, in favor of the Company
(incorporated by reference from Exhibit 1.1 to the Company's
Current Report on Form 8-K dated July 11, 1996).
27.1 Financial Data Schedule (filed herewith).
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE UNAUDITED FINANCIAL STATEMENTS FOR INDEPENDENT BANKSHARES, INC.
FOR THE SIX MONTHS ENDED JUNE 30, 1996, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 7,204,000
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 19,600,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 32,992,000
<INVESTMENTS-CARRYING> 47,704,000
<INVESTMENTS-MARKET> 46,916,000
<LOANS> 84,564,000<F1>
<ALLOWANCE> 796,000
<TOTAL-ASSETS> 201,301,000
<DEPOSITS> 185,581,000
<SHORT-TERM> 238,000
<LIABILITIES-OTHER> 917,000
<LONG-TERM> 370,000
135,000
135,000
<COMMON> 276,000
<OTHER-SE> 13,784,000
<TOTAL-LIABILITIES-AND-EQUITY> 201,301,000
<INTEREST-LOAN> 3,886,000
<INTEREST-INVEST> 2,094,000
<INTEREST-OTHER> 527,000
<INTEREST-TOTAL> 6,507,000
<INTEREST-DEPOSIT> 2,992,000
<INTEREST-EXPENSE> 3,029,000
<INTEREST-INCOME-NET> 3,478,000
<LOAN-LOSSES> 121,000
<SECURITIES-GAINS> (10,000)
<EXPENSE-OTHER> 3,073,000
<INCOME-PRETAX> 1,026,000
<INCOME-PRE-EXTRAORDINARY> 1,026,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 677,000
<EPS-PRIMARY> .60
<EPS-DILUTED> .50
<YIELD-ACTUAL> 4.02
<LOANS-NON> 97,000
<LOANS-PAST> 7,000
<LOANS-TROUBLED> 80,000
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 759,000
<CHARGE-OFFS> 268,000
<RECOVERIES> 35,000
<ALLOWANCE-CLOSE> 796,000
<ALLOWANCE-DOMESTIC> 796,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 231,000
<FN>
<F1>Net of unearned income on installment loans of 2,769,000
</FN>
</TABLE>
