UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File Number: 0-10196
INDEPENDENT BANKSHARES, INC.
(Exact name of registrant as specified in its charter)
Texas 75-1717279
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
547 Chestnut Street
P. O. Box 3296
Abilene, Texas 79604
(Address of principal executive offices) (Zip Code)
(915) 677-5550
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports) and (2) has been subject to such filing requirements
for the past 90 days.
YES X NO
------ ------
Indicate the number of shares outstanding of each of
the issuer's classes of common stock at June 30, 1997.
Class: Common Stock, par value $0.25 per share
Outstanding at June 30, 1997: 1,946,000 shares
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements.
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<PAGE>
INDEPENDENT BANKSHARES, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1997 AND DECEMBER 31, 1996
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
ASSETS 1997 1996
- ------ ------------ ------------
<S> <C> <C>
Cash and Cash Equivalents:
Cash and Due from Banks $ 12,438,000 $ 11,458,000
Federal Funds Sold 14,300,000 18,500,000
------------ ------------
Total Cash and Cash Equivalents 26,738,000 29,958,000
------------ ------------
Securities:
Available-for-sale 37,058,000 27,771,000
Held-to-maturity--Market Value of $50,294,000 for
June 30, 1997, and $47,291,000 for December 31, 1996 50,548,000 47,381,000
------------ ------------
Total Securities 87,606,000 75,152,000
------------ ------------
Loans:
Total Loans 139,450,000 94,264,000
Less:
Unearned Income on Installment Loans 2,047,000 2,247,000
Allowance for Possible Loan Losses 1,328,000 793,000
------------ ------------
Net Loans 136,075,000 91,224,000
------------ ------------
Premises and Equipment 7,153,000 4,437,000
Goodwill 3,342,000 957,000
Accrued Interest Receivable 2,116,000 1,599,000
Real Estate and Other Repossessed Assets 754,000 389,000
Other Assets 1,982,000 2,252,000
------------ ------------
Total Assets $265,766,000 $205,968,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Liabilities:
Deposits:
Noninterest-bearing Demand Deposits $ 41,108,000 $ 32,240,000
Interest-bearing Demand Deposits 79,069,000 58,676,000
Interest-bearing Time Deposits 123,891,000 98,659,000
------------ ------------
Total Deposits 244,068,000 189,575,000
Accrued Interest Payable 905,000 951,000
Notes Payable 824,000 240,000
Other Liabilities 383,000 265,000
------------ ------------
Total Liabilities 246,180,000 191,031,000
------------ ------------
Stockholders' Equity:
Series C Preferred Stock 62,000 135,000
Common Stock 487,000 276,000
Additional Paid-in Capital 13,845,000 9,891,000
Retained Earnings 5,372,000 4,610,000
Unrealized Gain on Available-for-sale Securities 24,000 25,000
Unearned ESOP Shares (204,000) 0
------------ ------------
Total Stockholders' Equity 19,586,000 14,937,000
------------ ------------
Total Liabilities and Stockholders' Equity $265,766,000 $205,968,000
============ ============
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
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<PAGE>
INDEPENDENT BANKSHARES, INC.
CONSOLIDATED INCOME STATEMENTS
QUARTERS AND SIX-MONTH PERIODS ENDED JUNE 30, 1997 AND 1996
(Unaudited)
<TABLE>
<CAPTION>
Six-month Period
Quarter Ended June 30, Ended June 30,
------------------------- --------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Interest Income:
Interest and Fees on Loans $ 3,102,000 $ 1,926,000 $ 5,833,000 $ 3,886,000
Interest on Securities 1,389,000 1,123,000 2,699,000 2,094,000
Interest on Federal Funds Sold 187,000 235,000 442,000 527,000
----------- ----------- ----------- -----------
Total Interest Income 4,678,000 3,284,000 8,974,000 6,507,000
----------- ----------- ----------- -----------
Interest Expense:
Interest on Deposits 2,178,000 1,529,000 4,214,000 2,992,000
Interest on Notes Payable 15,000 15,000 35,000 37,000
----------- ----------- ----------- -----------
Total Interest Expense 2,193,000 1,544,000 4,249,000 3,029,000
----------- ----------- ----------- -----------
Net Interest Income 2,485,000 1,740,000 4,725,000 3,478,000
Provision for Loan Losses 60,000 71,000 60,000 121,000
----------- ----------- ----------- -----------
Net Interest Income After
Provision for Loan Losses 2,425,000 1,669,000 4,665,000 3,357,000
----------- ----------- ----------- -----------
Noninterest Income:
Service Charges 393,000 302,000 739,000 594,000
Trust Fees 48,000 43,000 94,000 96,000
Other Income 23,000 34,000 53,000 52,000
----------- ----------- ----------- -----------
Total Noninterest Income 464,000 379,000 886,000 742,000
----------- ----------- ----------- -----------
Noninterest Expenses:
Salaries and Employee Benefits 1,007,000 759,000 1,926,000 1,517,000
Equipment Expense 213,000 161,000 415,000 321,000
Net Occupancy Expense 216,000 177,000 411,000 345,000
Stationery, Printing and Supplies Expense 98,000 77,000 184,000 140,000
Professional Fees 92,000 82,000 182,000 140,000
Goodwill Amortization 57,000 8,000 101,000 12,000
Net Cost (Revenues) Applicable to Real
Estate and Other Repossessed Assets (45,000) (3,000) (40,000) 2,000
Other Expenses 430,000 308,000 779,000 596,000
----------- ----------- ----------- -----------
Total Noninterest Expenses 2,068,000 1,569,000 3,958,000 3,073,000
----------- ----------- ----------- -----------
Income Before Federal Income Taxes 821,000 479,000 1,593,000 1,026,000
Federal Income Taxes 259,000 163,000 538,000 349,000
----------- ----------- ----------- -----------
Net Income $ 562,000 $ 316,000 $ 1,055,000 $ 677,000
=========== =========== =========== ===========
Preferred Stock Dividends $ 14,000 $ 17,000 $ 28,000 $ 34,000
=========== =========== =========== ===========
Net Income Available to Common Stockholders $ 548,000 $ 299,000 $ 1,027,000 $ 643,000
=========== =========== =========== ===========
Primary Earnings per Common Share
Available to Common Stockholders $ 0.30 $ 0.22 $ 0.59 $ 0.48
=========== =========== =========== ===========
Fully Diluted Earnings Per Common Share
Available to Common Stockholders $ 0.27 $ 0.19 $ 0.52 $ 0.40
=========== =========== =========== ===========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
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<PAGE>
INDEPENDENT BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX-MONTH PERIODS ENDED JUNE 30, 1997 AND 1996
(Unaudited)
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income $ 1,055,000 $ 677,000
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
Deferred Federal Income Tax Expense 239,000 144,000
Depreciation and Amortization 336,000 195,000
Provision for Loan Losses 60,000 121,000
Loss on Sale of Available-for-sale Securities 0 12,000
Gain on Sale of Held-to-maturity Securities 0 (2,000)
Gains on Sales of Real Estate and Other Repossessed Assets (64,000) (16,000)
Writedown of Real Estate and Other Repossessed Assets 2,000 15,000
Increase in Accrued Interest Receivable (100,000) (312,000)
Decrease in Other Assets 528,000 127,000
Decrease in Accrued Interest Payable (224,000) (84,000)
Increase (Decrease) in Other Liabilities (193,000) 28,000
------------ ------------
Net Cash Provided by Operating Activities 1,639,000 905,000
------------ ------------
Cash Flows from Investing Activities:
Proceeds from Maturities of Available-for-sale Securities 1,228,000 28,000
Proceeds from Maturities of Held-to-maturity Securities 9,919,000 12,141,000
Proceeds from Sale of Available-for-sale Securities 193,000 30,000
Proceeds from Sale of Held-to-maturity Securities 0 2,000,000
Purchases of Available-for-sale Securities (6,037,000) (16,575,000)
Purchases of Held-to-maturity Securities (8,021,000) (22,684,000)
Net Increase in Loans (5,061,000) (3,940,000)
Additions to Premises and Equipment (174,000) (240,000)
Proceeds from Sales of Premises and Equipment 0 94,000
Proceeds from Sales of Real Estate and Other Repossessed Assets 643,000 467,000
Cash and Cash Equivalents Held by Peoples National Bank, Winters, Texas on
January 1, 1996 (Date of Acquisition), in Excess of Cash Paid for Purchase of
Peoples National Bank 0 584,000
Cash and Cash Equivalents Held by Coastal Banc ssb, San Angelo, Texas, on May 27,
1996 (Date of Acquisition), in Excess of Cash Paid for Coastal Banc ssb, San Angelo 0 13,619,000
Cash Paid for Purchase of Crown Park Bancshares, Inc., Lubbock, Texas, in Excess
of Cash and Cash Equivalents Held by Crown Park Bancshares on January 28, 1997
(Date of Acquisition) (736,000) 0
------------ ------------
Net Cash Used in Investing Activities (8,046,000) (14,476,000)
Cash Flows from Financing Activities:
Increase in Deposits 889,000 5,982,000
Proceeds from Notes Payable 1,300,000 0
Repayment of Notes Payable (2,805,000) (245,000)
Net Proceeds from Issuance of Equity Securities 4,004,000 0
Payment of Cash Dividends (196,000) (121,000)
Payment for Fractional Shares in Stock Dividend (5,000) 0
------------ ------------
Net Cash Provided by Financing Activities 3,187,000 5,616,000
------------ ------------
Net Decrease in Cash and Cash Equivalents (3,220,000) (7,955,000)
Cash and Cash Equivalents at Beginning of Period 29,958,000 34,759,000
------------ ------------
Cash and Cash Equivalents at End of Period $ 26,738,000 $ 26,804,000
============ ============
Cash Paid During the Period for:
Interest $ 4,295,000 $ 3,113,000
Federal Income Taxes 350,000 248,000
Noncash Investing Activities:
Additions to Real Estate and Other Repossessed Assets Through Foreclosures $ 571,000 $ 469,000
Sales of Real Estate and Other Repossessed Assets Financed with Loans 81,000 45,000
Decrease in Unrealized Gain/Loss on Available-for-sale Securities,
Net of Tax (1,000) (179,000)
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
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<PAGE>
INDEPENDENT BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
For information with regard to significant accounting
policies, reference is made to Notes to Consolidated Financial
Statements included in the Annual Report on Form 10-K for the year
ended December 31, 1996, which was filed with the Securities and
Exchange Commission pursuant to Section 13 or 15(d) of the
Securities and Exchange Act of 1934, as amended.
The accompanying financial statements reflect all adjustments
necessary to present a fair statement of the results for the
interim periods presented, and all adjustments are of a normal
recurring nature.
(2) RECENT ACCOUNTING PRONOUNCEMENTS
In June 1996, the Financial Accounting Standards Board (the
"FASB") issued Statement of Financial Accounting Standards No. 125
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" ("FAS 125"). FAS 125 provides
accounting and reporting standards for, among other things, the
transfer and servicing of financial assets, such as factoring
receivables with recourse. FAS 125 is effective for transfers and
servicing of financial assets occurring after December 31, 1996,
and is to be applied prospectively. Earlier or retroactive
application is not permitted. In December 1996, the FASB issued
Statement of Financial Accounting Standards No. 127, "Deferral of
the Effective Date of Certain Provisions of FAS 125" ("FAS 127").
FAS 127 amends the effective date for certain provisions of FAS 125
to December 31, 1997. Management of the Company does not
anticipate the adoption of FAS 125 will have a material impact on
the Company's financial position or results of operations.
In March 1997, the FASB issued Statement of Financial
Accounting Standards No. 128, "Earnings Per Share" ("FAS 128"),
which establishes standards for computing and presenting earnings
per share for entities with publicly held common stock or potential
common stock. FAS 128 simplifies the standards for computing
earnings per share previously found in Accounting Principles Board
Opinion No. 15, "Earnings per Share," and makes them comparable to
international earnings per share standards. It replaces the
presentation of primary earnings per share with a presentation of
basic earnings per share, which excludes dilution. It also
requires dual presentation of basic and diluted earnings per share
on the face of the income statement for all entities with complex
capital structures. FAS 128 is effective for fiscal years ending
after December 15, 1997, and early adoption is not permitted. Had
FAS 128 been adopted on December 31, 1995, basic earnings per share
would have been $0.30 and $0.59 for the quarter and six-month
period ended June 30, 1997, respectively, and $0.22 and $0.48 for
the quarter and six-month period ended June 30, 1996, respectively.
Diluted earnings per share would have been $0.27 and $0.52 for the
quarter and six-month period ended June 30, 1997, and $0.19 and
$0.40 for the quarter and six-month period ended June 30, 1996,
respectively. These earnings per share amounts have been adjusted
for the five-for-four stock split, effected in the form of a 25%
stock dividend, paid to stockholders on May 30, 1997.
In February 1997, the FASB issued Statement of Financial
Accounting Standards No. 129, "Disclosure of Information about
Capital Structure" ("FAS 129"), which establishes standards for
disclosing information about an entity's capital structure. FAS
129 continues the existing requirements to disclose the pertinent
rights and privileges of all securities other than ordinary common
stock, but expands the number of companies subject to portions of
its requirements. FAS 129 is effective for fiscal years ending
after December 15, 1997. Management of the Company does not
anticipate the adoption of FAS 129 will have a material impact on
the Company's financial statements or results of operations.
(3) 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
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<PAGE>
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 have
been and will be credited against the Company's gross deferred tax
asset. The reduction in the Company's deferred tax asset during
the first six months of 1997 and 1996 totaled $239,000 and
$144,000, respectively.
(4) ACQUISITION OF SUBSIDIARY BANK
The Company completed the acquisition of Crown Park
Bancshares, Inc. ("Crown Park") and its wholly owned subsidiary
bank, Western National Bank, Lubbock, Texas ("Western National")
effective January 28, 1997, for an aggregate cash consideration of
$7,510,000. On the acquisition date, Crown Park was merged with
and into a wholly owned subsidiary of the Company and Western
National was merged with and into First State Bank, National
Association, Abilene, Texas (the "Bank"), the Company's subsidiary
bank. To obtain funding for the acquisition, the Company sold an
aggregate of 316,250 shares of its common stock in an underwritten
offering at a price of $14.25 per share (the "Offering"). This
included 41,250 shares covered by the underwriter's over-allotment
option. The Company borrowed $800,000 from a financial institution
in Amarillo, Texas (the "Amarillo Bank") to finance a portion of
the cost of acquiring Crown Park. The $800,000 of borrowings was
reduced to $400,000 with the proceeds of the sale of the over-
allotment shares and further to $200,000 on March 31, 1997. At the
date of acquisition, Crown Park had total assets of $60,420,000,
total loans, net of unearned income, of $41,688,000, total deposits
of $53,604,000 and stockholders' equity of $4,238,000. This
acquisition was accounted for using the purchase method of
accounting. A total of $2,486,000 of goodwill was recorded as a
result of this acquisition, and such goodwill is being amortized
over a period of 15 years.
The following pro forma financial information combines the
historical results of the Company as if the Crown Park acquisition
had occurred as of the beginning of each period presented:
<TABLE>
<CAPTION>
Six-month Period
Quarter Ended June 30, Ended June 30,
---------------------- ----------------------
1997 1996 1997 1996
------- ------- ------- -------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Net interest income $ 2,485 $ 2,409 $ 4,896 $ 4,716
Net income 562 474 879 911
Primary earnings per share 0.30 0.26 0.49 0.51
Fully diluted earnings per share 0.27 0.23 0.44 0.44
</TABLE>
The pro forma amounts for net income and primary and fully
diluted earnings per share for the six-month period ended June 30, 1997,
are less than the amounts reported herein as a result of certain
adjustments recorded by Crown Park prior to the acquisition.
(5) NOTES PAYABLE
The Company has a note payable (the "Note") to the Amarillo
Bank noted above. This Note had an outstanding principal balance
of $200,000 at June 30, 1997. This Note had a maturity of April
23, 1997. On April 23, 1997, the maturity date was extended to
July 23, 1997. On July 23, 1997, the Note was placed on a one-year
maturity with payments of $50,000 principal plus interest to be
made quarterly beginning October 23, 1997. The Note bears interest
at the Amarillo Bank's floating base rate plus 1/2% (9.00% at June
30, 1997) and is collateralized by 100% of the stock of the Bank.
The loan agreement between the Company and the Amarillo Bank
contains certain covenants that, among other things, restrict the
ability of the Company to incur additional debt, to create liens on
its property, to merge or to consolidate with any other person or
entity, to make certain investments, to purchase or sell assets or
to pay cash dividends on the common stock without the approval of
the Amarillo Bank if the indebtedness due to the Amarillo Bank is
$1,200,000 or greater. The loan agreement also requires the
Company and the Bank to meet certain financial ratios, all of which
were met at June 30, 1997, and December 31, 1996.
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<PAGE>
The Bank also has a $500,000 note payable to one former
stockholder of Crown Park, which originated as a result of that
acquisition. The note is payable in five equal annual principal
payments of $100,000 on January 28 of each year. Interest is
payable quarterly at the 26-week Treasury Bill rate plus 2% (7.45%
at June 30, 1997), adjustable quarterly. The note is unsecured and
may be repaid with no penalty in whole or in part at any time by
the Bank.
In addition, at June 30, 1997, the Company had notes payable
to one current and two former directors of the Company aggregating
$114,000. 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 two
annual installments of $117,000 were made on March 1, 1996 and
1997, respectively. The notes represent a portion of the final
settlement of certain litigation.
(6) FEDERAL INCOME TAXES
Effective January 1, 1993, the Company adopted Statement of
Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("FAS 109"), which required companies to adopt the liability
method for computing income taxes. As a result of the acquisition
of Peoples National Bank, Winters, Texas ("Peoples National") in
1996, the Company increased its gross deferred tax asset and
related valuation allowance by $162,000. The Company may reduce or
increase its valuation allowance depending on changes in the
expectation of future earnings and other circumstances. Deferred
income taxes reflect the net effects of temporary differences
between the carrying amount of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
(7) EARNINGS PER SHARE
Primary earnings per common share is computed by dividing net
income available to common stockholders by the weighted average
number of shares and share equivalents outstanding during the
period. Because the Company's outstanding preferred stock is
cumulative, the dividends allocable to such preferred stock reduces
income available to common stockholders in the earnings per share
calculations. The Series C Cumulative Convertible Preferred
Stock(the "Series C Preferred Stock") issued in December 1990 was
determined not to be a common stock equivalent and, therefore, is
not used to calculate primary earnings per common share. In
computing fully diluted earnings per common share for the quarters
and six-month periods ended June 30, 1997 and 1996, the conversion
of the Series C Preferred Stock was assumed, as the effect is
dilutive. The weighted average common shares outstanding used in
computing primary earnings per common share for the quarters ended
June 30, 1997 and 1996, was 1,863,000 and 1,354,000 shares,
respectively. The weighted average common shares outstanding used
in computing fully diluted earnings per common share for the
quarters ended June 30, 1997 and 1996, was 2,079,000 and 1,697,000
shares, respectively. The weighted average common shares
outstanding used in computing primary earnings per common share for
the first six months of 1997 and 1996 was 1,752,000 and 1,336,000
shares, respectively. The weighted average common shares
outstanding used in computing fully diluted earnings per common
share for the first six months of 1997 and 1996 was 2,015,000 and
1,696,000 shares, respectively. The number of weighted average
common shares outstanding have been adjusted for the five-for-four
stock split, effected in the form of a 25% stock dividend, paid to
stockholders on May 30, 1997.
(8) UNEARNED ESOP SHARES
The Company's Employee Stock Ownership/401(k) Plan (the
"ESOP") purchased 18,750 shares, adjusted for the five-for-four
stock dividend, effected in the form of a 25% stock dividend, paid
to stockholders on May 30, 1997, of the Company's common stock (the
"Common Stock") in the Offering for $213,750. The funds used for
the purchase were borrowed from the Company. The note evidencing
such borrowing is due in eighty-four equal monthly installments of
$3,500, including interest, and matures on February 27, 2004. The
note bears interest at the Company's floating base rate plus 1%
(9.50% at June 30, 1997). The note is collateralized by the stock
purchased in the Offering.
As a result of the lending arrangement between the Company and
the ESOP, the shares are considered "unearned." The shares are
"earned" on a pro rata basis as principal payments are made on the
note. The shares are included in the Company's earnings per share
calculations only as they are earned. At June 30, 1997, a total of
$204,000, or 17,945 shares, are considered to be unearned.
-8-
<PAGE>
(9) SUBSEQUENT EVENT
Subsequent to June 30, 1997, holders of a total of 490 shares
of the Company's Series C Preferred Stock converted such shares
into 11,254 shares of Common Stock. As of the date of filing of
this report, the Company had 5,758 shares of Series C Preferred
Stock and 1,957,254 shares of Common Stock issued and outstanding.
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<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS CERTAIN FORWARD-
LOOKING STATEMENTS AND INFORMATION RELATING TO INDEPENDENT
BANKSHARES, INC. (THE "COMPANY") AND ITS SUBSIDIARIES THAT ARE
BASED ON THE BELIEFS OF THE COMPANY'S MANAGEMENT AS WELL AS
ASSUMPTIONS MADE BY AND INFORMATION CURRENTLY AVAILABLE TO THE
COMPANY'S MANAGEMENT. WHEN USED IN THIS REPORT, THE WORDS
"ANTICIPATE," "BELIEVE," "ESTIMATE," "EXPECT" AND "INTEND" AND
WORDS OR PHRASES OF SIMILAR IMPORT, AS THEY RELATE TO THE COMPANY
OR ITS SUBSIDIARIES OR COMPANY MANAGEMENT, ARE INTENDED TO IDENTIFY
FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS REFLECT THE CURRENT
VIEW OF THE COMPANY WITH RESPECT TO FUTURE EVENTS AND ARE SUBJECT
TO CERTAIN RISKS, UNCERTAINTIES AND ASSUMPTIONS RELATED TO CERTAIN
FACTORS INCLUDING, WITHOUT LIMITATION, COMPETITIVE FACTORS, GENERAL
ECONOMIC CONDITIONS, CUSTOMER RELATIONS, THE INTEREST RATE
ENVIRONMENT, GOVERNMENTAL REGULATION AND SUPERVISION, NONPERFORMING
ASSET LEVELS, LOAN CONCENTRATIONS, CHANGES IN INDUSTRY PRACTICES,
ONE TIME EVENTS AND OTHER FACTORS DESCRIBED HEREIN. BASED UPON
CHANGING CONDITIONS, SHOULD ANY ONE OR MORE OF THESE RISKS OR
UNCERTAINTIES MATERIALIZE, OR SHOULD ANY UNDERLYING ASSUMPTIONS
PROVE INCORRECT, ACTUAL RESULTS MAY VARY MATERIALLY FROM THOSE
DESCRIBED HEREIN AS ANTICIPATED, BELIEVED, ESTIMATED, EXPECTED OR
INTENDED. THE COMPANY DOES NOT INTEND TO UPDATE THESE FORWARD-
LOOKING STATEMENTS.
THE COMPANY
The Company is a bank holding company that, at June 30, 1997,
owned 100% of Independent Financial Corp. ("Independent Financial")
which, in turn, owned 100% of First State Bank, National
Association, Abilene, Texas (the "Bank"). The Bank currently
operates full-service banking locations in the West Texas cities of
Abilene (two locations), Lubbock, Odessa (2 locations), San Angelo,
Stamford and Winters. The Bank acquired its two branches in
Stamford and Winters when two of the Company's former subsidiary
banks, The First National Bank in Stamford, Stamford, Texas ("First
National"), and The Winters State Bank, Winters, Texas ("Winters
State"), were merged into the Bank, effective November 1, 1994.
The Bank acquired Peoples National Bank, Winters, Texas
("Peoples National") effective January 1, 1996. The existing
location of Peoples National was subsequently closed, the land and
building were sold and Peoples National was merged with and into
the Bank's existing branch facility in Winters. Effective May 27,
1996, the Bank also acquired the San Angelo branch of Coastal Banc
ssb ("Coastal Banc - San Angelo"), which was merged with and into
and became a branch of the Bank.
As noted in "Note 4: Acquisition of Subsidiary Bank," the
Company acquired Crown Park Bancshares, Inc. ("Crown Park") and its
wholly owned subsidiary bank, Western National Bank, Lubbock, Texas
("Western National"), on January 28, 1997. Western National was
merged with and into and became a branch of the Bank.
RESULTS OF OPERATIONS
General
- -------
The following discussion and analysis presents the more
significant factors affecting the Company's financial condition at
June 30, 1997, and December 31, 1996, and results of operations for
each of the quarters and six-month periods ended June 30, 1997 and
1996. 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.
Net Income
- ----------
Net income for the quarter ended June 30, 1997, amounted to
$562,000 ($0.30 primary earnings per common share) compared to net
income of $316,000 ($0.22 primary earnings per common share) for
the quarter ended June 30, 1996. Net income for the six-month
period ended June 30, 1997, was $1,055,000 ($0.59 primary earnings
per common share) compared to net income of $677,000 ($0.48 primary
earnings per common share) for the six-month period ended June 30,
1996. These earnings per share amounts have been adjusted for the
five-for-four stock split, effected in the form of a 25% stock
dividend, paid to stockholders on May 30, 1997.
-10-
<PAGE>
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 $2,485,000 for the second
quarter of 1997, an increase of $745,000, or 42.8%, from the second
quarter of 1996. Net interest income for the second quarter of
1996 was $1,740,000. Net interest income for the first six months
of 1997 was $4,725,000, an increase of $1,247,000, or 35.9%, from
net interest income of $3,478,000 for the first six months of 1996.
The increase in 1997 was primarily due to the acquisition of Crown
Park effective January 28, 1997. The net interest margin on a
fully taxable-equivalent basis, was 4.15% and 4.08% for the second
quarter and first six months of 1997, respectively, compared to
3.93% and 4.02% for the second quarter and first six months of
1996, respectively. The primary reason for the increases in the
net interest margin during 1997 is the acquisition of Crown Park in
January 1997, which had a higher loan-to-deposit ratio than the
Bank, and the acquisition of Coastal Banc - San Angelo in May 1996,
which had $14,895,000 in deposits and only $155,000 in loans at the
date of acquisition. As a result of the Coastal Banc - San Angelo
acquisition, a significant amount of the increased funds were
invested in investment securities and federal funds sold, which
yield a lower rate of interest than loans and, therefore, had a
negative impact on the Company's net interest margin during 1996.
At June 30, 1997, approximately $30,317,000, or 22.1%, of the
Company's total loans, net of unearned income, were tied to
fluctuations in the prime interest rate. This amount represents
40.8% of the Company's loans, excluding loans to individuals which
are almost exclusively fixed rate in nature. Average rates paid
for various types of deposits, particularly certificates of
deposit, remained relatively stable for the first six months of
1997, when compared to the first six months of 1996. For example,
the average rate paid by the Company for certificates of deposit of
$100,000 or more increased slightly from 5.41% for the first six
months of 1996 to 5.47% for the first six months of 1997. The
average rate paid for certificates of deposit less than $100,000
decreased from 5.41% during the first half of 1996 to 5.29% during
the first half of 1997. Rates on other types of deposits, such as
interest-bearing demand, savings and money market deposits,
increased from an average of 2.33% during the first six months of
1996 to an average of 2.66% during the first half of 1997. Given
the fact that the Company's interest-bearing liabilities are
subject to repricing faster than its interest-earning assets in the
very short-term, an overall rising interest rate environment would
normally produce a lower net interest margin than a falling
interest rate environment. As noted under "Analysis of Financial
Condition - Interest Rate Sensitivity" below, because the Company's
interest-bearing demand, savings and money market deposits are
somewhat less rate-sensitive, the Company's net interest margin
does not necessarily decrease significantly in an overall rising
interest rate environment.
The following table presents the average balance sheets of the
Company for the quarters and six-month periods ended June 30, 1997
and 1996, 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>
<CAPTION>
Quarter Ended June 30,
--------------------------------------------------------
1997 1996
------------------------- -------------------------
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
-------- -------- ----- -------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
ASSETS(1) (Dollars in thousands)
Interest-earning assets:
Loans, net of unearned income (2) $135,521 $ 3,102 9.16% $ 83,121 $ 1,927 9.27%
Securities (3) 90,698 1,390 6.13 76,100 1,123 5.90
Federal funds sold 13,471 187 5.55 17,744 234 5.28
-------- -------- ----- -------- -------- -----
Total interest-earning assets 239,690 4,679 7.81 176,965 3,284 7.42
-------- -------- ----- -------- -------- -----
Noninterest-earning assets:
Cash and due from banks 10,369 6,858
Premises and equipment 7,147 4,382
Goodwill 3,364 717
Accrued interest receivable
and other assets 4,958 4,226
Allowance for possible loan losses (1,295) (861)
-------- --------
Total noninterest-earning assets 24,543 15,322
-------- --------
Total assets $264,233 $192,287
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY(1)
Interest-bearing liabilities:
Demand, savings and money
market deposits $ 77,147 $ 516 2.68% $ 57,324 $ 334 2.33%
Time deposits 124,204 1,662 5.35 89,462 1,195 5.34
-------- -------- ----- -------- -------- -----
Total interest-bearing deposits 201,351 2,178 4.33 146,786 1,529 4.17
Notes payable 824 15 7.28 622 15 9.65
-------- -------- ----- -------- -------- -----
Total interest-bearing liabilities 202,175 2,193 4.34 147,408 1,544 4.19
-------- -------- ----- -------- -------- -----
Noninterest-bearing liabilities:
Demand deposits 41,282 29,798
Accrued interest payable and
other liabilities 1,483 1,009
-------- --------
Total noninterest-bearing liabilities 42,765 30,807
-------- --------
Total liabilities 244,940 178,215
Stockholders' equity 19,293 14,072
-------- --------
Total liabilities and
stockholders' equity $264,233 $192,287
======== ========
Net interest income $ 2,486 $ 1,740
======== ========
Interest rate spread (4) 3.47% 3.23%
===== =====
Net interest margin (5) 4.15% 3.93%
===== =====
______________________________
(1) The Average Balance and Interest Income/Expense columns
include the balance sheet and income statement accounts of
Coastal Banc - San Angelo and Crown Park from May 27, 1996,
and January 28, 1997, the respective acquisition dates of such
companies.
(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) Nontaxable interest income on securities for 1997 was adjusted
to a taxable yield assuming a tax rate of 34%.
(4) The interest rate spread is the difference between the average
yield on interest-earning assets and the average cost of
interest-bearing liabilities.
(5) The net interest margin is equal to net interest income, on a
fully taxable-equivalent basis, divided by average interest-
earning assets.
</TABLE>
-12-
<PAGE>
<TABLE>
<CAPTION>
Six-month Period Ended June 30,
--------------------------------------------------------
1997 1996
------------------------- -------------------------
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
-------- -------- ----- -------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
ASSETS(1) (Dollars in thousands)
Interest-earning assets:
Loans, net of unearned income (2) $126,841 $ 5,833 9.20% $ 83,319 $ 3,886 9.33%
Securities (3) 88,629 2,702 6.10 70,050 2,094 5.98
Federal funds sold 16,318 442 5.42 19,635 527 5.37
-------- -------- ----- -------- -------- -----
Total interest-earning assets 231,788 8,977 7.75 173,004 6,507 7.52
-------- -------- ----- -------- -------- -----
Noninterest-earning assets:
Cash and due from banks 9,803 7,225
Premises and equipment 6,623 4,348
Goodwill 2,983 488
Accrued interest receivable
and other assets 5,062 4,474
Allowance for possible loan losses (1,168) (868)
-------- --------
Total noninterest-earning assets 23,303 15,667
-------- --------
Total assets $255,091 $188,671
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY(1)
Interest-bearing liabilities:
Demand, savings and money
market deposits $ 74,526 $ 992 2.66% $ 56,172 $ 654 2.33%
Time deposits 120,557 3,222 5.34 86,375 2,337 5.41
-------- ------- ----- -------- -------- -----
Total interest-bearing deposits 195,083 4,214 4.32 142,547 2,991 4.20
Notes payable 859 35 8.15 703 38 10.81
-------- ------- ----- -------- -------- -----
Total interest-bearing liabilities 195,942 4,249 4.34 143,250 3,029 4.23
-------- ------- ----- -------- -------- -----
Noninterest-bearing liabilities:
Demand deposits 39,319 30,185
Accrued interest payable and
other liabilities 1,352 1,114
-------- --------
Total noninterest-bearing liabilities 40,671 31,299
-------- --------
Total liabilities 236,613 174,549
Stockholders' equity 18,478 14,122
-------- --------
Total liabilities and
stockholders' equity $255,091 $188,671
======== ========
Net interest income $ 4,728 $ 3,478
======== ========
Interest rate spread (4) 3.41% 3.29%
===== =====
Net interest margin (5) 4.08% 4.02%
===== =====
______________________________
(1) The Average Balance and Interest Income/Expense columns
include the balance sheet and income statement accounts of
Coastal Banc - San Angelo and Crown Park from May 27, 1996,
and January 28, 1997, the respective acquisition dates of such
companies.
(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) Nontaxable interest income on securities for 1997 was adjusted
to a taxable yield assuming a tax rate of 34%.
(4) The interest rate spread is the difference between the average
yield on interest-earning assets and the average cost of
interest-bearing liabilities.
(5) The net interest margin is equal to net interest income, on a
fully taxable-equivalent basis, divided by average interest-
earning assets.
</TABLE>
-13-
<PAGE>
The following table presents the changes in the components of
net interest income and identifies the part of each change due to
differences in the average volume of interest-earning assets and
interest-bearing liabilities and the part of each change due to the
average rate on those assets and liabilities. The changes in
interest due to both rate and volume in the table have been
allocated to volume or rate change in proportion to the absolute
amounts of the change in each.
<TABLE>
<CAPTION>
Quarters Ended Six-month Periods Ended
June 30, 1997 vs. 1996 (1) June 30, 1997 vs 1996 (1)
--------------------------- ---------------------------
Increase (Decrease) Due to Increase (Decrease) Due To
Changes In: Changes In
--------------------------- ---------------------------
Volume Rate Total Volume Rate Total
------- ------- ------- ------- ------- -------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans, net of unearned income (2) $ 1,198 $ (23) $ 1,175 $ 2,002 $ (55) $ 1,947
Securities (3) 222 45 267 565 43 608
Federal funds sold (59) 12 (47) (90) 5 (85)
------- ------- ------- ------- ------- -------
Total interest income 1,361 34 1,395 2,477 (7) 2,470
------- ------- ------- ------- ------- -------
Interest-bearing liabilities:
Deposits:
Demand, savings and money
market deposits 127 55 182 236 102 338
Time deposits 465 2 467 915 (30) 885
------- ------- ------- ------- ------- -------
Total interest-bearing deposits 592 57 649 1,151 72 1,223
Notes payable 4 (4) 0 7 (10) (3)
------- ------- ------- ------- ------- -------
Total interest expense 596 53 649 1,158 62 1,220
------- ------- ------- ------- ------- -------
Increase (decrease) in net interest income $ 765 $ (19) $ 746 $ 1,319 $ (69) $ 1,250
======= ======= ======= ======= ======= =======
______________________________
(1) Income statement items include the income statement accounts
of Coastal Banc - San Angelo and Crown Park beginning May 27,
1996, and January 28, 1997, the respective acquisition dates of
such companies.
(2) Nonaccrual loans have been included in average assets for the
purposes of the computations, thereby reducing yields.
(3) Information with respect to tax-exempt securities for 1997 is
provided on a fully taxable-equivalent basis assuming a tax
rate of 34%.
</TABLE>
Provision for Loan Losses
- -------------------------
The amount of the provision for loan losses is based on
periodic (not less than quarterly) evaluations of the loan
portfolio, especially nonperforming and other potential problem
loans. During these evaluations, consideration is given to such
factors as: management's evaluation of specific loans; the level
and composition of nonperforming loans; historical loss experience;
results of examinations by regulatory agencies; an internal asset
review process conducted by the Company that is independent of the
management of the 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 made for the quarter and
six-month period ended June 30, 1997, were both $60,000, compared
to $71,000 and $121,000 for the quarter and six-month period ended
June 30, 1996, respectively. These represent decreases of $11,000
and $61,000, respectively. The reduced provisions in 1997 were
primarily a result of the Company having net loan recoveries for
the first six months of 1997 in the amount of $80,000. In the past
few years, the overall quality of the Company's loan portfolio has
improved, necessitating generally lower provisions.
-14-
<PAGE>
Noninterest Income
- ------------------
Noninterest income increased $85,000, or 22.4%, from $379,000
during the second quarter of 1996 to $464,000 during the second
quarter of 1997. Noninterest income also increased $144,000, or
19.4%, from $742,000 for the first six months of 1996 to $886,000
for the first six months of 1997.
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 $302,000 during the second
quarter of 1996 to $393,000 during the second quarter of 1997, a
30.1% increase, and increased $145,000, or 24.4%, from $594,000 for
the first six months of 1996 to $739,000 for the first six months
of 1997. Over 80% of the year-to-date increase was due to the
acquisition of Crown Park in January 1997.
Trust fees from the operation of the trust department of the
Bank increased $5,000, or 11.6%, from $43,000 during the second
quarter of 1996 to $48,000 during the same period in 1997, but
decreased $2,000, or 2.1%, from $96,000 for the first six months of
1996 to $94,000 for the first six months of 1997 as a result of a
one-time $5,000 fee that was charged during the first quarter of
1996.
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 $11,000, or 32.4%, from $34,000 during the second
quarter of 1996 to $23,000 during the second quarter of 1997, but
increased $1,000, or 1.9%, from $52,000 for the first six months of
1996 to $53,000 for the corresponding period in 1997 due to a
$7,000 positive adjustment relating to the acquisition of Peoples
National and a recovery of $9,000 in legal fees previously expensed
in connection with a loan participation. These amounts were
partially offset by an $11,000 increase in other income as a result
of the acquisition of Crown Park in January 1997 and a net loss of
$10,000 recorded on sales of securities during 1996.
Noninterest Expenses
- --------------------
Noninterest expenses increased $499,000, or 31.8%, from
$1,569,000 during the second quarter of 1996 to $2,068,000 during
the second quarter of 1997 and increased $885,000, or 28.8%, from
$3,073,000 during the first six months of 1996 to $3,958,000 during
the first six months of 1997. Noninterest expenses for the quarter
and six-month period ended June 30, 1997, were higher than the same
periods for 1996 primarily as a result of the acquisition of Crown
Park in January 1997.
Salaries and employee benefits rose $248,000, or 32.7%, from
$759,000 for the second quarter of 1996 to $1,007,000 for the
corresponding period of 1997, and increased $409,000, or 27.0%,
from $1,517,000 for the six-month period ended June 30, 1996, to
$1,926,000 for the corresponding period of 1997. Over 95% of the
year-to-date increase was a result of the acquisitions of Coastal
Banc - San Angelo (18%) in May 1996, and Crown Park (78%) in
January 1997.
Equipment expense increased from $161,000 for the second
quarter of 1996 to $213,000 for the corresponding period in 1997,
representing an increase of $52,000, or 32.3%. These expenses also
increased $94,000, or 29.3%, from $321,000 for the first six months
of 1996 to $415,000 for the first six months of 1997.
Approximately 68% of the year-to-date increase is a result of the
acquisitions of Coastal Banc - San Angelo and Crown Park.
Net occupancy expense increased $39,000, or 22.0%, from
$177,000 for the second quarter of 1996 to $216,000 for the same
period in 1997, and increased $66,000, or 19.1%, from $345,000 for
the first six months of 1996 to $411,000 for the first six months
of 1997. The year-to-date increase is due to the acquisition of
Coastal Banc - San Angelo ($13,000 increase) and Crown Park
($61,000 increase).
Stationery, printing and supplies expense increased $21,000,
or 27.3%, from $77,000 for the second quarter of 1996 to $98,000
for the second quarter of 1997, and increased $44,000, or 31.4%,
from $140,000 for the first six months of 1996 to $184,000 for the
first six months of 1997. Approximately 77% of the year-to-date
increase is due to the acquisitions noted above.
-15-
<PAGE>
Professional fees, which include legal and accounting fees,
increased $10,000, or 12.2%, from $82,000 during the second quarter
of 1996 to $92,000 during the second quarter of 1997, and increased
$42,000, or 30.0%, from $140,000 during the first six months of
1996 to $182,000 for the corresponding period of 1997. The
increases were due primarily to additional legal fees incurred by
the Lubbock branch of the Bank relating to collections of loans
which had been made by management of Crown Park.
Goodwill amortization increased $49,000, or 612.5%, from
$8,000 for the second quarter of 1996 to $57,000 for the second
quarter of 1997, and increased $89,000, or 741.7%, from $12,000 for
the first six months of 1996 to $101,000 for the first six months
of 1997. Amortization expense of goodwill related to the
acquisitions of Coastal Banc - San Angelo and Crown Park is $51,000
and $12,000, respectively, on a quarterly basis.
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 second quarter of 1996
to $45,000 for the corresponding period of 1997. The Company
recorded net expenses of $2,000 for the first six months of 1996,
compared to net revenues of $40,000 for the first six months of
1997. The larger amount of net revenues for 1997 resulted
primarily from gains on the sale of two petroleum producing
properties that were held by the Winters branch of the Bank.
Other noninterest expense includes, among many other items,
postage, advertising, data processing, insurance, directors' fees,
dues and subscriptions, regulatory examinations, travel and
entertainment, due from bank account charges and Federal Deposit
Insurance Corporation ("FDIC") insurance expense. These expenses
increased $122,000, or 39.6%, from $308,000 during the second
quarter of 1996 to $430,000 during the second quarter of 1997, and
increased $183,000, or 30.7%, from $596,000 for the first six
months of 1996 to $779,000 for the first half of 1997.
Approximately 85% of the year-to-date increase is due to the
acquisitions of Coastal Banc - San Angelo and Crown Park.
Federal Income Taxes
- --------------------
The Company accrued $259,000 and $163,000 in federal income
taxes in the second quarter of 1997 and 1996, respectively, and
accrued $538,000 and $349,000 in federal income taxes for the first
six months of 1997 and 1996, respectively.
Impact of Inflation
- -------------------
The effects of inflation on the local economies in which the
various branches of the Bank operate 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 $59,798,000, or 29.0%, from
$205,968,000 at December 31, 1996, to $265,766,000 at June 30,
1997, due to the acquisition of Crown Park, which had total assets
of $60,420,000 at January 28, 1997, the date of acquisition.
Cash and Cash Equivalents
- -------------------------
The amount of cash and cash equivalents decreased $3,220,000,
or 10.7%, from $29,958,000 at December 31, 1996, to $26,738,000 at
June 30, 1997, primarily due to an increase in loan volume during
the first six months of 1997.
-16-
<PAGE>
Securities
- ----------
Securities increased $12,454,000, or 16.6%, from $75,152,000
at December 31, 1996, to $87,606,000 at June 30, 1997. The
increase in 1997 is primarily due to the acquisition of Crown Park,
which had $9,742,000 in securities at the date of acquisition.
The board of directors of the 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, federal agency securities and
mortgage-backed 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
totaling $37,058,000 are classified as available-for-sale and are
carried at fair value at June 30, 1997. Securities totaling
$50,548,000 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 second
quarter of 1997, the Company sold $193,000 of investments
classified as available-for-sale. No gain or loss was recorded on
the sale of such investments. During the first quarter of 1996,
the Company sold investments in certain mutual funds obtained in
the acquisition of Peoples National because they did not meet the
Company's investment criteria. A loss of $12,000 was recorded on
the sale of such investments. In addition, during the second
quarter of 1996, the Company sold investments classified as held-
to-maturity with a book value of $1,998,000 approximately 30 days
prior to their scheduled maturity and recorded a $2,000 gain on
such sale.
Certain of the Company's securities are pledged to secure
public and trust fund deposits and for other purposes required or
permitted by law. At June 30, 1997, the book value of U.S.
Treasury and other U.S. Government agency securities so pledged
amounted to $11,233,000, or 12.8% of the total securities
portfolio.
The following table summarizes the amounts and the
distribution of the Company's securities held at the dates
indicated.
<TABLE>
<CAPTION>
June 30, 1997 December 31, 1996
----------------- -----------------
Amount % Amount %
-------- ------ -------- ------
<S> <C> <C> <C> <C>
(Dollars in thousands)
Carrying value:
U.S. Treasury securities $ 38,083 43.5% $ 35,143 46.8%
Obligations of other U.S. Government
agencies and corporations 37,698 43.0 29,928 39.8
Mortgage-backed securities 11,066 12.6 9,438 12.6
Obligations of states and political subdivisions 175 0.2 200 0.2
Other securities 584 0.7 443 0.6
-------- ----- -------- -----
Total carrying value of securities $ 87,606 100.0% $ 75,152 100.0%
======== ===== ======== =====
Total market value of securities $ 87,352 $ 75,062
======== ========
</TABLE>
The market value of securities classified as held-to-maturity
is usually different from the reported carrying value of such
securities due to interest rate fluctuations that cause market
valuations to change.
The following table provides the maturity distribution and
weighted average interest rates of the Company's total securities
portfolio at June 30, 1997. 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.
-17-
<PAGE>
<TABLE>
<CAPTION>
Estimated Weighted
Type and Maturity Grouping Principal Carrying Fair Average
at June 30, 1997 Amount Value Value Yield
- -------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
(Dollars in thousands)
U.S. Treasury securities:
Within one year $ 28,850 $ 28,803 $ 28,811 5.88%
After one but within five years 9,250 9,280 9,281 5.82
--------- --------- --------- -----
Total U.S. Treasury securities 38,100 38,083 38,092 5.87
--------- --------- --------- ------
Obligations of other U.S. Government
agencies and corporations:
Within one year 0 0 0 --
After one but within five years 35,600 35,675 35,365 6.40
After five but within ten years 2,000 2,023 1,982 5.83
--------- --------- --------- ------
Total obligations of U.S. Government
agencies and corporations 37,600 37,698 37,347 6.37
--------- --------- --------- ------
Mortgage-backed securities 10,989 11,066 11,148 6.44
--------- --------- --------- ------
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 175 175 181 8.49
--------- --------- --------- ------
Total obligations of states and political
subdivisions 175 175 181 8.49
--------- --------- --------- ------
Other securities:
Within one year 0 0 0 --
After one but within five years 0 0 0 --
After five but within ten years 0 0 0 --
After ten years 584 584 584 3.97
--------- --------- --------- ------
Total other securities 584 584 584 3.97
--------- --------- --------- ------
Total securities $ 87,448 $ 87,606 $ 87,352 6.15%
========= ========= ========= ======
</TABLE>
Loan Portfolio
- --------------
Total loans, net of unearned income, increased $45,386,000, or
49.3%, from $92,017,000 at December 31, 1996, to $137,403,000 at
June 30, 1997. The increase during the first half of 1997 was a
result of the purchase of Crown Park, which had $41,688,000 in
loans, net of unearned income, at January 28, 1997, the date of
acquisition, and an increase in loan volume, particularly at the
Bank's Lubbock and San Angelo branches.
The Bank primarily makes installment loans to individuals and
commercial and real estate loans to small to medium-sized
businesses and professionals. The Bank offers a variety of
commercial lending products including revolving lines of credit,
letters of credit, 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 accounts
receivable, inventory or other business assets.
Due to diminished loan demand in most areas, the Bank's Odessa
branch instituted an installment loan program whereby it began to
purchase automobile loans from automobile dealerships in the
Abilene and Odessa/Midland, Texas areas. Under this program, an
automobile 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
-18-
<PAGE>
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. At June 30, 1997, the Company had
approximately $48,732,000, net of unearned income, of this type of
loan outstanding.
The following table presents the Company's loan balances at
the dates indicated separated by loan types.
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
----------- ------------
(In thousands)
<S> <C> <C>
Loans to individuals $ 65,227 $ 43,927
Real estate loans 43,206 26,233
Commercial and industrial loans 27,306 21,478
Other loans 3,711 2,626
--------- ---------
Total loans 139,450 94,264
Less unearned income 2,047 2,247
--------- ---------
Loans, net of unearned income $ 137,403 $ 92,017
========= =========
</TABLE>
Loan concentrations are considered to exist when there are
amounts loaned to a multiple number of borrowers engaged in similar
activities that would cause them to be similarly impacted by
economic or other conditions. The Company had no concentrations of
loans at June 30, 1997, except for those described in the above
table. The Bank had no loans outstanding to foreign countries or
borrowers headquartered in foreign countries at June 30, 1997.
Management of the Bank may renew loans at maturity when
requested by a customer whose financial strength appears to support
such renewal or when such renewal appears to be in the Company's
best interest. The Company requires payment of accrued interest in
such instances and may adjust the rate of interest, require a
principal reduction or modify other terms of the loan at the time
of renewal.
The following table presents the distribution of the maturity
of the Company's loans and the interest rate sensitivity of those
loans, excluding loans to individuals, at June 30, 1997. The table
also presents the portion of loans that have fixed interest rates
or interest rates that fluctuate over the life of the loans in
accordance with changes in the money market environment as
represented by the prime rate.
<TABLE>
<CAPTION>
One to Over Total
One Year Five Five Carrying
and Less Years Years Value
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
(In thousands)
Real estate loans $ 14,884 $ 21,339 $ 6,983 $ 43,206
Commercial and industrial loans 9,407 13,486 4,413 27,306
Other loans 1,278 1,833 600 3,711
--------- --------- --------- ---------
Total loans $ 25,569 $ 36,658 $ 11,996 $ 74,223
========= ========= ========= =========
With fixed interest rates $ 14,644 $ 24,118 $ 5,144 $ 43,906
With variable interest rates 10,925 12,540 6,852 30,317
--------- --------- --------- ---------
Total loans $ 25,569 $ 36,658 $ 11,996 $ 74,223
========= ========= ========= =========
</TABLE>
Allowance for Possible Loan Losses
- ----------------------------------
Implicit in the Company's lending activities is the fact that
loan losses will be experienced and that the risk of loss will vary
with the type of loan being made and the creditworthiness of the
borrower over the term of the loan. To reflect the currently
perceived risk of loss associated with the Company's loan
portfolio, additions are made to the Company's allowance for
possible loan losses (the "allowance"). The allowance is created
by direct charges against
-19-
<PAGE>
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 $1,328,000, or 0.97% of
loans, net of unearned income, at June 30, 1997, compared to
$793,000, or 0.86% of loans, net of unearned income, at December
31, 1996. The increase in the allowance and the percentage of the
allowance to loans, net of unearned income, is partially due to the
acquisition of Crown Park, which had a balance of $395,000, or
0.97% of loans, net of unearned income, in its allowance at the
date of acquisition. In addition, the Company recorded $80,000 in
net loan recoveries during the first half of 1997. Recoveries on
five previously charged off loans, the largest of such recoveries
being $108,000, accounted for $250,000, or 87.8%, of total
recoveries during the first six months of 1997.
Credit and loan decisions are made by management and the board
of directors of the Bank in conformity with loan policies
established by the board of directors of the Company. The
Company's practice is to charge off any loan or portion of a loan
when it is determined by management to be uncollectible due to the
borrower's failure to meet repayment terms, the borrower's
deteriorating or deteriorated financial condition, the depreciation
of the underlying collateral, the loan's classification as a loss
by regulatory examiners or for other reasons. The Company charged
off $89,000 and $205,000 in loans during the second quarter and
first six months of 1997, respectively. Recoveries during the
second quarter and first six months of 1997 were $45,000 and
$285,000, respectively.
-20-
<PAGE>
The following table presents the provisions for loan losses,
loans charged off and recoveries on loans previously charged off,
the amount of the allowance, the average loans outstanding and
certain pertinent ratios for the quarters and six-months period
ended June 30, 1997 and 1996.
<TABLE>
<CAPTION>
Quarter Ended Six-month Period
June 30, Ended June 30,
------------------- -------------------
1997 1996 1997 1996
-------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Analysis of allowance for possible loan losses:
Balance, beginning of period $ 1,312 $ 894 $ 793 $ 759
Acquisition of subsidiary bank 0 0 395 149
Provision for loan losses 60 71 60 121
-------- -------- -------- --------
1,372 965 1,248 1,029
-------- -------- -------- --------
Loans charged off:
Loans to individuals 87 64 164 110
Real estate loans 2 100 2 100
Commercial and industrial loans 0 18 35 58
Other loans 0 0 4 0
-------- -------- -------- --------
Total charge-offs 89 182 205 268
-------- -------- -------- --------
Recoveries of loans previously charged off:
Loans to individuals 19 8 32 16
Real estate loans 2 0 35 0
Commercial and industrial loans 24 5 218 19
Other loans 0 0 0 0
-------- -------- -------- --------
Total recoveries 45 13 285 35
-------- -------- -------- --------
Net loans charge-offs (recoveries) 44 169 (80) 233
-------- -------- -------- --------
Balance, end of period $ 1,328 $ 796 $ 1,328 $ 796
======== ======== ======== ========
Average loans outstanding, net of unearned income(1) $135,521 $ 83,121 $126,841 $ 83,319
======== ======== ======== ========
Ratio of net loan charge-offs (recoveries) to average
loans outstanding, net of unearned income
(annualized) 0.13% 0.81% (0.13)% 0.56%
======== ======== ======== ========
Ratio of allowance for possible loan losses to total
loans, net of unearned income, at June 30 0.97% 0.94% 0.97% 0.94%
======== ======== ======== ========
______________________________
(1) Average loans, net of unearned income, include the average
loans, net of unearned income, of Crown Park and Coastal Banc
- San Angelo from January 28, 1997, and May 27, 1996, the
respective dates of acquisition of such companies.
</TABLE>
Foreclosures on defaulted loans result 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 has been decreasing. Accordingly, the Company
incurs other expenses, specifically net costs applicable to real
estate and other repossessed assets, in maintaining, insuring and
selling such assets. The Company attempts to convert nonperforming
loans into interest-earning assets, although usually at a lower
dollar amount than the face value of such loans, either through
liquidation of the collateral securing the loan or through
intensified collection efforts.
As the economies of the Bank's market areas have recovered and
stabilized over the past several years, there has been a steady
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
-21-
<PAGE>
industries, prior loan loss experience and the financial conditions
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 the allocated and unallocated
portions of the allowance are available for charge-offs for all
loans.
On January 1, 1995, the Company adopted Statement of Financial
Accounting Standards No. 114, "Accounting by Creditors for
Impairment of a Loan" ("FAS 114"). In accordance with FAS 114, any
change in the present value of such loans is recognized as an
adjustment to the Company's allowance.
The following table shows the allocations in the allowance and
the respective percentages of each loan category to total loans at
June 30, 1997, and December 31, 1996.
<TABLE>
<CAPTION>
June 30, 1997 December 31, 1996
---------------------------- ----------------------------
Percent of Percent of
Loans by Loans by
Amount of Category to Amount of Category to
Allowance Loans, Net of Allowance Loans, Net of
Allocated to Unearned Allocated to Unearned
Category Income Category Income
------------ ------------- ------------ -------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Loans to individuals $ 508 46.0% $ 323 45.3%
Real estate loans 56 31.4 128 28.5
Commercial and industrial loans 217 19.9 97 23.3
Other loans 34 2.7 43 2.9
------ ----- ------ ------
Total allocated 815 100.0% 591 100.0%
===== =====
Unallocated 513 202
------ ------
Total allowance for possible loan losses $1,328 $ 793
====== ======
</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 Bank maintains an internally classified loan list
that, along with the list of nonperforming loans discussed below,
helps management assess the overall quality of the loan portfolio
and the adequacy of the allowance. Loans classified as
"substandard" are those loans with clear and defined weaknesses,
such as highly leveraged positions, unfavorable financial ratios,
uncertain repayment sources or poor financial condition, which 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 or have been involved in bankruptcy proceedings
for more than 120 days and must be classified as such according to
regulatory authorities and are awaiting formal approval of a plan
of bankruptcy. At June 30, 1997, substandard loans totaled
$1,294,000, of which $160,000 were loans designated as nonaccrual,
90 days past due or restructured; doubtful loans totaled $25,000,
$10,000 of which were designated as nonaccrual; and loss loans
totaled $5,000.
In addition to the internally classified and nonperforming
loans, the Bank also has a "watch list" of loans that further
assists the 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.
Management of the Bank reviews these loans in assessing the
adequacy of the allowance. Substantially all of the loans on the
watch list at
-22-
<PAGE>
June 30, 1997, are current and paying in accordance with loan
terms. At June 30, 1997, watch list loans totaled $1,515,000
(including $615,000 of loans guaranteed by U.S. governmental
agencies). At such date, $42,000 of loans on the watch list,
$38,000 of which were guaranteed, were designated as nonaccrual
loans. In addition, at June 30, 1997, $97,000 of loans not
classified and not on the watch list were designated as
restructured loans. See "Nonperforming Assets" below.
Nonperforming Assets
- --------------------
Nonperforming loans consist of nonaccrual, past due and
restructured loans. A past due loan is an accruing loan that is
contractually past due 90 days or more as to principal or interest
payments. Loans on which management does not expect to collect
interest in the normal course of business are placed on nonaccrual
or are restructured. When a loan is placed on nonaccrual, any
interest previously accrued but not yet collected is reversed
against current income unless, in the opinion of management, the
outstanding interest remains collectible. Thereafter, interest is
included in income only to the extent of cash received. A loan is
restored to accrual status when all interest and principal payments
are current and the borrower has demonstrated to management the
ability to make payments of principal and interest as scheduled.
A "troubled debt restructuring" is a restructured loan upon
which interest accrues at a below market rate or upon which certain
principal has been forgiven so as to aid the borrower in the final
repayment of the loan, with any interest previously accrued, but
not yet collected, being reversed against current income. Interest
is accrued based upon the new loan terms.
Nonperforming loans are fully or substantially collateralized
by assets, with any excess of loan balances over collateral values
allocated in the allowance. Assets acquired through foreclosure
are carried at the lower of cost or estimated fair value, net of
estimated costs of disposal, if any. See "Real Estate and Other
Repossessed Assets" below.
The following table lists nonaccrual, past due and
restructured loans and real estate and other repossessed assets at
June 30, 1997, and December 31, 1996.
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
------------- ------------
<S> <C> <C>
(In thousands)
Nonaccrual loans $ 142 $ 82
Accruing loans contractually past due over 90 days 53 41
Restructured loans 114 73
Real estate and other repossessed assets 754 389
------------- ------------
Total nonperforming assets $ 1,063 $ 585
============= ============
</TABLE>
The increase in nonperforming assets during the first six
months of 1997 is due to the acquisition of Crown Park, which had
$80,000 in nonperforming loans and $456,000 in real estate and
other repossessed assets at the date of acquisition. These
increases have been partially offset primarily by sales of
repossessed real estate during the first half of 1997.
The gross interest income that would have been recorded during
the second quarter and first six months of 1997 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 $3,000 and
$5,000, respectively. No interest income was actually recorded
(received) on loans that were on nonaccrual during the first six
months of 1997.
A potential problem loan is a loan where information about
possible credit problems of the borrower is known, causing
management to have serious doubts as to the ability of the borrower
to comply with the present loan repayment terms and which may
result in the inclusion of such loan in one of the nonperforming
asset categories. The Company does not believe it has any
potential problem loans other than those reported in the above
table.
-23-
<PAGE>
Premises and Equipment
- ----------------------
Premises and equipment increased $2,716,000, or 61.2%, during
the first six months of 1997, from $4,437,000 at December 31, 1996,
to $7,153,000 at June 30, 1997. The increase was due to the
acquisition of Crown Park, which had $2,776,000 in net premises and
equipment at the date of acquisition. This increase was partially
offset by depreciation expense of $240,000 recorded on the
Company's premises and equipment during the first six months of
1997.
Goodwill
- --------
Goodwill increased $2,385,000, or 249.2%, from $957,000 at
December 31, 1996, to $3,342,000 at June 30, 1997. This increase
resulted from $2,486,000 in goodwill that was recorded as a result
of the acquisition of Crown Park on January 28, 1997, which was
partially offset by $101,000 of goodwill amortization expense
recorded during the first six months of 1997. The goodwill
recorded from all of the recent acquisitions made by the Company is
being amortized over a period of 15 years.
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 $517,000, or 32.3%, from $1,599,000 at
December 31, 1996, to $2,116,000 at June 30, 1997. The increase
was primarily a result of the acquisition of Crown Park, which, at
the date of acquisition, had a total of $417,000 in accrued
interest receivable. Of the total balance at June 30, 1997,
$1,156,000, or 54.6%, was interest accrued on securities and
$960,000, or 45.4%, was interest accrued on loans. The amounts of
accrued interest receivable and percentages attributable to
securities and loans at December 31, 1996, were $943,000, or 59.0%,
and $656,000, or 41.0%, respectively.
Real Estate and Other Repossessed Assets
- ----------------------------------------
Real estate and other repossessed assets consist of real
property and other assets unrelated to banking premises or
facilities. Income derived from real estate and other repossessed
assets, if any, is generally less than that which would have been
earned as interest at the original contract rates on the related
loans. At June 30, 1997, and December 31, 1996, real estate and
other repossessed assets had an aggregate book value of $754,000
and $389,000, respectively. Real estate and other repossessed
assets increased $365,000, or 93.8%, during the first six months of
1997, due to the acquisition of Crown Park effective January 28,
1997. At the date of acquisition, Crown Park had a total of
$456,000 in real estate and other repossessed assets. Of the June
30, 1997, balance, $391,000 represented three commercial
properties, $192,000 represented nineteen (19) repossessed
automobiles and $171,000 represented three residential properties.
Other Assets
- ------------
The balance of other assets decreased $270,000, or 12.0%, to
$1,982,000 at June 30, 1997, from $2,252,000 at December 31, 1996,
primarily as a result of the utilization of a portion of the
Company's net operating loss carryforwards. The most significant
component of other assets at June 30, 1997, is a net deferred tax
asset of $1,359,000.
Deposits
- --------
The Bank's lending and investing activities are funded almost
entirely by core deposits, 49.2% of which are demand, savings and
money market deposits at June 30, 1997. Total deposits increased
$54,493,000, or 28.7%, from $189,575,000 at December 31, 1996, to
$244,068,000 at June 30, 1997. The increase is primarily due to
the acquisition of Crown Park, which had total deposits of
$53,604,000 at January 28, 1997. The Bank does not have any
brokered deposits.
-24-
<PAGE>
The following table presents the average amounts of, and the
average rates paid on, deposits of the Company for the quarters
and six-month periods ended June 30, 1997 and 1996.
<TABLE>
<CAPTION>
Quarter Ended June 30, Six-month Period Ended June 30,
------------------------------------- --------------------------------------
1997 1996 1997 1996
----------------- ----------------- ------------------ ------------------
Average Average Average Average Average Average Average Average
Amount(1) Rate Amount(1) Rate Amount(1) Rate Amount(1) Rate
--------- ------- --------- ------- --------- -------- --------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Noninterest-bearing
demand deposits $ 41,282 --% $ 29,798 --% $ 39,319 --% $ 30,185 --%
Interest-bearing demand,
savings and money
market deposits 77,147 2.68 57,324 2.33 74,526 2.66 56,172 2.33
Time deposits of less
than $100,000 86,947 5.30 62,453 5.31 84,777 5.29 59,848 5.41
Time deposits of
$100,000 or more 37,257 5.48 27,009 5.39 35,780 5.47 26,527 5.41
--------- ----- --------- ----- --------- ----- --------- ------
Total deposits $ 242,633 3.59% $ 176,584 3.46% $ 234,402 3.59% $ 172,732 3.46%
========= ===== ========= ===== ========= ===== ========= ======
______________________________
(1) The average amounts of deposits include the average deposits
of Crown Park and Coastal Banc - San Angelo from January 28,
1997, and May 27, 1996, the respective dates of acquisition of
such companies.
</TABLE>
The maturity distribution of time deposits of $100,000 or more
at June 30, 1997, is presented below.
At June 30, 1997
----------------
(In thousands)
3 months or less $ 13,206
Over 3 through 6 months 11,004
Over 6 through 12 months 11,443
Over 12 months 2,169
--------
Total time deposits of $100,000 or more $ 37,822
=========
The Bank experiences relatively limited reliance on time
deposits of $100,000 or more. Time deposits of $100,000 or more
are a more volatile and costly source of funds than other deposits
and are most likely to affect the Company's future earnings because
of interest rate sensitivity. At June 30, 1997, deposits of
$100,000 or more represented approximately 14.2% of the Company's
total assets, compared to 14.2% of total assets at December 31,
1996.
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 $46,000, or 4.8%, from $951,000 at December 31,
1996, to $905,000 at June 30, 1997, despite the acquisition of
Crown Park, which had $178,000 in accrued interest payable at the
date of acquisition. This increase was offset by a decrease in
accrued interest payable on certificates of deposit at the Bank's
Abilene and Lubbock locations, which had a significant amount of
time deposits of $100,000 or more that matured in the first six
months of 1997.
Notes Payable
- -------------
The Company's notes payable increased $584,000, or 243.3%,
from $240,000 at December 31, 1996, to $824,000 at June 30, 1997.
The Company borrowed $800,000 from a financial institution in
Amarillo, Texas (the "Amarillo Bank") to finance a portion of the
cost of acquiring Crown Park. The $800,000 of borrowings was
reduced to $200,000 by March 31, 1997. The Bank also has a
$500,000 note payable to one former stockholder of Crown Park,
which originated as a result of that acquisition. These increases
were partially offset by the payment of the second of
-25-
<PAGE>
three annual installments aggregating $117,000 on notes payable to
one current and two former directors. See "Note 5: Notes Payable"
to the Company's Consolidated Financial Statements.
Other Liabilities
- -----------------
The most significant components of other liabilities are
amounts accrued for various types of expenses. The balance of
other liabilities increased $118,000, or 44.5%, from $265,000 at
December 31, 1996, to $383,000 at June 30, 1997, primarily because
of the acquisition of Crown Park, which had $301,000 in other
liabilities at the date of acquisition, $200,000 of which
represented a deferred tax liability that was offset against the
Bank's deferred tax asset at the date of acquisition.
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
47.6% at the 90-day interval, 49.0% at the 180-day interval and
50.8% at the 365-day interval at June 30, 1997. Currently, the
Company is in a liability-sensitive position at the three
intervals. During a slightly rising interest rate environment, as
was the case during most of the first six months of 1997 when
compared to the first six months of 1996, this position normally
produces a lower net interest margin than in a falling interest
rate environment. However, because the Company had $79,069,000 of
interest-bearing demand, savings and money market deposits at June
30, 1997, that are somewhat less rate-sensitive, the Company's net
interest margin does not necessarily decrease in a rising interest
rate environment. Excluding these types of deposits, the Company's
interest-sensitive assets to interest-sensitive liabilities ratio
at the 365-day interval would have been 86.0% at June 30, 1997.
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.
-26-
<PAGE>
The following table shows the interest rate sensitivity
position of the Company at June 30, 1997.
<TABLE>
<CAPTION>
Volumes
Cumulative Volumes Subject to
Subject to Repricing Within Repricing
--------------------------------------- After
90 Days 180 Days 365 Days 1 Year Total
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Interest-earning assets: (Dollars in thousands)
Federal funds sold $ 14,300 $ 14,300 $ 14,300 $ 0 $ 14,300
Securities 6,182 14,080 30,115 57,491 87,606
Loans, net of unearned income 36,916 42,352 53,489 83,914 137,403
--------- --------- --------- --------- ---------
Total interest-earning assets 57,398 70,732 97,904 141,405 239,309
--------- --------- --------- --------- ---------
Interest-bearing liabilities:
Demand, savings and money market
deposits 79,069 79,069 79,069 0 79,069
Time deposits 40,906 64,695 112,993 10,898 123,891
Notes payable 702 703 818 6 824
--------- --------- --------- --------- ---------
Total interest-bearing liabilities 120,677 144,467 192,880 10,904 203,784
--------- --------- --------- --------- ---------
Rate-sensitivity gap(1) $ (63,279) $ (73,735) $ (94,976) $ 130,501 $ 35,525
========= ========= ========= ========= =========
Rate-sensitivity ratio(2) 47.6% 49.0% 50.8%
========= ========= =========
______________________________
(1) Rate-sensitive interest-earning assets less rate-sensitive
interest-bearing liabilities.
(2) Rate-sensitive interest-earning assets divided by rate-
sensitive interest-bearing liabilities.
</TABLE>
Selected Financial Ratios
- -------------------------
The following table presents selected financial ratios
(annualized) for the quarters and six-month periods ended June 30,
1997 and 1996.
<TABLE>
<CAPTION>
Quarter Ended Six-month Period
June 30, Ended June 30,
------------------ -----------------
1997(1) 1996(1) 1997(1) 1996(1)
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income to:
Average assets 0.85% 0.66% 0.83% 0.72%
Average interest-earning assets 0.94 0.71 0.91 0.78
Average stockholders' equity 11.65 8.98 11.42 9.59
Dividend payout (2) to:
Net income 17.33 17.45 15.96 12.80
Average stockholders' equity 2.02 1.57 1.82 1.23
Average stockholders' equity to:
Average total assets 7.30 7.32 7.24 7.48
Average loans (3) 14.24 16.93 14.57 16.95
Average total deposits 7.95 7.97 7.88 8.18
Average interest-earning assets to:
Average total assets 90.71 92.03 90.86 91.70
Average total deposits 98.79 100.22 98.88 100.16
Average total liabilities 97.86 99.30 97.96 99.11
Ratio to total average deposits of:
Average loans (3) 55.86 47.07 54.11 48.24
Average noninterest-bearing deposits 17.01 16.87 16.77 17.48
Average interest-bearing deposits 82.99 83.13 83.23 82.52
Total interest expense to total interest income 46.88 47.02 47.35 46.55
Efficiency ratio (4) 69.72 73.88 69.45 72.32
-27-
<PAGE>
_________________________
(1) Average balance sheet and income statement items include the
accounts of Crown Park and Coastal Banc - San Angelo from
January 28, 1997, and May 27, 1996, their respective dates of
acquisition.
(2) Dividends on Common Stock only.
(3) Before allowance for possible loan losses.
(4) Calculated as a noninterest expense less amortization of
intangibles and net expenses (revenues) related to real estate
and other repossessed assets divided by the sum of net
interest income before provision for loan losses and total
noninterest income, excluding securities gains and losses.
</TABLE>
LIQUIDITY
The Bank
- --------
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
Bank 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 Bank maintains adequate
levels of cash and near-cash investments to meet its day-to-day
needs. Cash and due from banks averaged $10,369,000 and $9,803,000
during the second quarter and first six months of 1997,
respectively, and $6,858,000 and $7,225,000 during the second
quarter and first six months of 1996, respectively. These amounts
comprised 3.9% and 3.8% of average total assets during the second
quarter and first six months of 1997, respectively, and 3.6% and
3.8% of average total assets during the second quarter and first
six months of 1996, respectively. The average level of securities
and federal funds sold was $104,169,000 and $104,947,000 during the
second quarter and first six months of 1997, respectively, and
$93,844,000 and $89,685,000 during the second quarter and first six
months of 1996, respectively. The increases from 1996 to 1997 were
due to the acquisitions of Coastal Banc - San Angelo on May 27,
1996, and Crown Park on January 28, 1997.
The Bank sold $193,000 of securities classified as
available-for-sale during the second quarter of 1997. The Bank sold
$30,000 and $2,028,000 of securities during the quarter and six-month
period ended June 30, 1996, respectively. At June 30, 1997,
$28,803,000, or 32.9%, of the Company's securities portfolio,
excluding mortgage-backed securities, matured within one year and
$44,955,000, or 51.3%, excluding mortgage-backed securities, matured
after one but within five years. The Bank's commercial lending
activities are concentrated in loans with maturities of less than
five years and with adjustable interest rates, while their installment
lending activities are concentrated in loans with maturities of three
to five years and with fixed interest rates. The Bank's experience,
however, has been that these installment loans are paid off in an
average of approximately thirty months. At June 30, 1997,
approximately $53,489,000, or 38.9%, of the Company's loans, net of
unearned income, matured within one year and/or had adjustable
interest rates. Approximately $44,961,000, or 60.6%, of the
Company's loans (excluding loans to individuals) matured within one
year and/or had adjustable interest rates. See "Analysis of Financial
Condition - Loan Portfolio" above.
On the liability side, the principal sources of liquidity are
deposits, borrowed funds and the accessibility to money and capital
markets. Customer deposits are by far the largest source of funds.
During the second quarter and first six months of 1997, the
Company's average deposits were $242,633,000, or 91.8% of average
total assets, and $234,402,000, or 91.9% of average total assets,
respectively, compared to $176,584,000, or 91.8% of average total
assets, and $172,732,000, or 91.6% of average total assets, during
the second quarter and first six months of 1996, respectively. The
Company attracts its deposits primarily from individuals and
businesses located within the market areas served by the Bank. See
"Analysis of Financial Condition - Deposits" above.
The level of nonperforming assets has squeezed interest
margins and has resulted in noninterest expenses from net operating
costs and write-downs associated with nonperforming assets,
although the level of such nonperforming assets has generally been
decreasing over the past several years. In order to improve
liquidity, the Bank has implemented various cost-cutting and
revenue-generating measures and extended efforts to reduce
nonperforming assets.
-28-
<PAGE>
The Company
- -----------
The Company depends on the Bank 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 Bank, (2) current tax liabilities generated by the
Bank and (3) management and service fees for services performed for
the Bank.
The payment of dividends to the Company is subject to
applicable law and the scrutiny of regulatory authorities.
Dividends paid by the Bank to Independent Financial during the
second quarter and first six months of 1997 totaled $300,000 and
$500,000, respectively; in turn, Independent Financial paid
dividends to the Company totaling $300,000 and $500,000 during the
same time periods, respectively. Dividends paid by the Bank to
Independent Financial during the second quarter and first six
months of 1996 were $150,000 and $375,000, respectively; in turn,
Independent Financial paid dividends to the Company totaling
$150,000 and $375,000 during the same time periods of 1996,
respectively. At June 30, 1997, there were approximately
$2,078,000 in dividends available for payment to Independent
Financial by the Bank without regulatory approval.
The payment of current tax liabilities generated by the Bank
and management and service fees constituted 50% and 5%,
respectively, of the Company's cash flow from the Bank during the
second quarter of 1997. These percentages were 52% and 6%,
respectively, for the first six months of 1997. Pursuant to a tax-
sharing agreement, the Bank pays to the Company an amount equal to
its individual tax liability on the accrual method of federal
income tax reporting. The accrual method generates more timely
payments of current tax liabilities by the Bank to the Company,
increasing the regularity of cash flow and shifting the time value
of such funds to the Company. In the event that the Bank incurs a
loss, the Company may be required to refund tax liabilities
previously collected. Current tax liabilities totaling $347,000
and $691,000 were paid by the Bank to the Company during the second
quarter and first six months of 1997, respectively, compared to a
total of $222,000 and $442,000 during the second quarter and the
first six months of 1996.
From January 1, 1989, through December 31, 1995, the Company
collected federal income taxes from the Bank 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. At December
31, 1995, the Company's net operating loss carryforwards for
alternative minimum tax purposes had been fully utilized. As a
result, the Company began paying federal income taxes at the
effective tax rate of approximately 20% during the first quarter of
1996. The Company still has net operating carryforwards available
for regular federal income tax purposes.
The Bank pays management fees to the Company for services
performed. These services include, but are not limited to,
financial and accounting consultation, attendance at the Bank's
board meetings, audit and loan review services and related
expenses. The Bank paid a total of $34,000 and $76,000 in
management fees to the Company in the second quarter and first six
months of 1997, respectively, compared to $41,000 and $84,000 paid
by the Bank during the second quarter and first six months of 1996,
respectively. The Company's fees must be reasonable in relation to
the management services rendered, and the 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 the Amarillo Bank noted
above. This Note had an outstanding principal balance of $200,000
at June 30, 1997. The Note had a maturity of April 23, 1997. On
April 23, 1997, the maturity date was extended to July 23, 1997.
On July 23, 1997, the Note was placed on a one-year maturity with
payments of $50,000 principal plus interest to be made quarterly
beginning October 23, 1997. The Note bears interest at the Amarillo
Bank's floating base rate plus 1/2% (9.00% at June 30, 1997) and is
collateralized by 100% of the stock of the Bank. The loan
agreement between the Company and the Amarillo Bank contains
certain covenants that, among other things, restrict the ability of
the Company to incur additional debt, to create liens on its
property, to merge or to consolidate with any other person or
entity, to make certain investments, to purchase or sell assets or
to pay cash dividends on the common stock without the approval of
the Amarillo Bank if the indebtedness due to the Amarillo Bank is
$1,200,000 or greater. The loan agreement also requires the
Company and the Bank to meet certain financial ratios, all of which
were met at June 30, 1997, and December 31, 1996.
-29-
<PAGE>
The Bank also has a $500,000 note payable to one former
stockholder of Crown Park, which originated as a result of that
acquisition. The note is payable in five equal annual principal
payments of $100,000 on January 28 of each year. Interest is
payable quarterly at the 26-week Treasury Bill rate plus 2% (7.45%
at June 30, 1997), adjustable quarterly. The note is unsecured and
may be repaid with no penalty in whole or in part at any time by
the Bank.
In addition, at June 30, 1997, the Company had notes payable
to one current and two former directors of the Company aggregating
$114,000. 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 two
annual installment of $117,000 were made on March 1, 1996, and
1997, respectively. The notes represent a portion of the final
settlement of certain litigation.
CAPITAL RESOURCES
At June 30, 1997, stockholders' equity totaled $19,586,000, or
7.4% of total assets, compared to $14,937,000, or 7.3% of total
assets, at December 31, 1996.
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 and to be
designated as well-capitalized, the bank must have Tier 1 and total
capital ratios of 8% and 10%, respectively. Tier 1 capital
includes common stockholders' equity, qualifying perpetual
preferred stock and minority interests in unconsolidated
subsidiaries, reduced by goodwill and net deferred tax assets in
excess of regulatory capital limits. Tier 2 capital may be
comprised of certain other preferred stock, qualifying debt
instruments and all or a part of the allowance for possible loan
losses.
Banking regulators have also issued leverage ratio
requirements. The leverage ratio requirement is measured as the
ratio of Tier 1 capital to adjusted quarterly average assets. The
leverage ratio standards require all banks to have a minimum
leverage ratio of 3% and to be designated as well-capitalized, the
bank must have a leverage ratio of 6%. 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 Bank's
risk-based capital ratios and leverage ratios to the minimum
regulatory and well-capitalized minimum requirements at June 30,
1997.
<TABLE>
<CAPTION>
The Company June 30, 1997
----------- ---------------------
(Dollars in thousands)
<S> <C>
Tier 1 capital:
Common stockholders' equity, excluding unrealized gain on
available-for-sale securities $ 19,299
Preferred stockholders' equity (1) 262
Goodwill (3,342)
---------
Total Tier 1 capital 16,219
---------
Tier 2 capital:
Allowance for possible loan losses (2) 1,328
---------
Total Tier 2 capital 1,328
---------
Total capital $ 17,547
=========
Risk-weighted assets $ 145,714
=========
Adjusted quarterly average assets $ 260,869
=========
</TABLE>
-30-
<PAGE>
<TABLE>
<CAPTION>
Regulatory Well-capitalized Actual Ratios at
The Company Minimum Minimum June 30, 1997
- ----------- ---------- ---------------- ----------------
<S> <C> <C> <C>
Tier 1 capital to risk-weighted assets ratio 4.00% 8.00% 11.13%
Total capital to risk-weighted assets ratio 8.00 10.00 12.04
Leverage ratio 3.00 6.00 6.22
The Bank
- --------
Tier 1 capital to risk-weighted assets ratio 4.00% 8.00% 10.22%
Total capital to risk-weighted assets ratio 8.00 10.00 11.13
Leverage ratio 3.00 6.00 5.76
___________________________
(1) Limited to 25% of total Tier 1 capital, with any remainder
qualifying as Tier 2 capital.
(2) Limited to 1.25% of risk-weighted assets.
</TABLE>
The Federal Deposit Insurance Corporation Improvement Act of
1991 ("FDICIA") requires each federal banking agency to revise its
risk-based capital standards to ensure that those standards take
adequate account of interest rate risk, concentration of credit
risk and the risks of non-traditional activities, as well as
reflect the actual performance and expected risk of loss on multi-
family mortgages. This law also requires each federal banking
agency to specify the levels at which an insured institution would
be considered "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" and
"critically undercapitalized." Under the FDIC's regulations, the
Company and the Bank were both "well capitalized" at June 30, 1997.
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 Bank has filed an application with the Office of the
Comptroller of the Currency (the "OCC") for approval to open four
branches in supermarket locations, two in Abilene and two in
Odessa. The Bank anticipates OCC approval of the application late
in the third quarter and expects to open two branches in the fourth
quarter of 1997 and two branches in mid 1998. The Company believes
that the costs of establishment and growth of the branches may have
a negative impact on net income in the last three months of 1997
and in 1998 and, to a lesser extent, in 1999.
The payment of dividends on the Common Stock and Series C
Cumulative Convertible Preferred Stock (the "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 Bank, 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 the Common Stock during the second quarter of 1994. The
Company increased its quarterly cash dividend to $0.05 per share on
the Common Stock during the second quarter of 1996.
The Company paid a five-for-four stock split, effected in the
form of a 25% stock dividend, on the Common Stock on May 30, 1997.
At its meeting on July 16, 1997, the Board of Directors approved
the payment of the regular
-31-
<PAGE>
quarterly cash dividend of $0.05 per share on August 29, 1997, to
holders of shares of the Company's Common Stock on August 15, 1997.
Subsequent to June 30, 1997, holders of a total of 490 shares
of the Company's Series C Preferred Stock converted such shares
into 11,254 shares of Common Stock. As of the date of filing of
this report, the Company had 5,748 shares of Series C Preferred
Stock and 1,957,254 shares of Common Stock issued and outstanding.
-32-
<PAGE>
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is involved in various litigation proceedings
incidental to the ordinary course of business. In the opinion of
management, the ultimate liability, if any, resulting from such
litigation would not be material in relation to the Company's
financial position or results of operations.
Item 2. Changes in Securities.
None
Item 3. Defaults upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
-33-
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Date: August 14, 1997 Independent Bankshares, Inc.
(Registrant)
By: /s/ Randal N. Crosswhite
---------------------------------
Randal N. Crosswhite
Senior Vice President and
Chief Financial Officer
-34-
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED FINANCIAL STATEMENTS FOR INDEPENDENT BANKSHARES, INC. FOR THE SIX
MONTHS ENDED JUNE 30, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 12,438,000
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 14,300,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 37,058,000
<INVESTMENTS-CARRYING> 87,606,000
<INVESTMENTS-MARKET> 87,352,000
<LOANS> 137,403,000<F1>
<ALLOWANCE> 1,328,000
<TOTAL-ASSETS> 265,766,000
<DEPOSITS> 244,068,000
<SHORT-TERM> 418,000
<LIABILITIES-OTHER> 1,288,000
<LONG-TERM> 406,000
62,000
62,000
<COMMON> 487,000
<OTHER-SE> 19,037,000
<TOTAL-LIABILITIES-AND-EQUITY> 265,766,000
<INTEREST-LOAN> 5,833,000
<INTEREST-INVEST> 2,699,000
<INTEREST-OTHER> 442,000
<INTEREST-TOTAL> 8,974,000
<INTEREST-DEPOSIT> 4,214,000
<INTEREST-EXPENSE> 4,249,000
<INTEREST-INCOME-NET> 4,725,000
<LOAN-LOSSES> 60,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,958,000
<INCOME-PRETAX> 1,593,000
<INCOME-PRE-EXTRAORDINARY> 1,593,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,055,000
<EPS-PRIMARY> .59
<EPS-DILUTED> .52
<YIELD-ACTUAL> 4.15
<LOANS-NON> 142,000
<LOANS-PAST> 53,000
<LOANS-TROUBLED> 114,000
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 793,000
<CHARGE-OFFS> 205,000
<RECOVERIES> 285,000
<ALLOWANCE-CLOSE> 1,328,000
<ALLOWANCE-DOMESTIC> 1,328,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 815,000
<FN>
<F1>Net of unearned income on installment loans of $2,047,000.
</FN>
</TABLE>
