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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: September 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 September 30, 1996.
Class: Common Stock, par value $0.25 per share
Outstanding at September 30, 1996: 1,104,644 shares
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PART I
FINANCIAL INFORMATION
Item 1. Financial Statements.
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INDEPENDENT BANKSHARES, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1996 AND DECEMBER 31, 1995
(UNAUDITED)
September 30, December 31,
1996 1995
------------ ------------
ASSETS
Cash and Cash Equivalents:
Cash and Due from Banks $ 9,987,000 $ 8,559,000
Federal Funds Sold 12,100,000 26,200,000
------------ ------------
Total Cash and Cash Equivalents 22,087,000 34,759,000
------------ ------------
Securities:
Available-for-sale 33,590,000 16,746,000
Held-to-maturity--Market Value of
$48,716,000 at September 30, 1996,
and $39,384,000 at December 31, 1995 49,087,000 39,161,000
------------ ------------
Total Securities 82,677,000 55,907,000
------------ ------------
Loans:
Total Loans 92,626,000 85,281,000
Less:
Unearned Income on Installment Loans 2,511,000 3,354,000
Allowance for Possible Loan Losses 806,000 759,000
------------ ------------
Net Loans 89,309,000 81,168,000
------------ ------------
Premises and Equipment 4,501,000 4,155,000
Real Estate and Other Repossessed Assets 218,000 337,000
Accrued Interest Receivable 1,701,000 1,494,000
Goodwill 974,000 0
Other Assets 2,334,000 2,524,000
------------ ------------
Total Assets $203,801,000 $180,344,000
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest-bearing Demand Deposits $ 29,485,000 $ 33,267,000
Interest-bearing Demand Deposits 60,411,000 52,430,000
Interest-bearing Time Deposits 97,578,000 79,007,000
------------ ------------
Total Deposits 187,474,000 164,704,000
Notes Payable 578,000 849,000
Accrued Interest Payable 844,000 882,000
Other Liabilities 323,000 91,000
------------ ------------
Total Liabilities 189,219,000 166,526,000
------------ ------------
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 4,304,000 3,448,000
Unrealized Gain (Loss) on
Available-for-sale Securities (23,000) 68,000
------------ ------------
Total Stockholders' Equity 14,582,000 13,818,000
------------ ------------
Total Liabilities and
Stockholders' Equity $203,801,000 $180,344,000
------------ ------------
------------ ------------
See Accompanying Notes to Consolidated Financial Statements.
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INDEPENDENT BANKSHARES, INC.
CONSOLIDATED INCOME STATEMENTS
QUARTERS AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1995
(UNAUDITED)
<TABLE>
NINE-MONTH PERIOD
QUARTER ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
----------------------------- ------------------------------
1996 1995 1996 1995
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Interest Income:
Interest and Fees on Loans $2,008,000 $1,963,000 $ 5,894,000 $5,795,000
Interest on Securities 1,247,000 674,000 3,341,000 1,517,000
Interest on Federal Funds Sold 247,000 412,000 774,000 1,519,000
---------- ---------- ----------- ----------
Total Interest Income 3,502,000 3,049,000 10,009,000 8,831,000
---------- ---------- ----------- ----------
Interest Expense:
Interest on Deposits 1,679,000 1,372,000 4,671,000 3,775,000
Interest on Notes Payable 14,000 29,000 51,000 85,000
---------- ---------- ----------- ----------
Total Interest Expense 1,693,000 1,401,000 4,722,000 3,860,000
---------- ---------- ----------- ----------
Net Interest Income 1,809,000 1,648,000 5,287,000 4,971,000
Provision for Loan Losses 40,000 69,000 161,000 141,000
---------- ---------- ----------- ----------
Net Interest Income After Provision
for Loan Losses 1,769,000 1,579,000 5,126,000 4,830,000
---------- ---------- ----------- ----------
Noninterest Income:
Service Charges 335,000 269,000 929,000 881,000
Trust Fees 48,000 47,000 144,000 154,000
Other Income 19,000 55,000 71,000 121,000
---------- ---------- ----------- ----------
Total Noninterest Income 402,000 371,000 1,144,000 1,156,000
---------- ---------- ----------- ----------
Noninterest Expenses:
Salaries and Employee Benefits 777,000 717,000 2,294,000 2,127,000
Net Occupancy Expense 195,000 165,000 540,000 492,000
Equipment Expense 171,000 181,000 492,000 533,000
Stationery, Printing and Supplies Expense 71,000 73,000 211,000 190,000
Professional Fees 64,000 48,000 204,000 386,000
Net Revenues Applicable to Real Estate and
Other Repossessed Assets (18,000) (3,000) (16,000) (12,000)
Other Expenses 353,000 290,000 961,000 1,013,000
---------- ---------- ----------- ----------
Total Noninterest Expenses 1,613,000 1,471,000 4,686,000 4,729,000
---------- ---------- ----------- ----------
Income Before Federal Income Taxes 558,000 479,000 1,584,000 1,257,000
Federal Income Taxes 189,000 162,000 538,000 426,000
---------- ---------- ----------- ----------
Net Income $ 369,000 $ 317,000 $ 1,046,000 $ 831,000
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
Preferred Stock Dividends $ 14,000 $ 17,000 $ 48,000 $ 52,000
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
Net Income Available to Common Stockholders $ 355,000 $ 300,000 $ 998,000 $ 779,000
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
Primary Earnings per Common Share Available
to Common Stockholders $ 0.32 $ 0.29 $ 0.92 $ 0.75
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
Fully Diluted Earnings Per Common Share
Available to Common Stockholders $ 0.27 $ 0.23 $ 0.77 $ 0.62
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
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INDEPENDENT BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1995
(UNAUDITED)
<TABLE>
1996 1995
------------ ------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income $ 1,046,000 $ 831,000
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Deferred Federal Income Tax Expense 222,000 401,000
Depreciation and Amortization 299,000 290,000
Provision for Loan Losses 161,000 141,000
Gain on Sales of Investment Securities (10,000) 0
Gain on Sales of Premises and Equipment 0 (3,000)
Gain on Sales of Real Estate and Other Repossessed Assets (42,000) (39,000)
Writedown of Real Estate and Other Repossessed Assets 19,000 24,000
Increase in Accrued Interest Receivable (207,000) (336,000)
Increase in Goodwill (1,003,000) 0
Decrease in Other Assets 190,000 265,000
Increase (Decrease) in Accrued Interest Payable (38,000) 366,000
Increase (Decrease) in Other Liabilities 232,000 (626,000)
------------ ------------
Net Cash Provided by Operating Activities 869,000 1,314,000
------------ ------------
Cash Flows from Investing Activities:
Proceeds from Maturities of Available-for-sale Securities 3,572,000 11,937,000
Proceeds from Maturities of Held-to-maturity Securities 16,741,000 5,653,000
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 (20,594,000) (16,000,000)
Purchases of Held-to-maturity Securities (28,664,000) (27,000,000)
Net Increase in Loans (10,289,000) (2,423,000)
Additions to Premises and Equipment (709,000) (134,000)
Proceeds from Sales of Premises and Equipment 94,000 3,000
Proceeds from Sales of Real Estate and Other Repossessed Assets 655,000 625,000
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 Used in Investing Activities (35,845,000) (27,339,000)
------------ ------------
Cash Flows from Financing Activities:
Increase in Deposits 22,770,000 12,230,000
Proceeds from Notes Payable 0 275,000
Repayment of Notes Payable (276,000) (458,000)
Payment of Cash Dividends (190,000) (138,000)
Payment for Fractional Shares in Stock Dividend 0 (3,000)
------------ ------------
Net Cash Provided by Financing Activities 22,304,000 11,906,000
------------ ------------
Net Decrease in Cash and Cash Equivalents (12,672,000) (14,119,000)
Cash and Cash Equivalents at Beginning of Period 34,759,000 38,764,000
------------ ------------
Cash and Cash Equivalents at End of Period $ 22,087,000 $ 24,645,000
------------ ------------
------------ ------------
Cash Paid During the Period for:
Interest $4,760,000 $3,494,000
Federal Income Taxes 298,000 15,000
Noncash Investing Activities:
Additions to Real Estate and Other Repossessed Assets
Through Foreclosures $619,000 $734,000
Sales of Real Estate and Other Repossessed Assets Financed with Loans 107,000 183,000
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 (91,000) 125,000
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
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INDEPENDENT BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
For information with regard to significant accounting policies, reference
is made to Notes to Consolidated Financial Statements included in the 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 nine months of 1996 and 1995
totaled $222,000 and $401,000, respectively.
(3) NOTES PAYABLE
The Company had a note payable to a financial institution in Amarillo,
Texas (the "Amarillo Bank"). This note (the "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, were due quarterly on January 15, April 15, July 15 and
October 15. The Term Note bore interest at the Amarillo Bank's floating base
rate plus 1% (9.25% at September 30, 1996) and was 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 contained certain covenants that, among other things, restricted
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 was $1,000,000 or greater. The loan agreement also
required the Company and the Banks to meet certain
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financial ratios, all of which were met at September 30, 1996, and December
31, 1995. On October 15, 1996, the Company paid off the remaining principal
balance of the Term Note.
In addition, at September 30, 1996, the Company had notes payable to one
current and two former directors of the Company aggregating $226,000. 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 Series C Preferred Stock is cumulative, the dividends allocable to
such Series C Preferred Stock reduces income available to common stockholders in
the earnings per share calculations. The Series C Preferred Stock issued in
December 1990 was determined not to be a common stock equivalent and, therefore,
is not used to calculate primary earnings per common share. In computing fully
diluted earnings per common share for the quarters and nine-month periods ended
September 30, 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 September 30, 1996 and 1995, was 1,110,000 and 1,048,000 shares,
respectively. The weighted average common shares outstanding used in computing
fully diluted earnings per common share for the quarters ended September 30,
1996 and 1995, was
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1,358,000 and 1,352,000 shares, respectively. The weighted average common
shares outstanding used in computing primary earnings per common share for
the first nine months of 1996 and 1995, was 1,083,000 and 1,045,000 shares,
respectively. The weighted average common shares outstanding used in
computing fully diluted earnings per common share for the first nine months
of 1996 and 1995 was 1,358,000 and 1,350,000 shares, respectively.
(6) ACQUISITION OF SUBSIDIARY BANKS
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.
The goodwill that resulted from the above-noted acquisitions is being
amortized on a straight-line basis over a 15-year period. Management assesses
the recoverability of goodwill by comparing the goodwill to the undiscounted
cash flows expected to be generated by the acquired banks during the
anticipated period of benefit.
(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 September 30, 1996, Western National had total assets of
$56,598,000, total loans, net of unearned income, of $38,619,000, total deposits
of $50,802,000, and stockholders' equity of $5,385,000.
Consummation of the acquisition is subject to various regulatory approvals
and other conditions. The Company has filed 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 seeks 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 would probably be consummated during the first
quarter of 1997, at which time Western National would become a branch of First
State, N.A., Abilene.
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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 bank holding company that, at September 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 September 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"). Coastal 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 September 30, 1996, and December
31, 1995, and results of operations for each of the quarters and nine-month
periods ended September 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.
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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 nine months of
1996 and 1995 totaled $222,000 and $401,000, respectively.
RESULTS OF OPERATIONS
GENERAL
Net income for the quarter ended September 30, 1996, amounted to $369,000
($0.32 primary earnings per common share) compared to net income of $317,000
($0.29 primary earnings per common share) for the quarter ended September 30,
1995. Net income for the nine-month period ended September 30, 1996, was
$1,046,000 ($0.92 primary earnings per common share) compared to net income
of $831,000 ($0.75 primary earnings per common share) for the nine-month
period ended September 30, 1995. The results of operations for the
nine-month period ended September 30, 1995, included legal and settlement
expenses of $135,000 (net of tax expense of $70,000), or $0.13 primary
earnings per common share, 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 $1,809,000 for the third quarter of 1996,
an increase of $161,000, or 9.8%, from the third quarter of 1995. Net
interest income for the third quarter of 1995 was $1,648,000. Net interest
income for the first nine months of 1996 was $5,287,000, an increase of
$316,000, or 6.4%, from net interest income of $4,971,000 for the first nine
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 3.88% and 3.97% for the third quarter and first
nine months of 1996, respectively, compared to 4.21% and 4.33% for the third
quarter and first nine months of 1995, respectively. The primary 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
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loans. As a result, a significant amount of the increased funds has been
invested in investment 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 September 30, 1996, approximately $24,669,000, or 27.4%, of the
Company's total loans, net of unearned income, were loans with floating
interest rates. This amount represents 49.8% of the Company's loans,
excluding loans to individuals which are exclusively fixed rate in nature.
Overall average rates paid for various types of deposits, particularly
certificates of deposit, increased for the first nine months of 1996,
compared to the first nine months of 1995. The average rate paid by the
Company for certificates of deposit of $100,000 or more decreased slightly
from 5.57% for the first nine months of 1995 to 5.43% for the first nine
months of 1996. The average rate paid for certificates of deposit less than
$100,000 increased to 5.39% during the first nine months of 1996 from 5.32%
during the first nine months of 1995. Rates on other types of deposits, such
as interest-bearing demand, savings and money market deposits, increased
slightly from an average of 2.35% during the first nine months of 1995 to an
average of 2.38% during the first nine months 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 nine-month periods ended September 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.
-11-
<PAGE>
<TABLE>
Quarter Ended September 30,
----------------------------------------------------------------
1996 1995
------------------------------- -----------------------------
Annu- Annu-
Interest alized Interest alized
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
-------- ------- ------ -------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
ASSETS
Interest-earning assets:
Federal funds sold $ 18,261 $ 247 5.41% $ 27,847 $ 412 5.92%
Securities (1) 82,301 1,247 6.06 46,540 675 5.80
Loans, net of unearned income (2) 86,000 2,008 9.34 82,405 1,963 9.53
-------- ------ ---- -------- ------ ----
Total interest-earning assets 186,562 3,502 7.51 156,792 3,050 7.78
-------- ------ ---- -------- ------ ----
Noninterest-earning assets:
Cash and due from banks 6,930 6,658
Premises and equipment 4,525 4,227
Accrued interest receivable and other assets 5,501 4,485
Allowance for possible loan losses (787) (785)
-------- --------
Total noninterest-earning assets 16,169 14,585
-------- --------
Total assets $202,731 $171,377
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Demand, savings and money market deposits $ 59,097 $ 368 2.49% $ 52,897 $ 313 2.37%
Time deposits 97,574 1,311 5.37 74,637 1,060 5.68
-------- ------ ---- -------- ------ ----
Total interest-bearing deposits 156,671 1,679 4.29 127,534 1,373 4.31
Notes payable 584 14 9.59 1,168 28 9.59
-------- ------ ---- -------- ------ ----
Total interest-bearing liabilities 157,255 1,693 4.31 128,702 1,401 4.35
-------- ------ ---- -------- ------ ----
Noninterest-bearing liabilities:
Demand deposits 29,883 28,264
Accrued interest payable and other liabilities 1,165 1,026
-------- --------
Total noninterest-bearing liabilities 31,048 29,290
-------- --------
Total liabilities 188,303 157,992
Stockholders' equity 14,428 13,385
-------- --------
Total liabilities and stockholders' equity $202,731 $171,377
-------- --------
-------- --------
Net interest income $1,809 $1,649
------ ------
------ ------
Interest rate spread (3) 3.20% 3.43%
---- ----
---- ----
Net interest margin (4) 3.88% 4.21%
---- ----
---- ----
</TABLE>
- ---------------------------------
(1) Nontaxable interest income on securities was adjusted to a taxable yield
assuming a tax rate of 34%.
(2) Nonaccrual loans are included in the Average Balance columns, and income
recognized on these loans, if any, is included in the Interest
Income/Expense columns. Interest income on loans includes fees on loans,
which are not material in amount.
(3) The interest rate spread is the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(4) The net interest margin is equal to net interest income, on a fully
taxable-equivalent basis, divided by average interest-earning assets.
-12-
<PAGE>
<TABLE>
Nine-month Period Ended September 30,
----------------------------------------------------------------
1996 1995
------------------------------- -----------------------------
Annu- Annu-
Interest alized Interest alized
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
-------- ------- ------ -------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
ASSETS
Interest-earning assets:
Federal funds sold $ 19,177 $ 774 5.38% $ 33,936 $1,519 5.97%
Securities (1) 74,134 3,341 6.01 36,460 1,520 5.56
Loans, net of unearned income (2) 84,212 5,894 9.33 82,737 5,795 9.34
-------- ------- ---- -------- ------ ----
Total interest-earning assets 177,523 10,009 7.52 153,133 8,834 7.69
-------- ------- ---- -------- ------ ----
Noninterest-earning assets:
Cash and due from banks 7,128 7,031
Premises and equipment 4,407 4,225
Accrued interest receivable and other assets 5,141 3,554
Allowance for possible loan losses (841) (801)
-------- --------
Total noninterest-earning assets 15,835 14,009
-------- --------
Total assets $193,358 $167,142
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Demand, savings and money market deposits $ 57,147 $ 1,021 2.38% $ 53,486 $944 2.35%
Time deposits 90,108 3,650 5.40 70,104 2,831 5.38
-------- ------- ---- -------- ------ ----
Total interest-bearing deposits 147,255 4,671 4.23 123,590 3,775 4.07
Notes payable 662 51 10.27 1,119 85 10.13
-------- ------- ---- -------- ------ ----
Total interest-bearing liabilities 147,917 4,722 4.26 124,709 3,860 4.13
-------- ------- ---- -------- ------ ----
Noninterest-bearing liabilities:
Demand deposits 30,086 28,866
Accrued interest payable and other liabilities 1,131 1,337
-------- --------
Total noninterest-bearing liabilities 31,217 30,203
-------- --------
Total liabilities 179,134 154,912
Stockholders' equity 14,224 12,230
-------- --------
Total liabilities and stockholders' equity $193,358 $167,142
-------- --------
-------- --------
Net interest income $ 5,287 $4,974
------- ------
------- ------
Interest rate spread (3) 3.26% 3.56%
---- ----
---- ----
Net interest margin (4) 3.97% 4.33%
---- ----
---- ----
</TABLE>
- ---------------------------------
(1) Nontaxable interest income on securities was adjusted to a taxable yield
assuming a tax rate of 34%.
(2) Nonaccrual loans are included in the Average Balance columns, and income
recognized on these loans, if any, is included in the Interest
Income/Expense columns. Interest income on loans includes fees on loans,
which are not material in amount.
(3) The interest rate spread is the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(4) The net interest margin is equal to net interest income, on a fully
taxable-equivalent basis, divided by average interest-earning assets.
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
-13-
<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>
Quarters Ended Nine-month Periods Ended
September 30, 1996 vs. 1995 September 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:
Federal funds sold $(132) $(33) $(165) $(607) $(138) $(745)
Securities (1) 542 31 573 1,689 132 1,821
Loans, net of unearned income (2) 85 (40) 45 105 (6) 99
----- ---- ----- ----- ----- -----
Total interest income 495 (42) 453 1,187 (12) 1,175
----- ---- ----- ----- ----- -----
Interest-bearing liabilities:
Deposits:
Demand, savings and
money market deposits 39 16 55 65 12 77
Time deposits 312 (61) 251 807 11 818
----- ---- ----- ----- ----- -----
Total interest-bearing
deposits 351 (45) 306 872 23 895
Notes payable (14) 0 (14) (36) 3 (33)
----- ---- ----- ----- ----- -----
Total interest expense 337 (45) 292 836 26 862
----- ---- ----- ----- ----- -----
Increase (decrease) in net interest
income $ 158 $ 3 $ 161 $ 351 $ (38) $ 313
----- ---- ----- ----- ----- -----
----- ---- ----- ----- ----- -----
</TABLE>
- ------------------------------
(1) Information with respect to tax-exempt securities is provided on a fully
taxable-equivalent basis assuming a tax rate of 34%.
(2) Nonaccrual loans have been included in average assets for the purposes of
the computations, thereby reducing yields.
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 nine-month period ended September
30, 1996, were $40,000 and $161,000, respectively, compared to $69,000 and
$141,000, respectively, for the quarter and nine-month period ended September
30, 1995. These represent a decrease of $29,000 and an increase of $20,000,
respectively. The increased provision for the first nine months of 1996 was
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 a significant portion of
the loan is now considered to be very unlikely. The reduced provisions in all
periods
-14-
<PAGE>
compared to several years ago reflect the general stabilization of the
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 increased $31,000, or 8.4%, from $371,000 during the
third quarter of 1995 to $402,000 during the third quarter of 1996; however,
noninterest income decreased $12,000, or 1.0%, from $1,156,000 for the first
nine months of 1995 to $1,144,000 for the first nine 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
increased from $269,000 during the third quarter of 1995 to $335,000 during the
third quarter of 1996, a 24.5% increase, and increased $48,000, or 5.4%, from
$881,000 for the first nine months of 1995 to $929,000 for the first nine months
of 1996. The increases are due to the overall growth in deposits during the
past year primarily as a result of acquisitions and a recent increase in charges
on insufficient fund checks.
Trust fees from the operation of the trust department of First State, N.A.,
Odessa increased $1,000, or 2.1%, from $47,000 during the third quarter of 1995
to $48,000 during the same period in 1996, but decreased $10,000, or 6.5%, from
$154,000 for the first nine months of 1995, to $144,000 for the first nine
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 period 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 decreased $36,000, or 65.5%, from $55,000 during the third
quarter of 1995 to $19,000 during the third quarter of 1996, and decreased
$50,000, or 41.3%, from $121,000 for the first nine months of 1995 to $71,000
for the corresponding period in 1996 primarily due to a $37,000 decrease in
insurance premium income as a result of less dramatic increases in activity in
that area and a net loss of $10,000 on sales of securities during the first nine
months of 1996.
NONINTEREST EXPENSES
Noninterest expenses increased $142,000, or 9.7%, from $1,471,000 during
the third quarter of 1995 to $1,613,000 during the third quarter of 1996, but
decreased $43,000, or 0.9%, from $4,729,000 during the first nine months of 1995
to $4,686,000 during the first nine months of 1996. Noninterest expenses for
the nine-month period ended September 30, 1995, were higher than normal due to
the payment of $205,000 in legal fees and settlement expenses on the final
settlement of certain litigation.
Salaries and employee benefits rose $60,000, or 8.4%, from $717,000 for the
third quarter of 1995 to $777,000 for the corresponding period of 1996, and
increased $167,000, or
-15-
<PAGE>
7.9%, from $2,127,000 for the nine-month period ended September 30, 1995, to
$2,294,000 for the 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 $30,000, or 18.2%, from $165,000 for the
third quarter of 1995 to $195,000 for the same period in 1996, and increased
$48,000, or 9.8%, from $492,000 for the first nine months of 1995 to $540,000
for the first nine months of 1996. The increases are due primarily to a
reduction in rental income received in 1996 as a result of the loss of two
tenants in the building owned by First State, N.A., Odessa and the additional
occupancy expense of the San Angelo branch of First State, N.A., Abilene
acquired in May 1996.
Equipment expense decreased from $181,000 for the third quarter of 1995 to
$171,000 for the corresponding period in 1996, representing a decrease of
$10,000, or 5.5%. These expenses also decreased $41,000, or 7.7%, from $533,000
for the first nine months of 1995 to $492,000 for the first nine 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.
Stationery, printing and supplies expense decreased $2,000, or 2.7%, from
$73,000 for the third quarter of 1995 to $71,000 for the third quarter of 1996,
but increased $21,000, or 11.1%, from $190,000 for the first nine months of 1995
to $211,000 for the first nine 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.
Professional fees, which include legal and accounting fees, increased
$16,000, or 33.3%, from $48,000 during the third quarter of 1995 to $64,000
during the third quarter of 1996, but decreased $182,000, or 47.2%, from
$386,000 during the first nine months of 1995 to $204,000 for the corresponding
period of 1996. The decrease during 1996 was due to the settlement of
litigation noted above during 1995.
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 increased from $3,000 for the third quarter of 1995 to
$18,000 for the corresponding period of 1996, and the Company recorded net
revenues of $12,000 for the first nine months of 1995, compared to net revenues
of $16,000 for the first nine 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
increased $63,000, or 21.7%, from $290,000 during the third quarter of 1995 to
$353,000 during the third quarter of 1996, but decreased $52,000, or
-16-
<PAGE>
5.1%, from $1,013,000 for the first nine months of 1995 to $961,000 for the
first nine months of 1996. FDIC insurance premiums decreased $140,000 during
the past year, including a net credit of $7,000 during the third quarter of
1995, as a result of a reduction by the FDIC of deposit insurance rates for
banks. This decrease was partially offset by an 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 $538,000
and $426,000 in federal income taxes in the first nine months of 1996 and
1995, respectively. Of these amounts, $222,000 and $401,000 were offset
against the Company's gross deferred tax asset during the first nine 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 $23,457,000, or 13.0%, from $180,344,000 at
December 31, 1995, to $203,801,000 at September 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 $12,672,000, or 36.5%,
from $34,759,000 at December 31, 1995, to $22,087,000 at September 30, 1996, due
to the investment of additional funds in securities at September 30, 1996.
-17-
<PAGE>
SECURITIES
Securities increased $26,770,000, or 47.9%, from $55,907,000 at December
31, 1995, to $82,677,000 at September 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.
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 $33,590,000 are
classified as available-for-sale and are carried at fair value at September 30,
1996. Securities totalling $49,087,000 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 September
30, 1996, the book value of U.S. Treasury and other U.S. Government agency
securities so pledged amounted to $10,314,000, or 12.5% 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>
September 30, 1996 December 31, 1995
-------------------- --------------------
Amount % Amount %
------- ----- ------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Carrying value:
U.S. Treasury securities $40,964 49.6% $32,297 57.8%
Obligations of other U.S. Government
agencies and corporations 35,473 42.9 23,021 41.2
Mortgage-backed securities 5,597 6.8 146 0.2
Obligations of states and political subdivisions 200 0.2 0 --
Other securities 443 0.5 443 0.8
------- ----- ------- -----
Total carrying value of securities $82,677 100.0% $55,907 100.0%
------- ----- ------- -----
------- ----- ------- -----
Total market value of securities $82,306 $56,132
------- -------
------- -------
</TABLE>
-18-
<PAGE>
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 September 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.
<TABLE>
Estimated Weighted
Type and Maturity Grouping Principal Carrying Fair Average
at September 30, 1996 Amount Value Value Yield
- -------------------------- --------- -------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
U.S. Treasury securities:
Within one year $15,600 $15,569 $15,630 5.95%
After one but within five years 25,500 25,395 25,344 5.81
------- ------- ------- ----
Total U.S. Treasury securities 41,100 40,964 40,974 5.86
------- ------- ------- ----
Obligations of other U.S. Government
agencies and corporations:
Within one year 2,000 1,999 2,001 6.00
After one but within five years 30,500 30,420 30,213 6.44
After five but within ten years 3,000 3,054 2,976 6.43
------- ------- ------- ----
Total obligations of U.S. Government
agencies and corporations 35,500 35,473 35,190 6.41
------- ------- ------- ----
Mortgage-backed securities 5,469 5,597 5,494 6.12
------- ------- ------- ----
Obligations of states and political subdivisions:
Within one year 0 0 0 --
After one but within five years 0 0 0 --
After five but within ten years 200 200 205 8.49
------- ------- ------- ----
Total obligations of states and
political subdivisions 200 200 205 8.49
------- ------- ------- ----
Other securities:
Within one year 5 5 5 5.49
After one but within five years 0 0 0 --
After five but within ten years 0 0 0 --
After ten years 438 438 438 3.56
------- ------- ------- ----
Total other securities 443 443 443 3.59
------- ------- ------- ----
Total securities $82,712 $82,677 $82,306 6.11%
------- ------- ------- ----
------- ------- ------- ----
</TABLE>
LOAN PORTFOLIO
Total loans, net of unearned income, increased $8,188,000, or 10.0%, from
$81,927,000 at December 31, 1995, to $90,115,000 at September 30, 1996. The
increase during the first nine months of 1996 was partially due to the purchase
of Peoples National effective January 1,
-19-
<PAGE>
1996, but primarily due to increased loan activity due to improved economic
conditions in the Banks' market areas, principally in Abilene and Odessa.
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
the difference between the interest rate quoted to the buyer by the dealership
and the interest rate at which the loan is purchased by the financial
institution. During the third quarter of 1996, the Company instituted this
program in the San Angelo, Texas market. At September 30, 1996, the Company had
approximately $31,790,000, 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.
September 30, December 31,
1996 1995
------- -------
(In thousands)
Loans to individuals $43,058 $39,868
Real estate loans 25,798 23,265
Commercial and industrial loans 21,225 19,510
Other loans 2,545 2,638
------- -------
Total loans 92,626 85,281
Less unearned income 2,511 3,354
------- -------
Loans, net of unearned income $90,115 $81,927
------- -------
------- -------
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
-20-
<PAGE>
September 30, 1996, except for those described above. The Banks had no loans
outstanding to foreign countries or borrowers headquartered in foreign
countries at September 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 September 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.
One to Over Total
One Year Five Five Carrying
and Less Years Years Value
------- ------- ------- -------
(In thousands)
Real estate loans $ 4,658 $14,463 $ 6,677 $25,798
Commercial and industrial loans 9,722 6,905 4,598 21,225
Other loans 1,084 781 680 2,545
------- ------- ------- -------
Total loans $15,464 $22,149 $11,955 $49,568
------- ------- ------- -------
------- ------- ------- -------
With fixed interest rates $5,491 $14,465 $4,943 $24,899
With variable interest rates 9,973 7,684 7,012 24,669
------- ------- ------- -------
Total loans $15,464 $22,149 $11,955 $49,568
------- ------- ------- -------
------- ------- ------- -------
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
$806,000, or 0.89% of loans, net of unearned income, at September 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
-21-
<PAGE>
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 $40,000 and $308,000 in loans during the third quarter
and first nine months of 1996, respectively. Recoveries during the third
quarter and first nine months of 1996 were $10,000 and $45,000, respectively.
The following table presents the provisions for loan losses, loans charged
off and recoveries on loans previously charged off, the amount of the allowance,
the average loans outstanding and certain pertinent ratios for the quarters and
nine-month periods ended September 30, 1996 and 1995.
<TABLE>
Nine-month
Quarter Ended Period Ended
September 30, September 30,
------------------ ------------------
1996 1995 1996 1995
------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Analysis of allowance for possible loan losses:
Balance, beginning of period $ 796 $ 803 $ 759 $ 817
Provision for loan losses 40 69 161 141
Acquisition of subsidiary bank 0 0 149 0
------- ------- ------- -------
836 872 1,069 958
------- ------- ------- -------
Loans charged off:
Loans to individuals 40 98 150 221
Real estate loans 0 19 100 47
Commercial and industrial loans 0 7 58 7
Other loans 0 0 0 0
------- ------- ------- -------
Total charge-offs 40 124 308 275
------- ------- ------- -------
Recoveries of loans previously charged off:
Loans to individuals 8 10 24 33
Real estate loans 0 1 0 1
Commercial and industrial loans 2 2 21 39
Other loans 0 4 0 9
------- ------- ------- -------
Total recoveries 10 17 45 82
------- ------- ------- -------
Net loans charged off 30 107 263 193
------- ------- ------- -------
Balance, end of period $ 806 $ 765 $ 806 $ 765
------- ------- ------- -------
------- ------- ------- -------
Average loans outstanding, net of unearned income $86,000 $82,405 $84,212 $82,737
------- ------- ------- -------
------- ------- ------- -------
Ratio of net loan charge-offs to average loans
outstanding, net of unearned income (annualized) 0.14% 0.52% 0.42% 0.31%
Ratio of allowance for possible loan losses to total
loans, net of unearned income, at end of period 0.89 0.93 0.89 0.93
</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.
-22-
<PAGE>
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 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 September 30,
1996, and December 31, 1995.
<TABLE>
September 30, 1996 December 31, 1995
---------------------------------- ----------------------------------
Percent of Percent of
Amount of Loans by Amount of Loans by
Allowance Category to Allowance Category to
Allocated Loans, Net of Allocated Loans, Net of
to Category Unearned Income to Category Unearned Income
----------- --------------- ----------- ---------------
<S> <C> <C> <C> <C>
(Dollars in thousands)
Loans to individuals $314 45.0% $136 44.6%
Real estate loans 136 28.6 197 28.4
Commercial and industrial loans 104 23.6 96 23.8
Other loans 41 2.8 59 3.2
---- ----- ---- ------
595 100.0% 488 100.0%
----- -----
----- -----
Unallocated 211 271
---- ----
Total allowance for possible
loan losses $806 $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
-23-
<PAGE>
those loans with clear and defined weaknesses, such as highly leveraged
positions, unfavorable financial ratios, uncertain repayment sources or poor
financial condition, that may jeopardize recoverability of the loan. Loans
classified as "doubtful" are those loans that have characteristics similar to
substandard loans but also have an increased risk that a loss may occur or at
least a portion of the loan may require a charge-off if liquidated at
present. Although loans classified as substandard do not duplicate loans
classified as doubtful, both substandard and doubtful loans may include some
loans that are past due at least 90 days, are on nonaccrual status or have
been restructured. Loans classified as "loss" are those loans that are in the
process of being charged off. At September 30, 1996, substandard loans
totaled $1,751,000, of which $224,000 were loans designated as nonaccrual or
90 days past due. There were no loans classified as doubtful or loss at
September 30, 1996.
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
September 30, 1996, are current and paying in accordance with loan terms. At
September 30, 1996, watch list loans totaled $946,000 (including $703,000 of
loans guaranteed by U.S. governmental agencies). At September 30, 1996, no
watch list loans were designated as nonaccrual, 90 days past due or
restructured. At such date, there were $116,000 in loans designated as 90 days
past due or restructured which were not on the watch list or classified as
substandard. 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.
-24-
<PAGE>
The following table lists nonaccrual, past due and restructured loans and
real estate and other repossessed assets at September 30, 1996, and December 31,
1995.
September 30, December 31,
1996 1995
------------- ------------
(In thousands)
Nonaccrual loans $ 88 $204
Accruing loans contractually past due over 90 days 194 23
Restructured loans 77 65
Real estate and other repossessed assets 218 337
---- ----
Total nonperforming assets $577 $629
---- ----
---- ----
The gross interest income that would have been recorded during the third
quarter and first nine 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 $2,000 and $15,000, respectively. No interest income was actually
recorded (received) on loans that were on nonaccrual during the third quarter or
the first nine 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 is not aware of 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 September 30, 1996, and December 31, 1995, real estate
and other repossessed assets had an aggregate book value of $218,000 and
$337,000, respectively. Real estate and other repossessed assets decreased
$119,000, or 35.3%, during the first nine 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 September
30, 1996 balance, $105,000 represents nine repossessed automobiles, $59,000
represents various residential properties and $54,000 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 $346,000, or 8.3%, during the first nine
months of 1996, from $4,155,000 at December 31, 1995, to $4,501,000 at September
30, 1996. The increase was due to the acquisitions of Peoples National and
Coastal Banc - San Angelo which were partially
-25-
<PAGE>
offset by $270,000 of depreciation expense recorded on the Company's premises
and equipment during the first nine months of 1996.
ACCRUED INTEREST RECEIVABLE
Accrued interest receivable consists of interest that has accrued on
securities and loans, but is not yet payable under the terms of the related
agreements. The balance of accrued interest receivable increased $207,000, or
13.9%, from $1,494,000 at December 31, 1995, to $1,701,000 at September 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 September 30, 1996,
$1,105,000, or 65.0%, was interest accrued on securities and $596,000, or 35.0%,
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.
GOODWILL
Goodwill increased from $0 at December 31, 1995, to $974,000 at September
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 $29,000 in goodwill amortization expense was recorded
during the first nine months of 1996.
OTHER ASSETS
The most significant component of other assets at September 30, 1996, is a
net deferred tax asset of $1,731,000. The balance of other assets decreased
$190,000, or 7.5%, to $2,334,000 at September 30, 1996, from $2,524,000 at
December 31, 1995, primarily as a result of the utilization of $222,000 of the
Company's net operating loss carryforwards.
DEPOSITS
The Banks' lending and investing activities are funded to a great extent by
core deposits, 48.0% of which are demand, savings and money market deposits at
September 30, 1996. Total deposits increased $22,770,000, or 13.8%, from
$164,704,000 at December 31, 1995, to $187,474,000 at September 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 have any brokered deposits.
The following table presents the average amounts of and the average rates
paid on deposits of the Company for the quarters and nine-month periods ended
September 30, 1996 and 1995:
-26-
<PAGE>
<TABLE>
Quarter Ended September 30, Nine-month Period Ended September 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 $ 29,883 --% $ 28,264 --% $ 30,086 --% $ 28,866 --%
Interest-bearing demand, savings
and money market deposits 59,097 2.49 52,897 2.37 57,147 2.38 53,486 2.35
Time deposits of less than $100,000 69,118 5.34 53,844 5.65 62,938 5.39 51,537 5.32
Time deposits of $100,000 or more 28,456 5.47 20,793 5.75 27,170 5.43 18,567 5.57
-------- ---- -------- ---- -------- ---- -------- ----
Total deposits $186,554 3.60% $155,798 3.52% $177,341 3.51% $152,456 3.30%
-------- ---- -------- ---- -------- ---- -------- ----
-------- ---- -------- ---- -------- ---- -------- ----
</TABLE>
The maturity distribution of time deposits of $100,000 or more at September
30, 1996, is presented below.
At September 30, 1996
---------------------
(In thousands)
3 months or less $ 8,831
Over 3 through 6 months 10,567
Over 6 through 12 months 7,731
Over 12 months 1,820
-------
Total time deposits of $100,000
or more $28,949
-------
-------
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 September 30, 1996, deposits of $100,000 or more
represented approximately 14.2% 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 $271,000, or 31.9%, from $849,000 at
December 31, 1995, to $578,000 at September 30, 1996. The decrease represents
the regular quarterly principal payment made by the Company on the Term Note (as
defined below under "Liquidity - Notes Payable") on January 15, 1996, and July
15, 1996, a $100,000 principal payment made on the 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. On October 15, 1996, the
Company paid off the remaining principal balance of the Term Note. 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 $38,000, or 4.3%,
from $882,000 at December 31, 1995, to $844,000 at September 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.
-27-
<PAGE>
OTHER LIABILITIES
The most significant components of other liabilities are amounts accrued
for various types of expenses. The balance of other liabilities increased
$232,000, or 254.9%, from $91,000 at December 31, 1995, to $323,000 at September
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.
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 53.2% at the 90-day interval,
48.4% at the 180-day interval and 42.9% at the 365-day interval at September
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 most of the first nine
months of 1996, this position normally produces a lower net interest margin
than in a rising interest rate environment. The Company also had $60,411,000
of interest-bearing demand, savings and money market deposits at September
30, 1996, that are somewhat less rate-sensitive. Excluding these deposits,
the Company's interest-sensitive assets to interest-sensitive liabilities
ratio would have been 72.6% at the 365-day interval at September 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 September 30, 1996.
-28-
<PAGE>
<TABLE>
Cumulative Volumes Subject to Volumes
Repricing Within Subject to
---------------------------------- Repricing
90 Days 180 Days 365 Days After 1 Year Total
-------- -------- -------- ------------ --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Federal funds sold $ 12,100 $ 12,100 $ 12,100 $ 0 $ 12,100
Securities 5,914 9,811 17,722 64,955 82,677
Loans, net of unearned income 27,339 29,431 33,677 56,438 90,115
-------- -------- -------- -------- --------
Total interest-earning assets 45,353 51,342 63,499 121,393 184,892
-------- -------- -------- -------- --------
Interest-bearing liabilities:
Demand, savings and money market
deposits 60,411 60,411 60,411 0 60,411
Time deposits 24,525 45,147 87,015 10,563 97,578
Notes payable 341 454 456 122 578
-------- -------- -------- -------- --------
Total interest-bearing liabilities 85,277 106,012 147,882 10,685 158,567
-------- -------- -------- -------- --------
Rate-sensitivity gap(1) $(39,924) $(54,670) $(84,383) $110,708 $ 26,325
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Rate-sensitivity ratio(2) 53.2% 48.4% 42.9%
-------- -------- --------
-------- -------- --------
</TABLE>
- --------------------------
(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.
SELECTED FINANCIAL RATIOS
The following table presents selected financial ratios (annualized) for the
quarters and nine-month periods ended September 30, 1996 and 1995.
<TABLE>
Quarter Ended Nine-month Period
September 30, Ended September 30,
------------------ -------------------
1996 1995 1996 1995
----- ------ ------ ------
<S> <C> <C> <C> <C>
Net income to:
Average assets 0.73% 0.74% 0.72% 0.66%
Average interest-earning assets 0.79 0.81 0.79 0.72
Average stockholders' equity 10.23 9.47 9.81 9.06
Dividend payout (1) to:
Net income 14.91 9.83 13.58 10.23
Average stockholders' equity 1.52 0.93 1.33 0.93
Average stockholders' equity to:
Average total assets 7.12 7.81 7.36 7.32
Average loans (2) 16.78 16.24 16.89 14.78
Average total deposits 7.73 8.59 8.02 8.02
Average interest-earning assets to:
Average total assets 92.02 91.49 91.81 91.62
Average total deposits 100.00 100.64 100.10 100.44
Average total liabilities 99.08 99.24 99.10 98.85
Ratio to total average deposits of:
Average loans (2) 46.10 52.89 47.49 54.27
Average noninterest-bearing deposits 16.02 18.14 16.97 18.93
Average interest-bearing deposits 83.98 81.86 83.03 81.07
Total interest expense to total interest income 48.34 45.95 47.18 43.71
</TABLE>
- -------------------------
(1) Dividends on Common Stock only.
(2) Before allowance for possible loan losses.
-29-
<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 $6,930,000 and $7,128,000
during the third quarter and first nine months of 1996, respectively, and
$6,658,000 and $7,031,000 during the third quarter and first nine months of
1995, respectively. These amounts comprised 3.4% and 3.7% of average total
assets during the third quarter and first nine months of 1996, respectively,
and 3.9% and 4.2% of average total assets during the third quarter and first
nine months of 1995, respectively. The average level of securities and
federal funds sold was $100,562,000 and $93,311,000 during the third quarter
and first nine months of 1996, respectively, and $74,387,000 and $70,396,000
during the third quarter and first nine months of 1995, respectively.
Recently, a larger amount of the Banks' increasingly available funds has been
invested in securities, due 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 $2,029,000 during the
nine-month period ended September 30, 1996. 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 nine-month period ended September 30, 1995. At September 30,
1996, $17,573,000, or 22.8%, of the Company's securities portfolio, excluding
mortgage-backed securities, matured within one year and $55,815,000, or
72.4%, 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 September 30, 1996, approximately $33,677,000, or 37.4%, of the
Company's loans, net of unearned income, matured within one year and/or had
adjustable interest rates. Approximately $30,190,000, or 60.9%, 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 third quarter and
first nine months of 1996, the Company's average deposits
-30-
<PAGE>
were $186,554,000 and $177,341,000, respectively, or 92.0% and 91.7% of
average total assets, respectively, compared to $155,798,000 and
$152,456,000, respectively, or 90.9% and 91.2% of average total assets,
respectively, during the third quarter and first nine 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 COMPANY
The Company depends on the Banks for liquidity in the form of cash flow,
primarily to meet debt service and dividend requirements and to cover other
operating expenses. This cash flow from subsidiaries comes from three sources:
(1) dividends resulting from earnings of the Banks, (2) current tax liabilities
generated by the Banks and (3) management and service fees for services
performed for the Banks.
The payment of dividends to the Company is subject to applicable law and
the scrutiny of regulatory authorities. Dividends paid by the Banks to
Independent Financial during the third quarter and first nine months of 1996
totaled $225,000 and $600,000, respectively. Dividends paid by the Banks to
Independent Financial during the third quarter and first nine months of 1995
were $300,000 and $500,000, respectively. Dividends paid by Independent
Financial to the Company during the third quarter and first nine months of 1996
were $225,000 and $600,000, respectively. Independent Financial paid dividends
to the Company totaling $305,000 and $705,000 during the same time periods of
1995. At September 30, 1996, there were approximately $1,490,000 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 43% and 9%, respectively, of the
Company's cash flow during the third quarter of 1996. These percentages were
47% and 9%, respectively, for the first nine 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 $200,000 and $642,000 were paid by the Banks to the
Company during the third quarter and first nine months of 1996, respectively,
compared to a total of $210,000 and $729,000 during the third quarter and
first nine 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 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.
-31-
<PAGE>
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 $125,000 in
management fees to the Company during the third quarter and first nine months of
1996, respectively, compared to $47,000 and $134,000 paid by the Banks during
the third quarter and first nine 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 "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, were due quarterly on January 15, April 15, July 15 and
October 15. The Term Note bore interest at the Amarillo Bank's floating base
rate plus 1% (9.25% at September 30, 1996) and was 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 contained certain covenants
that, among other things, restricted 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 was $1,000,000 or
greater. The loan agreement also required the Company and the Banks to meet
certain financial ratios, all of which were met at September 30, 1996, and
December 31, 1995. On October 15, 1996, the Company paid off the remaining
principal balance of the Term Note.
In addition, at September 30, 1996, the Company had notes payable to one
current and two former directors of the Company aggregating $226,000. 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 September 30, 1996, stockholders' equity totaled $14,582,000, or 7.2% 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
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.
-32-
<PAGE>
Banking regulators have also issued leverage ratio requirements. The
leverage ratio requirement is measured as the ratio of Tier 1 capital to
adjusted quarterly average assets. The following table provides a calculation
of the Company's risk-based capital and leverage ratios and a comparison of the
Company's and the Banks' risk-based capital ratios and leverage ratios to the
minimum regulatory requirements at September 30, 1996.
<TABLE>
THE COMPANY SEPTEMBER 30, 1996
----------- ---------------------
(Dollars in thousands)
<S> <C>
Tier 1 capital:
Common stockholders' equity, excluding unrealized loss on
available-for-sale securities $14,039
Preferred stockholders' equity (1) 566
Goodwill (974)
Net deferred tax asset in excess of regulatory capital limits (2) (28)
--------
Total Tier 1 capital 13,603
--------
Tier 2 capital:
Allowance for possible loan losses (3) 806
--------
Total Tier 2 capital 806
--------
Total capital $14,409
--------
--------
Risk-weighted assets $98,260
--------
--------
Adjusted quarterly average assets $203,518
--------
--------
</TABLE>
MINIMUM ACTUAL
REGULATORY RATIOS AT
THE COMPANY REQUIREMENT(4) SEPTEMBER 30, 1996
- ----------- -------------- ------------------
Tier 1 capital to risk-weighted assets ratio 4.00% 13.84%
Total capital to risk-weighted assets ratio 8.00 14.66
Leverage ratio 3.00 6.68
THE BANKS
- ---------
Tier 1 capital to risk-weighted assets ratio 4.00% 12.07 - 13.68%
Total capital to risk-weighted assets ratio 8.00 12.85 - 14.25
Leverage ratio 3.00 5.63 - 7.25
- ---------------------------
(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.
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,"
-33-
<PAGE>
"undercapitalized," "significantly undercapitalized" and "critically
undercapitalized." Under the FDIC's regulations, the Company and the Banks
were all "well capitalized" at September 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
paid on August 30, 1996, and a like dividend was also declared by the Company's
Board of Directors on October 16, 1996. The dividend is payable on November 29,
1996, to holders of the Common Stock on November 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 $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.
-34-
<PAGE>
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 September 30, 1996, Western National had total assets of
$56,598,000, total loans, net of unearned income, of $38,619,000, total deposits
of $50,802,000, and stockholders' equity of $5,385,000.
Consummation of the acquisition is subject to various regulatory approvals
and other conditions. The Company has filed 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 seeks 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 would probably be consummated during the first
quarter of 1997 at which time Western National would 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.
-35-
<PAGE>
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
In CONNIE POLLARD V. FIRST STATE BANK, N.A., ODESSA, TEXAS (Cause No.
A-100,846) brought in the 70th District Court of Ector County, Texas, the
plaintiff, the former Senior Vice President, Manager of Trust Operations of
First State, N.A., Odessa, alleges, among other things, that she was
discriminated against on the basis of her sex, she was repeatedly passed over
for promotion to the Trust Department Manager, she was paid less than male
employees and that she was constructively discharged. The plaintiff alleges
damages for past and future wages, emotional distress and constructive
discharge, actual damages, exemplary damages, attorneys' fees, reinstatement and
promotion and pre-judgment and post-judgment interest. The Company believes the
plaintiff's claims to be without merit and intends to vigorously defend this
action.
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.
27.1 Financial Data Schedule (filed herewith).
(b) Reports on Form 8-K.
None.
-36-
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 14, 1996 Independent Bankshares, Inc.
(Registrant)
By: /s/ Randal N. Crosswhite
-----------------------------------
Randal N. Crosswhite
Senior Vice President and
Chief Financial Officer
-37-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR INDEPENDENT BANKSHARES,
INC. FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 9,987,000
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 12,100,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 33,590,000
<INVESTMENTS-CARRYING> 49,087,000
<INVESTMENTS-MARKET> 82,306,000
<LOANS> 90,115,000<F1>
<ALLOWANCE> 806,000
<TOTAL-ASSETS> 203,801,000
<DEPOSITS> 187,474,000
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,167,000
<LONG-TERM> 578,000
0
135,000
<COMMON> 276,000
<OTHER-SE> 14,171,000
<TOTAL-LIABILITIES-AND-EQUITY> 203,801,000
<INTEREST-LOAN> 5,894,000
<INTEREST-INVEST> 3,341,000
<INTEREST-OTHER> 774,000
<INTEREST-TOTAL> 10,009,000
<INTEREST-DEPOSIT> 4,671,000
<INTEREST-EXPENSE> 4,722,000
<INTEREST-INCOME-NET> 5,287,000
<LOAN-LOSSES> 161,000
<SECURITIES-GAINS> (10,000)
<EXPENSE-OTHER> 4,686,000
<INCOME-PRETAX> 1,584,000
<INCOME-PRE-EXTRAORDINARY> 1,584,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,046,000
<EPS-PRIMARY> .92
<EPS-DILUTED> .77
<YIELD-ACTUAL> 3.97
<LOANS-NON> 88,000
<LOANS-PAST> 194,000
<LOANS-TROUBLED> 218,000
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 759,000
<CHARGE-OFFS> 308,000
<RECOVERIES> 45,000
<ALLOWANCE-CLOSE> 806,000
<ALLOWANCE-DOMESTIC> 806,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 211,000
<FN>
<F1> NET OF UNEARNED INCOME ON INSTALLMENT LOANS OF 2,511,000.
</FN>
</TABLE>
